(b)lines Ask the Experts – Forcing First-Time RMDs

“I am concerned since a number of participants in our plan have not taken their required minimum distributions; not because they cannot be located, but because they simply refuse to complete the required paperwork, whether via oversight or intentionally.” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:      

Excellent question! Some plan sponsors have grown increasingly concerned over minimum distribution compliance as they face an increasing population of retired employees who leave their account balances on deposit. A few have taken the proactive step of amending their retirement plan to provide for the issuance of a required minimum distribution (RMD) by the required beginning date for such distributions, regardless of whether the participant has applied for the benefit by completing the appropriate paperwork.

If a participant who is locatable fails to complete the forms to apply for the RMD, the plan provides for the plan sponsor to direct the provider to commence payment of such RMDs on the required beginning date for the participant (generally no later than April 1st following the later of the year in which the participant attains age 70 ½ or terminates employment). Other plan sponsors, instead of forcing the distribution, simply forfeit the funds subject to reinstatement if the minimum distribution is properly executed.

However, though there is nothing in the Internal Revenue Code that would appear to prevent such a distribution/forfeiture (though it should be noted for Employee Retirement Income Security Act (ERISA) plan sponsors that it is questionable that the Department of Labor (DOL) would agree that the funds could be forfeited), there are some practical considerations to ponder before you take the necessary steps to amend your plan accordingly.

First of all, can your recordkeeper comply with such a plan provision?  Some recordkeepers will simply not permit distributions without participant consent, except in limited circumstances (e.g. small balance cash-outs). Thus, you will want to check with your recordkeeper to determine if it is able to issue an RMD without any of the necessary paperwork being completed. Some recordkeepers may require the plan sponsor to complete the distribution forms on behalf of the participant before issuing a distribution, Similarly, certain investment contracts (e.g. annuities) may require the consent of the participant before an RMD can be made, so those contracts should be reviewed as well.

If your retirement plan happens to be a 403(b) plan, there are some additional considerations. First of all, unlike a 401(a) or 401(k) plan, a participant may satisfy his/her RMD from another 403(b) plan in which he/she participates (e.g. from a previous employer). And, in 403(b) plans, there are special rules (see “(b)lines Ask the Experts: Required Minimum Distributions”) that apply to account balances with the plan that existed prior to 1987. These added complexities may result in 401(a) and 401(k) plans being better candidates for a forced RMD provision than 403(b) plans.

Thank you for your question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.