Managing Missing Plan Participants: Avoiding the Pitfalls of RMDs for 401(k), 403(b), and Other Qualified Plans

The IRS issued an internal memorandum to address when IRS examiners should pursue potential penalties for failure to make RMDs to missing participants in qualified plans. In the event of an IRS audit or DOL investigation, counsel and plan administrators must adhere to requirements and procedures to avoid penalties for failing to make RMDs to missing participants.

IRS examiners are directed not to challenge the qualified status of a plan for violation of RMD requirements under Section 401(a)(9) for failure to commence or make a distribution to a missing participant to whom a payment is due, so long as the plan has taken steps to locate the missing participant consistent with methods outlined explicitly in the memorandum. If the plan does not follow such practices, the IRS may challenge the plan and assess penalties.

On the heels of the IRS issuing guidance on missing plan participants, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations expanding its program to include terminating defined contribution plans and terminating small professional service defined benefit plans with 25 or fewer participants. The regulations provide terminating plans with the option to transfer missing participant benefits to the PBGC rather than establishing an IRA if specific requirements are met.

The IRS memorandum and subsequent guidance serve as a roadmap for plan fiduciaries to avoid penalties and excise taxes. Counsel and employee benefits advisers must formulate effective missing participant procedures per the provided IRS guidance.

Listen as our panel examines current RMD rules, IRS guidance, and procedures regarding missing plan participants, as well as offers techniques to ensure compliance to avoid penalties.