Excise Taxes and Plan Disqualification from RMD Processing Failures
Definition
Employee benefit plans in insurance and funds fail to timely process or correctly calculate Required Minimum Distributions (RMDs), triggering 50% excise taxes on unpaid amounts for participants and risking the plan's tax-qualified status. Plan sponsors must file under IRS Employee Plans Compliance Resolution System (EPCRS) using forms like 14568 Schedule H for corrections, often after deadlines, leading to ongoing compliance burdens. These operational failures are systemic due to SECURE Act changes complicating RMD ages and calculations across multiple custodians.
Key Findings
- Financial Impact: $50% excise tax on unpaid RMD amounts per participant annually
- Frequency: Annual
- Root Cause: Late or incorrect distribution requests, unresponsive participants, multiple 403(b) contracts requiring aggregation, and outdated recordkeeping leading to missed deadlines
Why This Matters
This pain point represents a significant opportunity for B2B solutions targeting Insurance and Employee Benefit Funds.
Affected Stakeholders
Plan Administrators, TPAs, Recordkeepers, Custodians
Deep Analysis (Premium)
Financial Impact
$100K-$400K across PEO client base annually (actuarial fees; correction costs; PEO reputational risk) • $100K-$500K per contractor annually (government audit penalties; contract compliance costs; fiduciary liability insurance; legal defense costs if federal violations alleged) • $100K-$500K per corporation annually (actuarial fees for recalculations; correction costs; plan sponsor liability; reputational risk)
Current Workarounds
Actuarial firms maintain separate Excel models per client plan; manual rule updates each tax year; email-based communication with plan sponsors and TPAs; spreadsheet reconciliation of calculation methodologies • Actuaries use Excel models for RMD calculations; manual updates to life expectancy factor tables; spreadsheet-based tracking of SECURE 2.0 rule changes (72→73→75); peer review via email • Actuary maintains Excel models for contractor plan; manual government compliance rule checks; spreadsheet-based audit trail creation; email coordination with government contractor benefits team and TPA
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Methodology & Sources
Data collected via OSINT from regulatory filings, industry audits, and verified case studies.
Evidence Sources:
- https://www.mercer.com/insights/law-and-policy/how-to-correct-required-minimum-distribution-errors/
- https://www.meadenmoore.com/blog/tax/required-minimum-distribution-tips-traps-part-i-
- https://www.truckerhuss.com/2025/12/complying-with-the-required-minimum-distribution-rules-when-participants-are-unresponsive-or-uncooperative/
Related Business Risks
Administrative Bottlenecks from Unresponsive Participants in RMD Processing
Overpayments from Unreconciled Employee Benefit Contributions
Regulatory Non-Compliance from Inadequate Reconciliation Procedures
Unreconciled Premium Contributions Leading to Revenue Loss
IRS Qualification Failures from Inadequate Hardship Withdrawal Documentation
Unauthorized Hardship Withdrawals Due to Lax Substantiation in Review Process
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