The Department of Labor and IRS are devoting increasing enforcement attention to whether employers are being proactive about meeting retirement plan payment deadlines. Department of Labor auditors are seeking information about the payment outreach and missing participant search process for plans under their review, and Form 5500 requires disclosure of payments that were not made on time (excluding payments not made because the plan could not locate the individual despite diligent effort). IRS auditors are examining plans to determine whether the plans have met the legal deadlines for commencement of required minimum distributions.
Tax-qualified retirement plans, 403(b) plans and 457(b) plans must begin paying participants no later than the April 1st after the year in which the participant turns 70½ or the year in which the participant’s employment terminates, whichever is later. In the case of individuals owning more than five percent of the plan sponsor, and all IRA owners, the deadline is always April 1st after the year in which the individual attains age 70½. Some plans (particularly defined benefit pension plans) require payment to commence earlier, when the participant reaches normal retirement age. Beneficiaries of deceased participants are also subject to payment deadlines, with the actual deadline varying depending on a number of factors. Small benefits of $5,000 or less ($1,000 or less, for plans not including an automatic rollover provisions) may be subject to automatic payment promptly following termination of employment.
The IRS issued a memorandum on October 19, 2018 to instruct auditors not to assert that a plan has violated the required minimum distribution rules if a plan has searched its records, the plan sponsor’s records and publicly available records or directories, used a commercial locator service, credit reporting agency or a proprietary internet search tool, and attempted contact via certified mail to the last known mailing address and through “appropriate means” for other contact information (such as e-mail and telephone). A plan that has not taken these steps and fails to make a required minimum distribution may be cited for violation of the required minimum distribution rules.
The IRS’s approach is consistent with the position of the Department of Labor, which has said that plan fiduciaries should maintain written procedures for enforcing payment deadlines and locating missing participants. Plan fiduciaries should make sure that they maintain and follow appropriate payment outreach procedures, and are proactive about keeping in touch with participants. Even if a participant has years to go before a payment deadline, fiduciaries should follow up promptly on returned mail or other information indicating a bad address, a deceased participant or other potential issues that may impact the plan’s payment deadline and/or the plan’s ability to make payment on time. Fiduciaries without clear written procedures should cooperate with their recordkeeper to document their plan’s actual practice, and make sure that practice is legally adequate.
If you are creating or updating your plan’s procedures, consider addressing the following points:
- Identification of the party responsible for tracking and initiating required distributions. If you expect the recordkeeper to perform this function, the recordkeeping contract should expressly impose this obligation.
- A process for searching for participants and beneficiaries as soon as the plan learns of a bad address. For example, if a routine benefit statement comes back as undeliverable, an address search should be conducted at that time. Waiting until the payment deadline approaches increases the odds that you will not be able to find the person, or that you will not have timely notice of a death and associated payment requirements. In addition, the plan has an ongoing obligation to provide required communications to the participant or beneficiary; it cannot simply ignore a bad address.
- Revisit the “bad address” list periodically, to conduct updated searches for individuals who could not be located through your original efforts.
- A process for conducting death searches, particularly if a plan is not in regular contact with a participant via ongoing benefit statements or other regular mailings. A participant’s death may accelerate the time at which payments must begin, or mean that payments need to stop, be reduced, or be redirected. Beneficiaries may not know of a participant’s retirement benefits, particularly if the participant had not yet commenced payment, so the plan should not assume it will receive timely notification from the next of kin. Note that enhanced requirements now apply to qualify for access to the Social Security death master file.
- The timing for initial and follow-up outreach to initiate payment, and rules for how to handle non-responsive participants and beneficiaries.
In addition, employers should look for opportunities to communicate payment deadlines and remind participants of the importance of keeping address information up to date. If possible, these warnings should be included in the summary plan description. Reminders can also be included with regular mailings, such as benefit statements and annual investment or funding notices. When employees first terminate employment, outreach about distribution rights should include a reminder of participants’ obligation to stay in contact if they choose not to take payment. The plan’s cash-out provisions should be enforced in a timely fashion for individuals whose benefits are subject to automatic payment.
Regular oversight of the plan’s ongoing communications and proper enforcement of the plan’s payment deadlines will minimize the risk of violation of plan payment rules, protecting the plan’s tax qualification and minimizing the risk of the adverse tax consequences for participants that can arise from late payment. In the case of defined benefit plans, timely payment also reduces the plan’s risk of potentially expensive actuarial adjustments or interest on delayed payments. And of course, even leaving all other considerations aside, timely payment serves the employer’s fundamental purpose in establishing and maintaining the plan – namely, the provision of retirement benefits to former employees.
As always, please feel free to contact a member of the Employee Benefits and Executive Compensation group at 585.232.6500 for more information about the items discussed in this newsletter, or for assistance in other matters.