Missing Retirement Plan RMDs: A Costly Mistake

In addition to the many advantages of investing in a tax-deferred retirement plan or an Individual Retirement Account (IRA) , there are several important rules to follow, especially as you enter into retirement. Failing to adhere to these rules can be costly for both participants and plan sponsors and it is estimated that such mistakes cost investors over $1.5 billion alone each year.

RMD Requirements

The Internal Revenue Service (IRS) requires most retirement participants to begin withdrawing at least a minimum amount annually – the Required Minimum Distribution (RMD) – from their accounts upon reaching a specified age (currently 73). This requirement applies to participants in employer-sponsored retirement plans, such as 401(k), 403(b) and 457(b) plans, as well as traditional IRAs and similar IRA-based plans, including SARSEPs, SEPs and SIMPLE IRAs. Living owners of Roth IRAs are exempt from RMD, but their beneficiaries are not. The IRS provides guidance to help determine an individual’s RMD amount.

Penalties

Retirement account owners who fail to make their full RMD withdrawal on time are subject to an excise tax of 25% of the amount that should have been withdrawn. If the error is corrected within two years, the fee drops to 10%. Plan sponsors are expected to identify participants affected by the RMD requirement, notify them of their RMD responsibilities, including deadlines and minimum distribution amount, and ensure distributions are processed.

Plan Sponsors do not typically pay an excise tax out-of-pocket for a participant’s missed Required Minimum Distribution (RMD). Instead, the plan participant is liable for an IRS excise tax equal to 25% of the undistributed amount, which drops to 10% if timely corrected within two years. While the sponsor isn’t hit with this specific excise tax, failing to properly distribute RMDs poses severe risks and hidden costs to the Plan Sponsors. Failures carry meaningful risks and consequences for Plan Sponsors, such as:  

• Excise Tax Liabilities & Corrections
  • Participant penalty: Participants who miss an RMD may owe an excise tax of 25% of the shortfall (reduced to 10% if corrected within two years). The IRS may waive the penalty if corrected promptly and due to reasonable cause.

• • Correction costs: Plan sponsors, as fiduciaries, must correct failures using IRS programs like the Employee Plans Compliance Resolution System (EPCRS), addressing both plan document issues and administrative errors.

• Plan Disqualification (Ultimate Sponsor Risk)
  • The most severe consequence is loss of the plan’s tax-qualified status if RMD rules are not followed.

• • Disqualification can trigger significant tax liabilities for both the sponsor and all participating employees.

• Fiduciary Liability
  • Sponsors have a fiduciary duty under ERISA to ensure accurate distributions and timely communication.

• • Systemic or negligent failures may expose sponsors to legal action, including claims for lost tax benefits, interest, or damages.

• Audit Exposure
  • RMD failures may lead to increased scrutiny from the IRS or Department of Labor (DOL) during audits.

• Reputational & Participant Impact
  • Errors can erode participant trust and require added communication, remediation, and coordination with affected individuals.

The Scope of the Problem

Despite clearly defined RMD expectations, missed distributions are fairly common. In 2024, it estimated that over 6.5% of IRA investors missed their RMDs entirely. With the average missed IRA for an RMD totaling $11,600, the potential individual tax penalty ranges from $1,160 to $2,900. Applying these numbers to the approximately 8.7 million RMD-age IRA holders nationwide, its estimated tax penalties ranging from $678 million to $1.7 billion annually for missed RMDs. These staggering numbers don’t even include another 24% of plan owners who made withdrawals below the correct RMD amount.

Many of these missed RMDs continue for multiple years. A majority of those who missed RMDs in 2023 repeated the error in 2024.

RMD compliance is a widespread and persistent challenge for plan sponsors. With large, aging participant populations and complex plan data, sponsors must track eligibility, calculate distributions accurately, and manage timely communications, often across multiple systems. Even small administrative gaps can lead to missed or incorrect RMDs, increasing the risk of operational failures, correction costs, and regulatory scrutiny.

Small-Balance Accounts

A significant number of investors who failed to comply with RMD requirements are owners of small-balance accounts or people with balances under $5,000. Roughly another 20% have accounts valued at between $5,000 and $10,000.

Small balance accounts are especially concerning for plan sponsors. Many of them forget about their accounts, fail to stay in contact with the plan sponsor, fail to cash distribution checks and ultimately become missing participants.

Regardless of individual account balances, however, sponsors owe the same fiduciary responsibility and care to all plan participants. Failure to meet those responsibilities can result in stiff fines. These small-balance accounts add little value to the overall retirement plan, pose significant risk, and offer limited value to sponsors.

Plan Sponsor Relief

To minimize costly RMD failures and protect a plan’s tax-qualified status, plan sponsors should adopt proactive tracking, communicate early and often with participants, and adhere closely to IRS search requirements for unresponsive individuals.

Best practices include:

• Implement proactive tracking systems
  • Use automated tools to monitor participant ages, including terminated and former employees, approaching retirement and RMD eligibility.

• Enhance participant communications
  • Deliver early and frequent reminders through multiple channels (email, text, portals, and mail) to highlight deadlines and potential tax implications.

• Follow missing participant guidelines
  • Document diligent search efforts in line with IRS guidance, leveraging commercial locator services to find unresponsive individuals before RMD deadlines are missed.

• Process RMDs for unresponsive participants
  • When participants remain unresponsive after repeated outreach, process distributions in accordance with plan terms and spousal protections to maintain compliance.

• Leverage IRS correction programs
  • If errors occur, use EPCRS options, such as the Self-Correction Program (SCP) or Voluntary Correction Program (VCP), to remediate issues and help avoid penalties or plan disqualification.

MarketSphere’s Retirement Reunification Services support retirement plan sponsors in meeting fiduciary obligations, maintaining participant engagement, and locating missing individuals. MarketSphere’s service stands out by combining deep unclaimed property expertise with a dedicated focus on retirement plan compliance and participant outcomes. Key differentiators include:

• Specialized fiduciary support
  • Purpose-built for retirement plan sponsors, aligning closely with ERISA obligations and compliance requirements.

• Advanced participant location capabilities
  • Uses robust data analytics and proprietary tools to locate missing or unresponsive participants or beneficiaries more effectively than standard outreach methods.

• End-to-end reunification process
  • Manages the full lifecycle, from identifying at-risk participants to re-engagement and reunification, reducing internal workload.

• Compliance-driven approach
  • Designed to help mitigate audit risk, support documentation requirements, and strengthen overall plan governance.

• Scalable, high-touch service model
  • Handles large populations efficiently while still providing personalized outreach to participants.

• Focus on participant outcomes
  • Not just compliance, helps ensure participants and beneficiaries receive the assets they’re entitled to, improving trust and experience.

MarketSphere differentiates itself by blending compliance expertise, advanced search, confirmation and response capabilities, and a participant-first approach to help sponsors proactively manage risk and deliver better outcomes.

Learn about MarketSphere’s Retirement Reunification Services and contact our team to get started and help ease these burdens and act in the best interest of plan participants, beneficiaries and plan sponsors.