In a February 2018 memorandum to its Employee Plans examiners, the IRS National Office extended to section 403(b) programs the audit guidelines for required minimum distribution (RMD) failures due to missing participants and beneficiaries that were accorded in an October 2017 memorandum to “qualified plans.” In both cases, examiners are instructed not to challenge the tax status of the plan on this basis so long as the plan has:

  • Searched plan, plan sponsor and publicly available records or directories for alternative contact information;
  • Used any of the search methods below:
    • A commercial locator service,
    • A credit reporting agency, or
    • A proprietary Internet search tool for locating individuals; and
  • Attempted contact by US Postal Service certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers).

This enforcement position will be incorporated into the Internal Revenue Manual (IRM) audit procedures for examination of Form 5500 returns primarily for section 401(a)/403(a) plans (which currently direct examiners to verify RMD compliance) and the IRM technical guidelines for section 403(b) plans.

Eversheds Sutherland comments

  • In the last year or two, it has been increasingly common for both the IRS and the DOL on audit to demand “scorch the earth” search methods for missing participants that frequently seem to lack a realistic cost/benefit balance or due sensitivity to privacy considerations. It is well that the National Office has articulated uniform, sensible requirements directly to its examiners and indirectly to plan sponsors and providers, and it would be helpful for DOL to do the same, particularly if the tax and ERISA requirements are consistent.
  • The guidelines do not address how plans should handle situations in which a participant address has been identified but the participant is unresponsive or will not request distribution, nor do the guidelines address circumstances in which participants fail to cash checks. These situations should not result in disqualification of a plan, but it still seems advisable for plan sponsors to establish a consistent process for dealing with these common fact patterns.
  • We understand that the IRS did not intend the October 2017 memorandum to reach IRAs and has not announced any IRM revisions in guidelines applicable to IRAs. Because governmental 457(b) plans always have the benefit of the statutory rule against disqualification for operational defects until the first plan year beginning more than 180 days after notification of the defect from the Service, the February 2018 memorandum leaves IRAs as the principal category of “qualified” retirement arrangement subject to the RMD rules without an audit reprieve.