Managing a retirement plan can be a challenging task. There are many rules and regulations that the plan sponsor must follow which include participant deferrals, hardship loans, contribution management and limits to review and hardship distribution management. In addition, the plan sponsor needs to work closely with the plan custodian to ensure participant’s best interest are maintained. Finally, they must ensure that the plan is operating according to the Plan Document or compliance issues may arise. The myriad of rules and regulations means that occasionally an error may arise when administering the plan. The IRS has created programs designed to help plan administrators correct common errors quickly and easily. A common error often committed is a failure to start minimum distributions on time. To help clients, prospects and others understand how to correct the issue, Barnes Dennig has provided a summary of corrective actions below.
Minimum Distribution Requirements – Minimum distributions from a retirement plan are requirements imposed by IRS, but they are also required to be written into the Plan Document of all qualified plans. At each participant’s “required beginning date” (RBD), they must begin taking distributions from their plan to avoid paying a penalty. This date is, for most folks, on April 1st of the year following the calendar year in which they turn 70 ½. If the participant chooses to continue working after they turn 70 ½, the RBD is pushed back until April 1st of the year after they retire. This RBD is not something you should overlook; if you forget to distribute the minimum amount required, the participant, not the plan, will incur a 50% excise tax on the amount they should have withdrawn. Additionally, if the IRS discovers that you are not following the Plan Document as written, you may lose your plan’s tax-favored status.
Maintaining Compliance – The easiest way to avoid these consequences is to plan ahead. First, keep updated contact information for all your participants. Second, monitor their ages. As they near age 70, get in contact with them and discuss the minimum distribution requirement. Be prepared to answer questions they have about the required amounts, and the tax implications, of those distributions. Make it easy for them, and it will be easy for you.
Correcting the Error – If you do make a mistake, and minimum distributions were missed, don’t fret; there may a workaround. The IRS’s Self-Correction Program (SCP) allows you to bring your plan back into compliance by making catch-up minimum distributions that were previously missed. As long as the correction is made within 2 years, you will not have to notify the IRS of your mistake. While the SCP will bring your plan back into compliance, it does not relieve your plan participants of the 50% excise tax. They would have to request relief using Form 5329, which they would file with their income tax returns.
To avoid placing this filing burden on the plan participants, many plan sponsors will, instead, choose to follow the Voluntary Correction Program (VCP). Participating in this program requires the IRS to approve of your correction method and will cost you a moderate fee, but you will have the option to request an excise tax waiver on behalf of the affected plan participants. You can also utilize the VCP if you discovered your mistake more than two years late.
As the population continue to age this will become an increasingly key area for plan sponsors to monitor. Ensuring that plan participants take RMD’s as required is essential. The good news is that if an error is made the SPC and VCP are available to correct common plan mistakes. If you have questions about a plan issue, error or need assistance with a 401k or other benefit pan audit, Barnes Dennig can help! For additional information please call us at 513-241-8313, or click here to contact us. We look forward to speaking with you soon.