RMD failure and corrections

[Karen McIver]

We have a client who is a 5% owner through attribution and still working.   He turned 70-1/2 in 2015.   It's a 401k self directed account.   

For reasons I can't explain, probably because the attribution wasn't coded correctly, he didn't receive RMDs.

Based on actual account balances RMDs for 2015, 2016, 2017 and 2018 have now been made without regard to earning or taking into account an offset for expected RMD.   

The client is leaning toward filing VCP to request waiver of the excise tax.

Here are my questions: 

1.  How should I have calculated the RMD?  

2.  Should I have taken the expected RMD for the previous year into account when calculating the current RMD?

3.  Is there any good examples or explanations on how to prepare the VCP filing?  I think I can do it on 14568 and 14568-H but I am not sure.

Thanks for any light you can shed on this murky topic!

[justanotheradmin]

Answer 1:

From Revenue Procedure 2019-19, page 85. 

.06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions (with Earnings from the date of the failure to the date of the distribution). The amount required to be distributed for each year in which the initial failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with §1.401(a)(9)-5, Q&A-3, reduced by the amount of the total missed minimum distributions for prior years. In a defined benefit plan, the permitted correction method is to distribute the required minimum distributions, plus an interest payment based on the plan’s actuarial equivalence factors in effect on the date that the distribution should have been made. See section 6.02(4)(d) of this revenue procedure. If this correction is made at the time the plan is subject to a restriction on single-sum payments pursuant to § 436(d), the Plan Sponsor must contribute to the plan the applicable amount under section 6.02(4)(e)(ii)(A) as part of the correction.

Answer 2: 

Based on the above, yes. 

Answer 3:

Yes, those two to start. I would suggest reading the VCP submission portion of the revenue procedure, particularly the portion for using the model forms (starting on page 60), and the rules for what to include (starting on page 62) You will need to include quite a bit more than just the two model forms. 

https://www.irs.gov/pub/irs-drop/rp-19-19.pdf

Since the submission is for only an HCE, be prepared for the possibility that the IRS reviewer will have questions. Usually these types of submissions go through without any hiccup, but on occasion if the only participant affected is an HCE I have seen additional questions. Doesn't mean it won't get approved, just means they are reviewing it a little more carefully. 

[justanotheradmin]

The plan does need to do a distribution for the earnings. It will need to include a breakdown of the earnings calculation with the VCP submission as well. So I would suggest working on that as well.