Plan sponsors can use the Employee Plans Compliance Resolution System (Rev. Proc. 2016-51, as modified) to voluntarily correct the mistake of not making required minimum distributions (RMDs) under Internal Revenue Code Section 401(a)(9) to affected participants and beneficiaries.
Self Correction Program (SCP) - Depending on the specific plan circumstances, you can use SCP to correct a RMD failure even if the plan is under an Employee Plans examination. However, participant-owed excise tax under IRC section 4974 can’t be waived under SCP.
Voluntary Correction Program (VCP) - Unlike under SCP, you may request a waiver of the IRC Section 4974 excise tax for RMD failures using VCP. Also, if the only failure in your VCP submission is the RMD failure subject to IRC Section 4974 excise tax, you may qualify for a reduced user fee. Learn more by reviewing Tips for VCP Submissions for Required Minimum Distributions.
VCP Forms – To report a RMD failure, you may complete IRS Form 14568-H, Model VCP Compliance Statement - Schedule 8: Failure to Pay Required Minimum Distributions Timely, as an attachment to IRS Form 14568, Model VCP Compliance Statement, as your VCP application. You can’t use Form 14568-H for:
- Affected beneficiaries – Only use Form 14568-H for affected participants. If the failure involves both participants and beneficiaries, then do not use Form 14568-H. Instead, you may report the failure on Form 14568 (or an alternative narrative format) and identify whether the affected beneficiaries are spousal or non-spousal beneficiaries when you describe the mistake and how it's going to be fixed.
- Other failures – If the listed RMD failure is also an IRC Section 401(a)(14) commencement of benefit failure or any other failure, use the Form 14568 (or alternative narrative format).
Consequences of RMD failures - When tax favored retirement plans don’t pay RMDs in a timely manner:
- The plan sponsor faces the potential disqualification of the plan, which ultimately affects all plan participants in a negative manner.
- The plan participant who should’ve received the RMD is liable for an excise tax under IRC Section 4974 equal to 50% of the amount of the RMD not received.
- Correcting Plan Errors – Fill-in VCP Submission Documents
- Missing Participants and Beneficiaries and Required Minimum Distributions
- FAQs regarding Required Minimum Distributions
- Publication 590-B, Distribution from Individual Retirement Arrangements (IRAs) - includes life expectancy tables used to calculate RMDs.
- Publication 560, Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
- RMD Comparison Chart - IRAs vs. Defined Contribution Plans