Required Minimum Distribution Audits Begin
Earlier this year, the Department of Labor ("DOL") began conducting audits of retirement plans and ERISA severance plans to determine whether plan sponsors have been timely paying vested benefits to retirement-eligible participants. Now, the DOL has expanded and directed its audit plans at certain 100+ participant defined benefit and defined contribution plans. The DOL questions if these plans have made reasonable attempts to find terminated vested participants who have reached their “required beginning dates” under the required minimum distribution ("RMD") rules. Plan sponsors should be aware of the DOL's initiative as it also serves as a reminder of the importance of keeping accurate retirement plan records.
The RMD Requirements
Code Section 401(a)(9) obligates every qualified plan to provide RMDs as soon as a participant reaches their required beginning date (generally April 1 following the end of the year in which the participant attains age 70½ or has a termination of employment, if later). Failure to distribute an RMD may ultimately result in plan disqualification by the IRS. It could also force an imposition of a 50% excise tax on the participant or beneficiary, unless the plan is corrected through the IRS and specifically requests a waiver of the tax.
The DOL and RMD failures:
While it’s been customary for the IRS to investigate RMDs as part of determining a plan’s qualified status, the DOL’s interest in RMD failures is fairly recent by comparison. The DOL has broad authority to investigate or audit a plan’s compliance with ERISA. DOL audits often focus on violations of ERISA’s fiduciary obligations and participants' benefit rights and responsibilities.
The DOL investigations have focused on plan procedures to ensure appropriate distributions occur and appropriate recordkeeping methods to locate missing participants, inform retirement-eligible participants that a benefit is payable, and provide the RMD itself. The Department found that some plan sponsors either do not have procedures to distribute benefits or locate missing participants, or if they do, they are not followed. Additionally, the DOL has found errors in plan records where dates of birth are clearly incorrect (for example, numerous individuals coded with the same “dummy” birth date who all appear to be over 100 years old).
How Ice Miller Can Help:
Plan sponsors that are not in compliance with applicable requirements can be subject to penalties. Depending on the circumstances, such failures could also be considered a fiduciary breach of duty under ERISA. Remember that fiduciaries may carry a personal liability for any tax consequences to affected participants. Failure to follow ERISA’s record maintenance requirements could cause a $28 (recently increased from $11) per participant penalty for failure to do so. This is in addition to the separate IRS sanctions that may apply.
If you have questions or concerns about RMDs as they relate to your plan, or how to locate missing plan participants, Ice Miller can help. Please contact Mary Beth Braitman
, Chris Sears
, Tara Schulstad Sciscoe
, Craig Burke
, Robert Gauss
or the Ice Miller employee benefits attorney
with whom you work. If you discover that RMDs have not been made from your plan, we can discuss how to correct this failure, which will likely include correction under the IRS correction program. And of course, if you are selected for an RMD audit, we can help you prepare your audit response.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.