Penalty for Missed RMD

We read where the penalty on a missed RMD is 10% rather than 25% as long as the missed RMD is paid from the plan within two years. Is this a Self Correction or (if the plan were audited) would the IRS automatically just assess the 10% if they saw it was corrected within two years.

Thanks.

In a DC plan, the plan may self-correct by making the distribution, adjusted for earnings.

As far as the excise tax, remember that the tax on unpaid RMDs is not a tax on the plan, it's a tax on the individual.

I haven't thought through this scenario thoroughly, but from looking at the instructions to Form 5329, it seems that if you correct the missed RMD within the correction period, but after paying the 25% excise tax, you would need to file a 1040-X with an amended 5329 to request a refund of the extra 15%.

But also see the instructions to Form 5329 about Reasonable Cause. As I understand, requests to waive the missed RMD penalty for reasonable cause are nearly always granted.

Did missed RMDs get added to self correction? I know for a long while they required VCP. If this got expanded, and it might have in the "somewhat" recent expansion of self correction it would be welcome news.

@Lou S. As you likely expected, the answer to whether SCP is available to correct RMDs is "it depends".  For starters,

https://www.irs.gov/retirement-plans/correcting-required-minimum-distribution-failures notes that a correction using SCP will require payment of the participant-owed excise tax.

The IRM 7.2.2 https://www.irs.gov/irm/part7/irm_07-002-002 says:

Special Tax Relief Requests

    Generally, excise taxes and income tax consequences associated with failures can’t be resolved through EPCRS. However, plan sponsors may ask the IRS in writing not to pursue certain specific income and excise taxes imposed by IRC 72(t), IRC 4972, IRC 4973, IRC 4974, and IRC 4979 for certain operational failures.

    Most special tax relief is granted through VCP. It’s not available through SCP or Audit CAP.

    Special tax relief is not granted automatically; VC approves it in appropriate cases and only if certain conditions are met. See the table below for the tax relief in Rev. Proc. 2021-30, Section 6.09, and the requirements/conditions to evaluate these requests.

If the plan wants to try to get the participant off the hook for the excise taxes, the plan will have to file a VCP.  The rules seem pretty forgiving.

So I'm curious, is it not treated as a failure if you self correct but the excise tax is due? And if you go through VCP it is clearly not treated as failure and the excise tax is likely waived in full in most cases.

The reason I ask is because the decision to do a VCP submission could hinge on the size of the excise tax. If the excise tax is smaller than the cost of a VCP submission, the sponsor might just want self Correct and pay the participant's excise tax rather than go through a VCP filing.

Just curious, if an employer pays the participant's extra tax (because the employer believes it, in its plan-administrator role, is responsible for the minimum-distribution failure), is the payment a deductible business expense?