Federal tax law requires retirement plan participants to begin taking required minimum distributions (RMDs) when they reach age 70½. December 31 is the deadline by which RMDs must be paid out each year, except for the first year’s RMD which may be delayed until April 1 of the following year.
To enforce this annual distribution rule, the IRS assesses a 50% excess accumulation tax on participants who fail to distribute the required amount. The IRS also has the authority to disqualify a plan if the plan sponsor does not make certain that RMDs are distributed. Because compliance with the RMD rules is a plan qualification issue, plan sponsors have the authority to initiate an RMD payment if a participant does not provide payment instructions. In some cases, however, plan sponsors do not have current contact information for participants or beneficiaries who are required to take a distribution under the RMD rules. In these circumstances, plan sponsors may be prevented from paying out RMDs as required. The IRS has provided guidance to address this issue.
In a recent memorandum to its Employee Plans examiners, the IRS instructed examiners to not challenge a plan for failing to pay out RMDs to a participant (or a beneficiary if a payment is required) if they are unable to locate a participant, provided they have taken the following steps:
- Searched the plan records, records of any related plans, and other records of the plan sponsor to find alternative contact information
- Searched publicly-available records or directories to find alternative contact information
- Used a commercial locator service, a credit reporting agency, or a proprietary internet search tool for locating individuals
- Attempted contact through the United States Postal Service by sending certified mail to the last known mailing address, and attempted contact through the appropriate means for any other address or contact information that has been obtained (for example an email address or a telephone number)
If a plan has not completed these steps, the IRS examiner may challenge the plan for failure to satisfy the RMD requirements.