Missed Pension Payments for 13 Years

Submitted by Tamara Richards on Tue, 2022-07-19 12:57

Client divorced in 2000. Ex retired in 2009 and started receiving pension payments at that time. Client did not know ex had retired and had been confused by QDRO and thought she had already been paid everything owed in QDRO. Record keeper for pension plan changed several times and apparently lost the QDRO in the process. Client’s address has not changed since divorce and record keeper never contacted her about pension payments due. Ex passed away in April and record keeper discovered QDRO while researching ex’s records.

Record keeper says they will be paying 153 months of back payments all at once (subject to taxes; cannot roll into IRA according to record keeper) and will start monthly payments at $2100 per month.

Questions:
Is client subject to RMD penalties on the 153 months of back payments?
Should there be interest paid on the missed payments?
Is it possible to have the 153 back payments rolled into a pre-tax account?



Submitted by Dan Zaehring on Tue, 2022-07-19 16:32

If these pension payments were from a defined benefit employer plan, there is no RMD requirements.  Otherwise more details on the pension are needed to determine the answer.



Submitted by Tamara Richards on Tue, 2022-07-19 18:29

Yes, they are from a defined benefit employer plan. However, this posts implies RMDs were required: https://irahelp.com/slottreport/how-do-rmds-work-db-plans



Submitted by Alan - IRA critic on Tue, 2022-07-19 19:06

  • A DB plan is subject to the RMD requirements per IRS Reg 1.401(a)(9)-6, further complicated by the QDRO rules under which the RBD of the participant applies to the alternate payee as well. Therefore, the payments should have begun to client when they began for ex in 2009. Unlike DC plans, DC plan RMDs were not waived for 2009 and 2020, therefore client faces a penalty for every year 2009-2021, and needs to file a 5329 to request the penalty waiver for each of those years. The required distribution is known (25,200 annually), but there are some other details that only the plan could provide with respect to the benefits, such as whether there was any interest paid with the lump sum – will the lump sum be around 321,000?
  • The lump sum is not eligible for rollover because it represents lifetime annuity payments which would not have been rollover eligible under Sec 402(c)(4). Neither will the monthly payments starting now be eligible for rollover.
  • It is likely that the lump sum should be greater than 321k since interest should be paid due to the near 13 year delay in payments, or perhaps an actuarial increase should be applied due to the delay. How the benefit and lump sum was determined should be explained by the plan.
  • The IRS will waive the penalty if the 5329 forms are completed correctly and submitted with explanation of the reasonable cause for the shortfall. The plan is also subject to penalty, but that’s their problem.


Submitted by Tamara Richards on Wed, 2022-07-20 03:43

The instructions for Form 5329 state:Qualified retirement plans (other than IRAs) and eligible section 457 deferred compensation plans. In general, you must begin receiving distributions from your plan no later than April 1 following the later of (a) the year in which you reach age 72, or (b) the year in which you retire.Since she turned 72 in 2019, does that mean she only needs to file the form for 2020 and 2021?  She’s asked for the plan documents for the plan and those are being mailed to her. We’re hoping that the interest information can be found there.The record keeper lost the QDRO, but the client still has it. According to the QDRO, she can start her payments at any time allowed by the plan, but the record keeper says it has to be the same date her ex started taking payments. 



Submitted by Alan - IRA critic on Wed, 2022-07-20 12:57

The record keeper is correct. The “in general” RMD starting year does not apply to QDRO distributions to the alternate payee. Her RMDs start when RMDs began for her ex. And since DB pensions can be started prior to the RBD, he may even have started his payments earlier than his RBD. Therefore, there would be several years of 5329 forms needed, but the same “reasonable cause” explanation can be used for each one. A 1040X is often required with the 5329, but there is no change to the prior returns other than the 5329 as the lump sum payment will all be taxed in 2022, the year received. 



Submitted by Dan Zaehring on Tue, 2022-07-19 19:37

The retired employee was taking benefit throughout this period so the shortfall is the RMD calculation minus what was taken each year.  Depending on the QDRO split, it could be large or small.



Submitted by Alan - IRA critic on Tue, 2022-07-19 22:24

Interesting point, since the QDRO was lost at some point. If so, the total RMD might have been satisfied, but partially mis distributed to the participant creating a shortfall for the client. Client should demand a full accounting from this plan since this has become a question greater than just the RMD issue for the client. It’s not clear that even if the total plan RMD was paid to the participant that client is relieved of RMDs for those years. Plan may need to submit a proposed solution to the IRS through the EPCRS process.



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