RMDs Are Not Just A Participant Headache

What is an RMD?


A “required minimum distribution” (“RMD”) sounds simple in theory. It means that for all qualified plans and traditional (non-Roth) individual retirement accounts (“IRAs”), there is a mandatory “required beginning date” (“RBD”),¹ by which a plan (or IRA) must begin distributing a benefit to a plan participant. See Internal Revenue Code (“Code”) Section 401(a)(9). As simple as that sounds, the timing, calculation and determination of how to make an RMD can be very tricky. In addition, RMDs don’t go away after a participant’s death, which raises even more complicate dissues. And the bottom line, if mistakes are made, is that a participant (and/or their beneficiaries) must still take the full amount of the RMD (and pay whatever income tax is due) and face steep excise taxes in an amount equal to 50 percent of the amount by which the RMD “exceeds the actual amount distributed” in a taxable year. See Code Section 4974(a)².


Ok, but aren’t RMD mistakes really just a participant headache?


No. The employer is charged with the duty to know to whom and when an RMD must be paid and to make sure they get correctly calculated and paid out in a timely fashion. Moreover, depending on plan language, employers may take on even greater responsibilities than their statutory ones. The failure to correctly calculate or timely pay RMD payments to the proper recipients may cause an operational (or, in some cases, a plan document) failure that puts a plan’s qualified status in jeopardy, and could well expose the employer and other fiduciaries to fiduciary duty violations and complicated Form 5500 reporting issues.


But the Code doesn’t even impose any specific obligation on an employer, does it?


Yes, it does. Although the Code speaks of the “plan’s obligations,” the employer has statutory responsibilities both as a sponsor and generally as plan administrator.


As a sponsor, it needs to get the plan document terms right to begin with. Specifically, the Code requires that the plan document expressly set forth certain RMD rules and provide that the Code rules override distribution options in the plan document that are inconsistent. See 26 CFR Section 1.401(a)(9)-1,Q&A-3 (a).³ If the plan document RMD language does not comply with the Code, this is a plan document failure threatening the plan’s tax qualification status. And, as discussed below, the employer, in its plan administrator role, must follow the plan’s RMD terms.


How difficult can following the Plan’s RMD terms really be?


That depends in large part on how well the employer keeps track of participant and beneficiary birthdate, contact, and other relevant data and its process for getting RMDs correctly and timely calculated and distributed. The Code is not permissive. Section 401(a)(9) provides that a trust “shall not constitute a qualified trust... unless the plan provides” that RMDs “will be distributed.” Neither the Code nor the Employee Retirement Income Security Act (“ERISA”) puts the burden on a participant (or other RMD recipient) to either give the employer the heads up when they reach 70½ or somehow to “apply” for an RMD payment. The Internal Revenue Service’s (“IRS”) enforcement position is that it is the employer’s duty to know where its participants are and if it does not, it must take specific steps to locate missing participants (or presumably other missing RMD recipients) or face plan disqualification for failure to pay an RMD. Specifically, according to IRS guidance, employers, at a minimum, must search plan and related plan, sponsor, and publicly-available records or directories and use commercial locator services and other publicly available search methods (including the internet),and use certified mail to last known address and/or other appropriate facts and circumstances related methods, to locate RMD recipients. See IRS Field Directive, TE/GE-04-1017-0033. The good news is that if these steps are taken, the IRS will not seek to disqualify the plan. Moreover, although the IRS guidance does not specifically address failures caused by missing information regarding birthdate, retirement date, or ownership interest, a failure to use reasonable efforts to collect and maintain that information could, depending of course on the facts and circumstances,also subject a plan to a risk of disqualification for failing to pay RMDs⁴.


Disqualification of the plan is not the only risk. Plan fiduciaries have a statutory duty, and risk fiduciary duty liability if, by not properly handling RMDs, they fail to follow the terms of their written plan documents [See ERISA Section 404(a)(1)(D)⁵] and to fulfill their general duties of prudence and to act for the exclusive benefits of participants,resulting in potential personal liability for fiduciaries and ERISA penalties. See ERISA Section 404(a)(1)(A) and (B). And although the Department of Labor’s (“DOL”) investigatory focus is not typically plan qualification, DOL investigators increasingly scrutinize employer procedures for handling of RMDs, and in particular employer procedures for finding missing participants whose RMDs (and/or other benefits) are not being paid to them. Moreover, the DOL’s guidance for locating missing participants does not mirror the IRS field directive. Based on available DOL guidance (albeit for terminating defined contribution plans), employers who have lost track of RMD recipients, depending on facts and circumstances, may have to consider more expensive search methods. See FAB 2014-01.⁶


Finally, the plan administrator also must attend to reporting of unpaid RMDs on the plan’s Form 5500. Generally, they will need to be reported as a failure to pay a benefit (See e.g., Schedule H, line 41),unless the plan administrator is in the process of making reasonable efforts to locate a participant or beneficiary as discussed above.


What are some of the most common RMD mistakes the employer can make?


  • Failing to keep track of participant data: This mistake tops the list–it is the most prevalent but the most preventable (as described above). An employer cannot pay out an RMD (and thus, cannot follow a plan document, the Code, or ERISA)–even if has a compliant plan document, has great advisors, and knows how to calculate them–if it does not know its participants’ birthdates or where they are.

  • Failing to pay out RMDs to 5%-or-moreowners who continue to work: The Code permits but does not require a plan document to allow the deferment of payments of RMDs until actual retirement unless the employer is a 5%-or-more owner. A 5%-or-more owner of an employer sponsoring the plan, however, must be paid distributions by their RBD, whether they continue to work or not. Employers need to understand what their plans say about deferring RMDs during continuing employment and whether there are 5%-or-more owners in the plan.

  • Using the wrong payment dates for RMDs:Although the actual payment dates for RMDs seem simple enough–first, there is the RBD and then subsequent RMDs must be made every year by December 31 [Code Section 401(a)(9)(C)]–neither the Code nor the regulations specify an actual payment date or even who gets to determine actual payment dates. However, since paying RMDs is a plan qualification issue, it would seem obvious that an employer should not allow the participant (or beneficiary) to determine when they want to receive their RMDs. But that is what some employers appear to do–leading to late RMD payments. Employers should consider specifying actual payments dates in their plan document or,at a minimum, promulgating internal procedures for establishing dates that ensure compliance with the plan RMD provisions and applicable law.⁷

  • Not understanding that an RMD must be calculated for, and paid from, each sponsored qualified plan:It is not unusual for an employer to sponsor more than one qualified plan and for its employees to participate in more than one plan. However, for RMD purposes, the employer may not aggregate those plans; it must calculate and pay out an RMD for and from each separate plan. Neither the employer nor the employee can direct the payment of an RMD due from one plan from another plan. This, of course, is different in the IRA context, and that difference seems to be at least one source of confusion. Needless to say, a failure to treat each plan separately would likely cause a failure from each of the plans improperly aggregated.

  • Making mistakes in handling RMDs after the participant’s death: As previously mentioned, the RMD headache for the employer continues, and indeed, can get worse, after the participant’s death. There are multiple landmines depending on whether the participant dies before or after their RBD, whether the participant is married and has a surviving spouse, whether there are designated beneficiaries,and the terms of the plan document. The rules for calculating RMDs depend on the type of beneficiary, and numerous other variables. But the one thing that is not variable at all is that a plan administrator cannot wait for a beneficiary to come forward and/or to dictate most aspects of how and when RMDs may be distributed.


¹ Generally, the RBD is April 1of the calendar year following the later of the calendar year in which the employee attains age 70½ or the calendar year in which the employee retires. Code Section 401(a)(9)(C)(i)and26 CFR Section 1.401(a)(9)-2. However, a 5%-or-more owner of the sponsor may not delay the RMD until they retire.Code Section 401(a)(9)(C)(ii)[See Code Section 416(i)(1)(B)(i) for definition of a 5%-or-more owner.]

² A participant may seek a waiver of the excise tax via a Form 5329 filing, upon a showing of “reasonable error,” as may the employer through a VCP filing (See footnote 4). But, although the IRS generally grants a waiver, it is not mandatory.

³ The plan document may also provide certain optional provisions so long as they are not inconsistent with the Code. See 26 CFR Section 1.401(a)(9)-1,Q&A-3(b).

⁴ A plan administrator may be able to avoid plan disqualification through correction of missed or incorrect RMDs through the Employee Plan Compliance Resolutions System (“EPCRS”) as a part of which it may also seek a waiver of excise tax on behalf of the affected recipient sought upon a showing of “reasonable error.” While the IRS generally grants such relief, avoiding the correction route by making proper RMD payments is obviously preferable.

⁵ [See–Those Pesky Plan Documents-What Do They Have to Do With My Fiduciary Duties]

⁶ [See –How to Deal With Missing Participants at Plan Termination]

⁷ See IRS information letter 2016-0072 suggesting that plan document “may specify” a date and/or who determines the date and suggesting that in the absence of such terms, terms, the plan administrator has discretion to determine.


Please feel free to contact our Firm if you would like to discuss these or any other RMD headaches in greater detail.


© Boutwell Fay LLP 2019, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of August30, 2019.



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