The issue Internal Revenue Code (IRC) section 401(a)(9) establishes a mandatory date, known as the "required beginning date" (RBD), by which payments to a plan participant must start. A minimum payment must be made to the participant by the RBD and for each following year. A participant is not allowed to delay distribution beyond the RBD. However, participants may still have choices regarding the form of the payment as long as the form doesn't violate the law's minimum distribution requirements. Note that different plans may have different available payment methods. Normally, the RBD for a participant who is not a 5% owner is the April 1 following the end of the calendar year in which the latter of two events occurs: The participant reaches age 70½ or The participant retires. The SECURE Act, which became law on December 20, 2019, made a major change to the RMD rules. If you attain age of 70½ in 2019, the prior rules apply, and you must take your first RMD by April 1, 2020. However, if you reach 70½ in 2020 you do not have to take your first RMD until April 1st of the year after you reach 72. For a participant who is a 5% (or more) owner, the RBD is the April 1 following the end of the calendar year in which they attain age 70 1/2, if they attain that age in 2019, or age 72 if they reach 70 ½ after December 31, 2019, regardless of whether they retire by the end of that year. Minimum distribution requirements also apply after a participant's death. When a participant dies, even if that death occurs before what would otherwise have been the participant's RBD, the law sets minimum distribution requirements on the payment of the participant's death benefit. The problem Plan sponsors often discover that required minimum payments have either not been paid timely or at all. This is especially true when a 5% (or more) owner continued working after reaching age 70½. The minimum distribution rules are qualification requirements, meaning they must be written into the plan. Failure to follow the minimum payment rules as written in the plan document can lead to the loss of the plan's tax-qualified status. If participants or beneficiaries do not receive their minimum distribution on time, they (not the plan) are subject to a 50% additional tax on the underpayment. To pay the additional tax, the participant or beneficiary must attach Form 5329 PDF to their federal income tax return for the calendar year in which the minimum distribution was due. The IRS may waive the additional tax for reasonable cause, if reasonable steps are being taken to make up the distribution. The fix The EPCRS Revenue Procedure is the latest update of the IRS's various resolution programs for correcting disqualifying defects in retirement plans and avoiding the tax consequences of plan disqualification. These programs are known collectively as the Employee Plans Compliance Resolution System (EPCRS). Employers may avoid disqualification of their plan by using EPCRS to correct the failures. The Self-Correction Program (SCP) or Voluntary Correction Program (VCP) can be used to correct the failures. (Note: explanations of and eligibility for these programs can be found in Correcting Plan Errors.) Under the SCP, a plan sponsor may self-correct minimum required distribution errors, even where significant. The self-correction period under SCP for significant violations is two years after the plan year in which the violation occurs. If there has been a failure to satisfy the minimum distribution requirements, the IRS will waive the 50% additional tax mentioned earlier if the plan sponsor applies for relief through VCP and requests the waiver as part of the submission. If the affected participant is an owner-employee or a 10% or more owner of a corporate plan sponsor, an explanation supporting the waiver request must be attached. If VCP isn't used to waive the additional taxes, each affected participant or beneficiary must apply for relief on an individual basis using the Form 5329 attachment to their individual federal income tax return. Making sure it doesn't happen again Plan sponsors should carefully monitor the age of all participants, including terminated participants with unpaid vested benefits, who are approaching age 70. Not making required minimum distributions can not only lead to plan disqualification, it also creates a 50% additional tax on the participant for missed distributions. Fortunately, VCP offers a course of action that can restore the qualified status of the plan and obtain waivers of the additional tax for all affected participants and beneficiaries.
