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Required Minimum Distributions for Missing Participants and Beneficiaries

This past fall, the IRS issued a field directive to all of its exam agents regarding missing participants, beneficiaries and the required minimum distributions (“RMD”) standards under Internal Revenue Code (“IRC”) section 401(a)(9). The directive enhances the enforcement of the RMD requirements, but does not address the application of any other qualification requirements under the IRC or other applicable law including Title 1 of ERISA.

Background

In general, IRC section 401(a)(9) establishes RMD requirements for qualified retirement plans. According to the RMD requirements, for participants who are not a 5% owner, distribution of the participant’s accrued benefit under a qualified retirement plan must commence after the attainment of age 70½ of the participant or (if provided for in the plan document) after the participant’s retirement. If a participant is a 5% owner of the plan sponsor, distribution of the participant’s accrued benefit must begin after the attainment of age 70½. In certain cases, plan sponsors have been unable to make a distribution to a terminated participant due to the inability to locate the participant or beneficiary.

IRS Directive

The directive instructs exam agents not to challenge a plan’s tax qualification for its failure to commence or make an RMD to a missing participant or beneficiary if the plan has taken each of the following steps:

  1. Searched records for the plan, any related plan, the plan sponsor, and publicly-available records or directories for alternative contact information;
  2. Used any of the following search methods:
    • a commercial locator service; 
    • a credit reporting agency; or
    • a proprietary internet search tool for locating individuals; and
  3. Attempted to contact the participant or beneficiary via U. S. Postal Service certified mail to the last known mailing address and through other appropriate means including email addresses and telephone numbers.
    If a plan’s sponsor has not completed the above steps, exam agents may challenge a plan’s tax qualification under the RMD requirements for its failure to commence or make a distribution to a participant or beneficiary to whom a payment is due.

Conclusion

In order to protect their plan’s tax qualification, plan sponsors will want to make sure they are following and documenting the above procedures. In addition, while the directive does not address it, plan sponsors may want to conduct these searches for missing participants on a periodic basis (e.g., annually or biannually) to demonstrate best efforts.

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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