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Out of Sight, Out of Mind Has Consequences for RMDs

By John Iekel

With myriad rules to follow and deadlines to meet, it’s only natural that ongoing but occasional requirements may be a bit innocuous and easier to put at the bottom of the “to do” list — or leave off that list altogether. Required minimum distributions (RMDs) — and that includes those for 403(b) participants — may be among those innocuous responsibilities, but a recent blog entry cautions that one fails to keep them in mind at one’s peril.

“Required Minimum Distributions (RMDs) — The Out of Sight, Out of Mind Problem,” a recent entry in Best Best & Krieger’s blog, notes that while it may be easy to let such a thing fall through the cracks, doing so with pension plans carries heavier consequences than doing so with other parts of life. “We all sometimes lose track of things hidden away in the back of the closet or fail to stay in touch with friends we haven’t heard from or seen in a while. These common tendencies can cause inconvenience in our everyday lives — but may lead to catastrophic failures when it’s our pension requirements that are out of sight, out of mind,” it warns.

Pension plans that must comply with the RMD rules are “susceptible to this phenomenon,” the blog says. And that can have very unwelcome consequences, it notes: “If the RMD rules are not followed, both the participant and the employer may be subjected to significant penalties and problems.”

What might those problems be? The blog suggests that they include:

The plan fails to lay out the RMD rules and requirements in detail and incorporates them by referring to the portion of the Internal Revenue Code from which they originate. The blog argues that this is “widespread” and “not advisable.” Why” “Many clients simply do not understand that this simple reference is shorthand for well over 30 pages of detailed and complex regulations.”

Rather than paying benefits to the extent vested when plan participants leave an employer, the blog says, many pension plans state that benefits will be paid at a certain age, which could be many years after departure. This runs the risk of the employer and the former employee forgetting that the benefits are there and should be paid out when that time eventually comes.

Actually locating and maintaining contact information for former employees who later are due RMD payments can prove difficult — which, in turn, complicates complying with the rules.

To obviate such circumstances, the blog poses some questions that a plan can ask itself:

  • Do you understand all of the shorthand references in your plan documents?
  • Are the plan’s administration systems and capabilities consistent with its design and needs?
  • Have you properly tried to contact participants from whom you have not heard?
  • Should you consider adding to the plan some form of the applicable IRS guidelines?