The Department of Labor (“DOL”) has recently implemented an initiative to investigate the manner in which defined benefit plans of large employers comply with the required minimum distribution rules set forth in Section 401(a)(9) of the Internal Revenue Code (“Code”). The initiative is focused on the extent to which large employers have processes in place to (i) locate missing plan participants, (ii) inform deferred vested participants that a benefit is payable, and (iii) commence benefit payments in a timely fashion by each participant’s “required beginning date” (generally, the April 1 following the later of the calendar year in which the participant reaches age 70½ or the calendar year in which the participant terminates employment).

In light of the DOL’s audit initiative, employers will want to assure that they have procedures in place to (i) locate missing plan participants, (ii) inform terminated vested participants regarding their right to elect benefits, and (iii) commence benefit payments on or before each participant’s required beginning date. In addition, employers will want to confirm that such procedures are consistently followed in practice, and that documentary evidence regarding compliance is being maintained and preserved. For example, employers will want to retain evidence of all certified mailings to terminated vested participants and lost participants, as well as efforts made through locator services to locate lost participants.

Outside of audit concerns, implementing and consistently following such procedures may help to minimize the risk that participants will be faced with excise taxes for not having their required minimum distributions timely distributed. Under Section 4974 of the Code, any participant who is not paid his or her required minimum distribution for a given year may be liable for an excise tax equal to 50% of amount that should have been paid out as a required minimum distribution for the year. Although this excise tax has been around for quite some time, it may be (unwelcome) news to participants who are past their required beginning dates. If, after implementing procedures, it is determined that there are participants who are delinquent on their required minimum distributions, an employer may be able to correct these missed distributions through the IRS’s Employee Plans Compliance Resolution System (“EPRCS”) and have the excise tax waived by the IRS.