Company Failed to Notify Former Employee of RMD after 10 yrs
A client who is 80 years old received a letter from her former employer (She worked with the employer from 1978 – 1988) stating that she had money (approx. $32k) in a qualified plan and issued her a check, but also stated she owed the 50% excise tax (approx $12K) on the distribution, because the required minimum distribution was not taken for the past 10 years. The client did not realize she had money in the plan. Is there anyway she can appeal the excise tax? I thought the employer had a responsibility to notify participants of their qualified plans of the required min. distribution. Any suggestions.
-RC
Chicago
Permalink Submitted by Martin Helmer on Sun, 2007-12-30 18:02
The plan is not a qualified plan, as we speak. Code subsection 401(a) is synonymous with the term ‘qualified plan’. This plan has violated paragraph 401(a)(9), which deals with MRDs. The plan may have distributed the client’s entire benefit, but it remains a disqualified plan.
Someone could approach the employer and ask them to look at Revenue Procedure 2006-27, Section 6.09(2). If they complete the Voluntary Correction Program (VCP), it will cure the MRD excise tax as well.
By the way, it appears the $12,000 estimate of tax owed is low. Did someone forget that this tax is cumulative, similar to a minimum funding deficiency or perhaps a prohibited transaction? That is, you keep adding larger and larger layers of tax each year. You pay over and over for the same error, to where the tax could exceed the principal amount involved.
Permalink Submitted by Alan Spross on Mon, 2007-12-31 05:03
Martin,
I do not follow some of your post, and perhaps you could clarify.
1) Are you saying the plan somehow lost qualification because of the RMD failure? Since this employee reached RMD age in approximately 1997, it seems that Revenue Procedure 94-22 could come into play with reference to locating a former employee if EE could not be located.
2) Since employer responsibility relative to RMDs seems to have evolved over the last several years, it may be hard to determine when their failure first occurred.
3) Probably impossible to determine how the 12,000 was determined because the RMD tables changed in 2002. We also have no way of knowing the rate of asset growth in the plan or the balance each year. But if the RMD averaged 5% for 10 years and the average balance was 26,000 for that period, $12,000 appears to at least be in the ballpark.
4) I do not understand by which authority a plan makes a full involuntary distribution when the balance exceeds 5,000 the entire time??? Perhaps this is a more serious gaffe than the RMD failure?
5) Is a 402f notice applicable here?
Just asking, because you have considerable expertise with the employer end of QRPs.
With respect to the original post, is the client’s concern limited to the excise tax only or is she irritated by the lump sum distribution that destroyed the remaining tax deferral?
Client may need to use Form 5329 to request IRS excuse the penalty, and possibly may have several compelling reasons such as having forgotten about the plan, or possibly physical or mental deficiencies. The IRS has been lenient regarding IRA RMD gaffes, and this actually seems more compelling.
Permalink Submitted by Martin Helmer on Tue, 2008-01-01 15:13
Happy New Year! There’s cold and ice in Denver.
1. Yes, the plan’s not qualified. Does R.P. 94-22 provide any relief? My recollection is that it deals with letter forwarding. It’s a sign of good faith by the plan (employer). But does it overcome 9 or so straight years with a new operational failure to meet 401a9? If you fail 401a you’re disqualified and need to go thru VCP, in this case.
2. Wouldn’t the first failure kick in for the year the client is 70 1/2? She was retired by that time, so no more deferral of the RMD.
3. I must have miscalculated. Sorry. Let’s just say that in some cases the tax can exceed the account balance.
4. Wouldn’t 411(a)(11) be relevant here, linking back to 401(a)(17)? See Alert Guidelines, worksheet and explanation #3, Roman I. Life annuity option might not apply here, correct?
5. We do not know the details of the communications between the plan and the participant. I still say that information will not ultimately change the fact the plan’s disqualified. There may well be additional issues of which we’ve not been apprised.
There are multiple reasons for the participant to be irritated, especially if we are able to determine that proper notices were not made by the plan.
I agree the client’s next step after unsuccessful communication with the employer would be to file Form 5329 and attach a statement of reasonable cause.
Looks like someone needs to do some reading, in order to answer one or more of our questions.