Why reexamine, you ask?
The 2015 instructions for one of the Schedule H questions have changed. Refer to the change to Question 4l on Schedule H, highlighted below:
“Line 4l. You must check ‘Yes’ if any benefits due under the plan were not timely paid or not paid in full. This would include minimum required distributions to 5% owners who have attained 70½ whether or not retired and/or non-5% owners who have attained 70½ and have retired or separated from service, see section 401(a)(9) of the Code. Include in this amount the total of any outstanding amounts that were not paid when due in previous years that have continued to remain unpaid.”
While most of us thought this Question 4I would prompt an obvious “no” answer, this instruction change highlights an area that is coming under Internal Revenue Service (IRS) and Department of Labor (DOL) scrutiny. Recent DOL and IRS examinations have revealed issues associated with plan sponsors not identifying the age 70½ terminated, vested participants.
WHEN DO YOU NEED TO ANSWER “YES”?
If the plan has benefits due under the plan, not timely paid or not paid in full, the plan is required to report the total amount, including any outstanding amounts that were not paid when due in previous years that remain unpaid. This includes unpaid benefits for vested, terminated participants who have reached the age of 70½ and are not in pay status, even if they have not submitted an application for benefits or cannot be located. For participants that have not applied for benefits, the benefit calculation is needed to determine the unpaid amounts. A “Yes” answer could be a red flag for the plan and draw unwanted attention by the DOL and IRS, so it is very important to have all necessary documentation on this group of participants.
WHAT IF A PLAN HAS ISSUES IDENTIFYING OR FINDING PARTICIPANTS WHO HAVE REACHED 70½?
Benefit plans should have procedures in place to locate missing participants, including participants that reach age 70½. Procedures should ensure that data necessary to identify age 70½ participants, as well as the ability to locate them in the event they have not applied for benefits, are in place. The search methods, attempts and failures must be documented for future reference.
A LITTLE RELIEF FROM THE IRS
In recent guidance, the IRS announced that, “ …in the absence of other guidance, filers do not need to report on Lines 4I of the Schedule H … unpaid required minimum distribution (RMD) amounts for participants who have retired or separated from service, or their beneficiaries, who cannot be located after reasonable efforts or where the plan is in the process of engaging in such reasonable efforts at the end of the plan year reporting period.”
The IRS guidance recommends that, “Plan administrators and employers should review their plan documents for written procedures on locating missing participants. Although the DOL’s FAB 2014-01 is specifically applicable to terminated defined contribution plans, employers and plan administrators of ongoing plans may want to consider periodically using one or more of the search methods described in the FAB in connection with making reasonable efforts to locate RMD-eligible missing participants.”
TIME TO LOOK AT YOUR PLAN!
Qualified Retirement Plans
- Can you identify age 70½ participants?
- Are you able to calculate benefits for those who have not yet applied?
- Does your plan:
- Send notices to participants that reached age 70½? Have procedures in place for finding and maintaining addresses for terminated, vested participants?
- Make a reasonable attempt to locate the participants when notices are returned undeliverable?
- Maintain documentation for attempts and failures to locate terminated, vested participants?
- Maintain documentation for RMD notices sent to participants?
Health and Welfare Plans
Health and welfare plans are not excluded from answering question 4l to Schedule H. For health and welfare plans, it is important to document the event for when a benefit is to become due under the plan: Upon receipt of benefit claim or upon approval for payment? For denied claims that are later appealed, what triggers a benefit to be due under the plan?
ACTION NEEDED NOW
Form 5500 filings for the 2015 calendar year (on extension) are quickly closing in on their final filing due date of October 17, 2016. It’s time to (1) identify age 70½ participants who have not applied for benefits; and (2) determine whether you can locate them. If reasonable search efforts have not been made, there is still time before the filing due date to get a game plan started to attempt to locate missing participants who have reached 70½.
We encourage plan administrators to coordinate questions with our partners and additional plan professionals, as determined necessary, to conclude that plans have met their obligations to locate missing participants to deliver benefits that are due in a timely manner.
For questions or concerns, please contact your partner at Lindquist. Our partners are ready to assist you with this matter.
Michelle L. McCann, CPA, is a partner in Lindquist’s San Ramon office. She is primarily responsible for overseeing quality control for preparation of employee benefit plan and exempt-organization returns, including Forms 5500, 990, LM-2 and 199. Michelle also provides QuickBooks training and support for the firm's clients. Contact Michelle at firstname.lastname@example.org.
Barry T. Omahen, CPA, is Lindquist's managing partner based in the San Ramon office. Barry specializes in serving the audit, accounting and reporting needs of employee benefit plans and not-for-profit organizations. He serves as the partner in-charge of the firm's quality control review and audit and accounting practice. Please contact him at email@example.com with questions.