We all know that April is closely associated with tax season. But for individuals who turned 70 ½ in 2013, April is important for another reason. By April 1, those who passed the 70 ½ mark must take their first required minimum distribution from their retirement accounts.
Without proper guidance, its all too easy for employees to forget about this vital step. If they fail to observe the rule, your companys retirement plan will face consequences. Typically thought of as the employees responsibility, plan sponsors should actually facilitate all aspects of RMDs from alerting participants about them to activating the fund withdrawal.
Heres a refresher on your responsibilities and the steps you need to take to protect you and your employees as your plan approaches its distributions.
As the plan sponsor, youre ultimately responsible for the distribution. Although your employees need to be mindful of their distribution requirements, you must take the time to notify the participant or their beneficiaries each year in advance of the early December filing deadline. If your employees dont elect the distribution, you can still set it in motion without their consent in order to protect your plan.
Educating your employees is key. Are your employees aware that failure to take the RMD in time results in a 50% penalty on the distribution amount due to excess accumulation? In order for them to amend the late distribution, they need to submit specific forms to the IRS. Further, if they want to be considered for a penalty waiver, they must include a letter detailing unforeseen circumstances. Educating them on the repercussions of inaction helps bring attention to the matter.
Employees failure to act can hurt you, too. If its found that a plan fails to distribute even just one RMD by the employees fault or your own your plan can be subjected to consequences. If you realize a distribution has been missed, its important to act quickly. Immediately begin the reconciliation process as outlined in the IRS Employer Compliance Resolution System.
You can make a plan compliant again after a failure. If your plan misses an RMD, all hope is not lost. Employers have two years to correct missed distributions via the Self-Correction Program if the mistake was deemed insignificant in relation to the plan. Under the SCP, the plan sponsor pays out missed RMDs. If this option doesnt work, the plan can elect a Voluntary Correction Program, which can provide assurance that its once again compliant.
With the potential implications of the entire plan on the line, its important to thoroughly monitor your employees RMD actions. Consult with your recordkeeper or plan provider to see what resources they can provide to keep you and your employees on track.
Kathleen Connelly is executive vice president of client service at Ascensus, a retirement and college savings plan administration services provider.
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