inadequate RMD

[K2retire]

We took over as TPA on a fiscal year plan with two owners who were taking monthly distributions toward their RMDs. The amounts were substantial. When preparing the 8/31/2015 valuation we (foolishly) assumed that the large distributions we were seeing were based on amounts calculated by the prior TPA.

While preparing the 8/31/2016 valuation we noticed that the distributions to one of the two owners were not sufficient to meet the RMD requirements for 2015. We are now drafting a reasonable cause statement for her to file with her excise tax return.

How much detail is required in this statement?

Are they typically approved, or is it questionable?

Any other tips about what works or what doesn't?

[jpod]

I know the IRS likes to hear you say (perhaps demand it) that you already withdrew the shortfall before you file the reasonable cause statement. I have never experienced one of these not being approved. What are you doing about the tax-qualification risks? I'm a little rusty on this, but isn't there a mechanism to get VCP relief that also eliminates the 50% excise tax risk for the participant?

[Calavera]

Just be sure that is really not sufficient. Check the form of benefit. Check the 415 application. Check the time of commencement: was it Required Beginning Date (i.e. 4/1) or earlier. If it was RBD, note that it only requires to receive benefit accrued as of 12/31 prior to RBD.

[Tom Poje]

back in 2010 I gave an ASPPA talk on distributions and this is what I had for missed minimum distributions.

sorry, these are the actual notes, so you have to put up with the dry humor that I included.

but basically it is about the same as jpod indicated

...............................................................

Oooops. You missed the minimum distribution, now what?

Make sure there is enough evidence in the folder that your co-worker gets blamed.

It's not my job to run the train.
The whistle I don't blow.
It's not my job to say how far,
the train is supposed to go.
I'm not allowed to pull the brake,
or even ring the bell.
But let the damn thing leave the track,
And see who catches hell!
............................................................

You can’t ask for the penalty to be waived until you have actually taken the distribution. This is proof you are trying to fix the situation as soon as possible.
Fill out form 5329.
Write letter begging for mercy, explaining the reason you didn’t receive the minimum distribution was the incompetence of the investment house or something similar.
Years ago, it was required to send in the 50% penalty and hope the IRS would have leniency and waive the penalty and return the money. Now simply send in the letter with the Form 5329, and if they don’t accept your lame excuse they will bill you.

[K2retire]

Just be sure that is really not sufficient. Check the form of benefit. Check the 415 application. Check the time of commencement: was it Required Beginning Date (i.e. 4/1) or earlier. If it was RBD, note that it only requires to receive benefit accrued as of 12/31 prior to RBD.

This case is further complicated by pooled assets that are only valued as of 8/31 each year. The RBD was 4/1/2013. Since at least 9/1/2014, she's been withdrawing $12,000 per month.