3893 / What penalties are imposed on a qualified plan that fails to satisfy the minimum distribution requirements?

Editor’s Note: The SECURE Act, enacted on December 20, 2019, made significant changes in required minimum distribution (RMD) rules for all qualified plans.

Failure to make minimum distributions. Although a plan that fails to meet the minimum distribution requirements with respect to all required distributions is technically subject to disqualification, Rev. Proc. 2016-51 states such failures can be corrected through the Employee Plans Compliance Resolution System (“EPCRS”).¹

For a defined contribution plan, the correction prescribed is to distribute the required minimum distributions, including earnings from the date of the failure to the date of distribution. The amount that must be distributed for each year a required minimum distribution was not made is determined by dividing the adjusted account balance on the applicable valuation date by the application distribution period. The adjusted account balance is the actual account balance on the applicable valuation date, reduced by the total missed distributions for prior
years.

For a defined benefit plan, the correction prescribed is to distribute the required minimum distribution plus an interest payment based on the plan’s actuarial equivalence factors in effect on the date the distribution should have been made.

If the plan is subject to a restriction on single-sum payments under section 436(d), the plan sponsor must contribute an amount to the plan determined according to the rules set out in Revenue Procedure 2016-51.²

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Planning Point: Plan sponsors and administrators should establish a system to monitor the ages of all participants. As a result of the SECURE Act 2.0, the employment status of participants who are approaching age 73 will need to be reviewed to determine if the exception for participants who are less than 5 percent owners are still working for the plan sponsor applies (the required beginning date was age 72 in 2020-2022).³ Those who do not qualify for the exception or who no longer qualify should be notified that they are nearing their required beginning date and when their required minimum distributions must begin.

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