Failure to issue minimum required distributions

Top 10 retirement plan internal control pitfalls #7

There is a misconception among plan sponsors regarding who is responsible for the process of setting up reminders when an employee is terminated and the distribution process should begin. Many are under the impression that the former employee should contact them regarding the milestone and starting the distribution, as they would with an IRA. But this is not the case for a 401(k) plan.

The minimum distribution rule as applied to an employer-sponsored retirement plan places that duty to make the distribution squarely on the shoulders of the plan sponsor. A failure to meet the minimum distribution requirement could adversely affect the tax qualification of the plan.

Another misconception is that employees need to submit paperwork to consent to the distribution. But plan sponsors don’t need the participant’s consent; they can simply calculate the distribution and issue the check. A VCP request could get the IRS to waive the participant penalty (when can be extreme) and the plan can remain qualified—after the distributions have been made.

Related article