RMD Fail

P born February 1944, retired 2012 and died early April, 2015.  Seems, therefore, RBD is April 1, 2015, just before DoD.  No distributions were made prior to DoD or since.

Had P died a week earlier, in March instead of April, I believe plan would have had until 12/31/2021 to distribute the entire account (end of year containing 5-year anniversary of DoD + 1 for 2020 RMD waiver). However, because P died after RBD, I fear we are looking instead at missed RMDs for the 2014 and 2015 distribution calendar years (the year P turned 70-1/2 and the year P died, respectively), and for 2016 - 2019, because distributions to the designated beneficiary (DB) have not begun.  Now that these problems have surfaced, it may yet be a challenge to get a distribution to the DB, currently age 70, whose whereabouts are unknown and who reportedly may be suffering under some incapacity and might require appointment of a guardian.  I believe we at least don't have a 2020 RMD to worry about, thanks to the covid relief legislation.

Does this sound like the right analysis so far, even though the plan says that if the Participant dies before the date distributions begin, the five-year anniversary year payout is available?  P did in fact die before distributions began.  P died after the RBD, is all, never having received a distribution.

If indeed, this is a penalty situation, and a qualification failure, besides, what is the best approach to fix? Six years of missed RMDs from a $150,000 plan account may not be an "insignificant failure" eligible for self-correction.  Is VCP a viable approach to seek both plan correction and penalty relief?  Is penalty relief more likely available through VCP than through a Form 5329 filing?  It's not even clear who would file Form 5329, since P's estate has no interest in the account and we don't even know if DB should, or even can, file, or if we can locate her.

What if the reasons for missed RMDs reflect an absence of sound plan practices and procedures, or even a lack of diligence on the part of plan fiduciaries?  Will IRS collect penalties from the account and require the plan sponsor make the account whole as part of any VCP correction?  Or will it be left to the DB or her heirs to file a suit for breach of fiduciary duty to recover the penalty amounts.

Thanks for any input on these or related issues or solutions you might think of!

On ‎9‎/‎30‎/‎2020 at 11:09 AM, Plan Doc said:

Does this sound like the right analysis so far, even though the plan says that if the Participant dies before the date distributions begin, the five-year anniversary year payout is available?  P did in fact die before distributions began.  P died after the RBD, is all, never having received a distribution.

When the reg says that, it assumes that distributions commenced by the RBD.

On ‎9‎/‎30‎/‎2020 at 11:09 AM, Plan Doc said:

Six years of missed RMDs from a $150,000 plan account may not be an "insignificant failure" eligible for self-correction. 

That's a facts and circumstances determination; not enough info.

On ‎9‎/‎30‎/‎2020 at 11:09 AM, Plan Doc said:

Is penalty relief more likely available through VCP than through a Form 5329 filing? 

I don't know, but in this case I would suspect VCP. My guess is that the service center is pretty well set up to approve most first time offenders, but here you are going to be filing for multiple years with a complex explanation.

Overall, seems to me you're on right track, Plan Doc.

Thank you, Luke.

After recommending VCP to the client/plan sponsor, they came back to me two weeks later with a "solution" of their own.  They are sending a certified letter to the designated beneficiary (DB) at her last known address.  Whether she will get the letter, much less respond to it, is doubtful.  The DB is a 70-year-old, possibly suffering from dementia, who lost her home at assessment sale a year ago while a $150,000 retirement plan account, which she should have received five years ago when P, her sister, died, remains to this day undistributed.

Nevertheless, the client now asserts that "we have followed the guidelines for locating the 'lost participant/beneficiary' with the mailing of the letter."  My sense is that the mailing of the letter is the very least of what they need to be doing.  Given the size of the account, my advice was to engage a commercial locator service to track down the whereabouts of the DB, something the plan sponsor has shown no enthusiasm for doing, as they are convinced that mailing a certified letter, whether or not it is received, is all they need to do.

Indeed, they have informed me that their intent, should the DB fail to reply to the letter, is to distribute the account to an IRA in the DB's name.  While the plan provides for distribution to an IRA of an account that remains unpaid solely by reason of the inability of the plan administrator to ascertain the whereabouts of a participant or beneficiary, I would think that a more diligent search for the beneficiary must first be made.  I am also questioning whether any IRA custodian would want to come within 10 miles of this situation.

Recall that RMDs from this account should have begun in 2015 (for the 2014 distribution calendar year) before P died, and the DB should have been receiving RMDs since 2016, the year after P's death.  As such, it is arguable whether the account remains unpaid solely by reason of the plan administrator's inability to ascertain the whereabouts of the participant or beneficiary.  P's whereabouts were known to the plan administrator at the time she should have started receiving RMDs, and the DB's whereabouts, if not known, were at least readily ascertainable at the time of P's death in 2015.

The client appears convinced that six years of missed RMDs (2014 - 2019) and associated penalties, and the plan qualification issues arising from the failure to distribute RMDs, will all disappear with distribution of the account to an IRA.  I think otherwise, and that whether the DB comes forward to claim the account or the account is distributed to an IRA in her name, we still have missed RMD penalties and plan qualification failures to address.  That said, the client appears to be getting advice from a third party administrator whose approach to the situation is more to their liking than mine.

I'm thinking at this point that the only thing that might bring them to their senses is that they try to distribute the account to an IRA and won't be able to find a custodian that will accept it.  Am I right to think that no prospective IRA custodian will want to get anywhere near this account?

I appreciate any input anyone has to offer.

Put your concerns in writing to the client, suggest they get input from an ERISA attorney.

Thanks, BG.

Oh, I've put everything in writing, including that they have 6 years of missed RMDs subject to 50% penalty, qualification failures that need to be corrected through EPCRS (and probably VCP), and that plan fiduciaries may be liable for breach of fiduciary duty for having neglected this account, not only as of the required beginning date, when P was still alive, but for another 5 years after she died, the first few years of which, at least, the designated beneficiary's whereabouts were readily ascertainable.

BTW, I am an ERISA attorney, or at least I play one at the office.  But the client has found someone they'd rather listen to, which I get.  In their minds, distributing the account to an IRA solves everything.  That's a lot more appealing than my recommendation that we go through VCP and ask IRS to waive RMD penalties and that the plan's tax-qualified status be maintained.

That's why I posed the question, the premise of which is that no prospective IRA custodian would want to get anywhere near this account!  Anyone with a take on that assumption?

1 hour ago, Plan Doc said:

Thanks, BG.

Oh, I've put everything in writing, including that they have 6 years of missed RMDs subject to 50% penalty, qualification failures that need to be corrected through EPCRS (and probably VCP), and that plan fiduciaries may be liable for breach of fiduciary duty for having neglected this account, not only as of the required beginning date, when P was still alive, but for another 5 years after she died, the first few years of which, at least, the designated beneficiary's whereabouts were readily ascertainable.

BTW, I am an ERISA attorney, or at least I play one at the office.  But the client has found someone they'd rather listen to, which I get.  In their minds, distributing the account to an IRA solves everything.  That's a lot more appealing than my recommendation that we go through VCP and ask IRS to waive RMD penalties and that the plan's tax-qualified status be maintained.

That's why I posed the question, the premise of which is that no prospective IRA custodian would want to get anywhere near this account!  Anyone with a take on that assumption?

Probably the most practical risk is IRS. They're playing audit lottery. Probably won't be the end of the world if they're caught out in an exam, but profess good faith (which what they are doing now sort of evidences), but they will likely pay a higher price (in the event of an exam) than if they dealt with it now proactively.

As for IRA custodian, I don't think the rollover in itself is bad, just that it may be coming from a disqualified plan. If the IRA custodian has all the facts, it would probably decline, but it may not get all the facts or ask.

I regularly have to force automatic rollovers from a qualified plan to an IRA on balances between $1k and $5k when participants don't respond and we have a good-faith address on file.  periodically a rollover request will get kicked back by the prospective new custodian because they find evidence the participant is deceased (as a TPA we don't always have access to the best software sources for this knowledge, and the plan sponsor doesn't have a clue).  so I think if the new custodian has access to this kind of data, they will likely not take it for auto rollover.

we have had a few situations over the years where a terminated participant is considered "lost" and has reached 70.5 at some point, but because the balance is not forcible and no one comes forward to claim, the balance stays in the plan until such time either the participant or beneficiary(s) is found, or the plan terminates and the Plan Sponsor is forced to make a decision.  we have not seen any penalties as a result of audit where RMDs were not paid under these circumstances.