“The dog ate my homework.” We all miss deadlines. But sometimes there are extenuating circumstances, as even the IRS recognizes — for instance, regarding required minimum distributions (RMDs).
In a recent PenChecks Trust blog entry, longtime ASPPA member Bill Grossman, Managing Member of WCG ERISA Consulting, LLC, discusses the RMD rules and what causes may be considered reasonable for not making an RMD.
“Retirement plans were designed to help build retirement nest eggs by deferring taxation on the contributions and earnings until the funds are withdrawn after age 59½ for use during retirement,” Grossman says. However, he notes, retirement funds “were not intended to primarily provide the participant’s beneficiary with benefits,” so Code Section 401(a)(9) was put in place to make sure that retirement benefits were disbursed to participants while they are alive. And, he reminds, “participants who ignore the RMD rules must pay a 50% excise tax as outlined in Code Section 4974(a).”
But Grossman also points out that Section 4974(d) “anticipates that errors may occur, and, if they occur for a reasonable cause, the IRS may waive the 50% penalty.” Grossman says that if a participant sufficiently establishes that there was a reasonable error, and reasonable steps to correct it, the penalty may be waived.
So why might an RMD be missed? Grossman suggests some reasons:
Incorrect Date of Birth. This could result from a typographical mistake, the information being lost or incorrectly transferred during a merger or acquisition, bad handwriting or transposition of numbers in the birth year.
Retirement Date. Grossman argues that exactly when a participant is retired “can be a ‘facts and circumstances’ determination.” Relevant factors can include whether the participant was:
- laid off;
- completely severed from employment;
- on an unpaid leave of absence;
- on a medical leave;
- on disability leave; or
- completely retired or still working part of the week.
“These factors can all compound the plan sponsor’s understanding of the participant’s retirement status,” says Grossman. He argues that a missed RMD that results from an employer misunderstanding the participant’s retirement status “could be a good case for a reasonable cause to have the 50% penalty waived.
“The IRS doesn’t take missed RMDs lightly,” says Grossman. “However, the IRS does understand there are reasonable causes for missing them.”