One of our employees retired on July 31, 2017 at age 73. During her tenure with the company she was an active participant in the 401(k) plan, accumulating a balance while having never taken a distribution to date. Now that she’s terminated, I understand she’s subject to required minimum distributions, with the first one due by April 1, 2018.
Since her retirement, we haven’t had any communication with this participant. Year-end has passed, and April is just a few months away. What are my responsibilities as plan sponsor to ensure her RMD is processed timely?
The short answer is that the RMD should be calculated and processed timely, with or without the participant’s authorization.
RMDs that are not taken in a timely manner result in headaches, steep penalties (think 50% of the amount not withdrawn timely), and require the participant to complete Form 5329 and attach it to his or her individual tax return. The IRS might waive the penalty if the participant attaches a letter of explanation with his or her tax return, detailing why the distribution did not occur timely and how this error will be remedied going forward. However, as with all things plan related, the preference is to stay in compliance in the first place and avoid the need for groveling and correction after the fact.
As this distribution is, in fact, a required distribution, our recommendation is to provide the participant with the necessary paperwork to request the RMD. In the absence of an election, the authorized plan representative or trustee should complete the necessary paperwork to instruct the recordkeeper to distribute the RMD amount. To further ease the burden of ongoing RMD elections, it may also be beneficial to take advantage of automatic RMD payments each year (if offered by the recordkeeper). In addition, you will want to monitor the participant’s balance after each RMD is paid to determine if it falls below the plan’s mandatory cash out threshold.
An unresponsive participant can create hassle for a plan sponsor, but in the case of RMDs, the plan trustee can act independently in the absence of a participant’s election to ensure timely processing. DWC can assist with the required minimum distribution calculations and determination of the deadline for distribution, as needed.