RMD 403b plan

[Santo Gold]

We are the TPA firm for an ERISA 403b that has assets with a well known recordkeeper' plan sponsor has an unbundled service agreement with the recordkeeper.

We have a terminated participant who will be due an RMD by 12/31/18 and are being told that only the participant can request the RMD.  Not the TPA, not the plan sponsor.  But, if the RMD is missed, it is the plan sponsor who is responsible and liable for the missed RMD, correct?  If the RMD is missed because the participant either intentionally or unintentionally does not request the RMD, but the plan sponsor requests I, is the plan sponsor still liable?

Is the answer different because this is a 403b plan?

Thanks

[Peter Gulia]

To apply IRC § 401(a)(9) rules to § 403(b) contracts, minimum-distribution rules similar to those for IRAs (see 26 C.F.R. § 1.408-8) apply, with some exceptions.  See 26 C.F.R. § 1.403(b)-6(e)(2) & -6(e)(7).

 

Absent restrictive plan provisions, this permits a participant to meet her minimum distribution using a distribution from any of her 403(b) contracts (counting those she holds as a participant, not as a beneficiary).

 

This information does not answer your questions.  But it suggests some possible explanations about why a custodian or insurer might not treat a minimum-distribution provision as one that applies looking only to one plan.

[Santo Gold]

Thank you for that information.  Would it be possible then that, in 403(b) plans with certain contracts, the plan sponsor is not responsible for ensuring that participants take their RMD?

[Larry Starr]

28 minutes ago, Santo Gold said:

Thank you for that information.  Would it be possible then that, in 403(b) plans with certain contracts, the plan sponsor is not responsible for ensuring that participants take their RMD?

You have run right up against one of the major problems with the historic 403(b) being shoehorned into the current 401(k) concept.  The investment/contract is not under control of the employer.  Without getting into that mess, remember what the penalty for failure of RMD is: the 50% penalty is on the PARTICIPANT.

If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.

Also remember that pre 1987 amounts in the contract are not supposed to be subject to RMDs.  They have a different set of rules that looks at age 75 or when the person actually retires.  Just another reason to hate 403(b)'s! :-)

[ERISAAPPLE]

Notify the participant with a copy to the vendor of the requirement to take RMDs or suffer a 50% tax.  Check your vendor agreement.  It may have an indemnification clause that makes the vendor liable for plan disqualification resulting from the vendor's acts or failure to act, not at the direction of the employer.  

[QDROphile]

I would love to see a vendor agreement that has a clause like that.

[ERISAAPPLE]

I have negotiated many.  I admit though that the clients who get that are large enough to negotiate for that clause.  

They contracts should have it.  The vendors hold themselves out as professionals who can operate plans in compliance.  That is the very reason clients hire them.  In fact, they hold themselves out as professionals who can tell the clients how to be compliant.  If they make a mistake that is totally their fault and no fault of the client, they should be held to what they promise.  

[austin3515]

My understanding of this (and I base in part on the wording of the plan documents) is that the participant is responsible for the RMD's.  The recordkeepers will send notifications to the age 70 folk to remind them.  But there is no such thing as a failure of a 403b plan to pay an RMD as there is in the 401k world.  Read the document. What you will find is that the Plan does not have an affirmative obligation to pay the RMD, entirely for the reason described by Peter above.

[JamesK]

Code section 403(b)(10) provides as follows:

Under regulations prescribed by the Secretary, this subsection shall not apply to any annuity contract (or to any custodial account described in paragraph (7) or retirement income account described in paragraph (9)) unless requirements similar to the requirements of sections 401(a)(9) and 401(a)(31) are met (and requirements similar to the incidental death benefit requirements of section 401(a) are met) with respect to such annuity contract (or custodial account or retirement income account).

This accords with my recollection that the IRS at one time indicated that, if the annuity owner failed to have distributions made to comply with 401(a)(9), then only that annuity owner would be treated as having failed to satisfy the requirements of 403(b).  IOW, an annuity failure, not a plan failure.  

There may be a different answer if the failure to make RMDs is widespread, but that doesn't seem to fit your fact pattern.