A required minimum distribution, or RMD, is the minimum amount one must withdraw from an IRA or retirement account each year. RMDs typically kick in after the owner of the account turns 70.5, and if your company offers any sort of employer-sponsored retirement plan (including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans) you could face serious consequences if your 70.5 and up workers fail to meet the RMD requirements.
Consider the following employer RMD responsibilities as well as the steps you should take to protect your invested workers and your plan, from alerting participants who are approaching RMD age to activating the fund withdrawal.
Employers are ultimately responsible for RMDs. Although your employee should make an effort to understand the minimum distribution requirements of the employer-sponsored retirement savings plan, making sure RMDs happen is ultimately your responsibility. You should notify participants age 70.5 or older in advance of the filing deadline each year and, if they fail to file for distribution, you should set the process in motion yourself to protect your company’s retirement savings plan.
Employers must educate their employees. Do your employees know that they’ll pay a 50 percent penalty tax on the distribution amount if they fail to take the RMD? In addition, if they fail to file for their RMD, they will need to submit specific forms to the IRS to amend the situation. While penalty waivers are possible, they require a letter detailing the unforeseen circumstances leading to the error.
Employers face penalties, too. If the employer-sponsored retirement plan fails to distribute an RMD, whether that failure is your employee’s fault or your own, the plan may be subject to consequences such as losing tax-qualified status and elimination of your tax deduction for employer contributions. As soon as you realize you’ve missed a distribution, you must contact the IRS and begin the reconciliation process as outlined by the Employee Plans Compliance Resolution System.
You can correct your mistakes. If you miss an RMD, you can correct your mistake using the IRS’s Self-Correction Program without paying a fee—provided you’ve made an “insignificant operational mistake” or a “significant operational mistake” that you are correcting within the required timeframe outlined by the IRS. You may also choose the Voluntary Correction Program if you prefer written IRS approval of your correction, though the VCP does require payment of a fee.
It’s essential you monitor your employee’s RMDs if you want to ensure your employer-sponsored retirement plan maintains its tax-preferred status. Contact your benefits expert for additional insight on retirement plan RMDs or to discuss benefit administration services you may find helpful.