The Rules

The Internal Revenue Code requires participants in qualified retirement plans to begin receiving required minimum distributions (RMDs) by a specific date known as the required beginning date (RBD). For a Participant that is not a 5% owner, the required beginning date (RBD) is generally April 1^st of the year following the latter of these two events:

• The calendar year in which the participant reaches age 73 (if born between 1951 and 1959), or age 75 (if born in 1960 or later),
• Or the year in which the participant retires

If a participant is a 5% owner, the RBD is April 1 of the year following the calendar year in which they reach the applicable RMD age—currently age 73 (or 75, based on birth year)—regardless of whether they have retired. After the required beginning date, participants must receive their RMD annually.

The Error

The Plan’s minimum distribution rules should be included in the Plan Document and may differ from the general rules above. For example, the Plan may require all Participants to begin receiving their RMD by April 1^st of the year following the year in which they turn 73, regardless of ownership or retirement status.

Failures to issue RMDs on time are common when participants continue working past traditional retirement age or when participant data (like birth dates or employment status) is incomplete. If an error has occurred resulting in a RMD not being paid, the Plan’s tax-qualified status is in jeopardy. Additionally, the participant may be subject to an excise tax on the underpaid RMD. Under SECURE 2.0, this excise tax was reduced from 50% to 25%, and may be further reduced to 10% if the RMD is corrected within a two-year correction window. The IRS may waive the additional tax if the error is corrected and reasonable efforts are taken to ensure that the error does not occur in the future.

The Fix

The Employee Plans Compliance Resolution System (EPCRS) should be used to correct errors regarding required minimum distributions. Under EPCRS (Rev. Proc. 2021-30), RMD failures can often be corrected using the Self-Correction Program (SCP), even if the failure is significant, as long as it is corrected within three years of the Plan year in which the failure occurred and the plan has adequate compliance procedures in place. The Voluntary Correction Program (VCP) may be used to correct older or systemic RMD failures and allows the Plan Sponsor to request a waiver of the participant’s excise tax by submitting Form 14568 and a statement of reasonable cause. Participants may also independently request a waiver of the excise tax by filing Form 5329 with the IRS.

The Prevention

Failures regarding RMDs can be very costly for both the Plan and Participant. To prevent these errors, Plan Sponsors should ensure the accuracy of Participant data including dates of birth & retirement status, and periodically review Participant data to ensure that Participants are receiving their required minimum distribution when applicable. Plans should also include RMD reviews as part of year-end compliance procedures and verify timely communication with service providers who assist with calculating and processing distributions.

For Assistance with Required Minimum Distributions

If you need help with required minimum distributions, contact Ekon Benefits at (314) 367-6555 or info@ekonbenefits.com.

Straight From the Source

IRS – RMD Errors Correction Guide: https://www.irs.gov/retirement-plans/correcting-required-minimum-distribution-failures

Retirement plan and IRA required minimum distributions FAQs: https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

Rev. Proc. 2021-30: https://www.irs.gov/pub/irs-drop/rp-21-30.pdf