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ESOP Guy

RMD took too much

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One of our client's just decided to take what he wanted for his RMD. It was $20k > the RMD amount.

The plan does NOT have an in-service provision.

What is the correction?

I suspect it is treated as a distribution without a distributeable event and needs to be paid back. That seems to be my memory of how it was handled the last time I heard of one of these.

Any cites would be helpful. I assume once again rev proc 2008-50 "overpayment" section is what is going to govern here, but want to make sure.

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It would be a strange document that did not permit in-service at NORMAL retirment age, although I did see one that delayed inservice to age 70.

Amend the darn document retroactively, file under EPCRS and be happy.

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I had a similar reaction... double check your definition of retirement that termination is a prerequisite. Not a question so much of being in-service but of being retirement eligible. I can attest that some plans permit active employees to become retirement eligible and thus take the types of withdrawals available to retirees.

And I also agree w/ simply fixing it via retroactive amendment under EPCRS if you can't find enough wiggle room in your plan doc.

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musings of someone who could be way off.

I thought the idea was that when you hit the magic date you had to take a 'minimum' amount, that there was nothing to prevent you from taking more, but maybe that is document driven.

1.401(a)(9)-5 Q and A 2 says

What if the amount distributed exceeds the minimum required, will credit be given in subsequent years for the excess distribution?

A. If, for any distribution calendar year, the amount distributed exceeds the required minimum, no credit will be given in sibsequent calendar years for such excess distribution.

there is no mention made of penalties for excess distributions under the minimum distribution rules that I can find.

So that Q and A seems to me to say you could take more, but you don't get brownie points for future years and reduce or eliminate next years min distribution.

The ERSIA Outline Book speaks about tax consequences - that anything above the min distrib would be eligible for rollover so should have had 20% withholding, but that is a different issue.

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musings of someone who could be way off.

I thought the idea was that when you hit the magic date you had to take a 'minimum' amount, that there was nothing to prevent you from taking more, but maybe that is document driven.

1.401(a)(9)-5 Q and A 2 says

What if the amount distributed exceeds the minimum required, will credit be given in subsequent years for the excess distribution?

A. If, for any distribution calendar year, the amount distributed exceeds the required minimum, no credit will be given in sibsequent calendar years for such excess distribution.

there is no mention made of penalties for excess distributions under the minimum distribution rules that I can find.

So that Q and A seems to me to say you could take more, but you don't get brownie points for future years and reduce or eliminate next years min distribution.

The ERSIA Outline Book speaks about tax consequences - that anything above the min distrib would be eligible for rollover so should have had 20% withholding, but that is a different issue.

Tom,

That is exactly how our firm handles amounts > than RMD. We make sure that the document permits in-service distributions at NRA and we advise our clients that they additional amount over the RMD is taxable at 20%.

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musings of someone who could be way off.

I thought the idea was that when you hit the magic date you had to take a 'minimum' amount, that there was nothing to prevent you from taking more, but maybe that is document driven.

1.401(a)(9)-5 Q and A 2 says

What if the amount distributed exceeds the minimum required, will credit be given in subsequent years for the excess distribution?

A. If, for any distribution calendar year, the amount distributed exceeds the required minimum, no credit will be given in sibsequent calendar years for such excess distribution.

there is no mention made of penalties for excess distributions under the minimum distribution rules that I can find.

So that Q and A seems to me to say you could take more, but you don't get brownie points for future years and reduce or eliminate next years min distribution.

The ERSIA Outline Book speaks about tax consequences - that anything above the min distrib would be eligible for rollover so should have had 20% withholding, but that is a different issue.

There are very obscure regulations which permit plans to defer commencement benefits after 70 1/2 for active employees:

reg 1.401(a)-14 permits commencement to be deferred to termination of employment after age 65

reg. 1.401(a)(9)-2 Q-2 states that for non 5% owners the required beginning date is the later of year employee attains 70 1/2 or year employee retires from employment. Plan is permitted to require MRDs for all employees to commence at 70 1/2.

If the plan does not allow active participants over 70 1/2 to commence benefits until retirement, then the way to fix the problem is to allow MRDs at 70 1/2.

What concerns me is whether the estate or spouse of an active participant in a DB plan who is over 70 1/2 dies and forfeits accrued DB benefits could sue plan or fids for failure to disclose that benefits would be forfeited if not commenced after attaining normal retirement age. Most DB plans permit active participants to commence benefits at 65 but dont explain the consequences if employee dies before commencing benefits b/c employee wanted to accrue larger benefit.

Under IRS regs participant can always take distribution in excess of MRD without penalty.

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RMD=Required Minimum Distribution=a precise amount that must be removed from the plan. It is in fact a minimum but that does not convey the right to take additional amounts.

If the plan permits other distribution, then as noted, no big deal (subject to proper option election being made).

If the plan does not permit other distributions, then there is no distributable event and the extra amount is not a permitted distribution. If it was a 2012 distribution, then you can still amend the plan this year to permit it retroactively. I'm not sure that you can just put it back for 2011; that might be a permitted self-correction but I don't know. If you wanted to go to the trouble of filing for an approval, I imagine the IRS would let you amend the plan to permit the distribution now. It's not like anyone was hurt.

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I've looked at a couple of different documents and they are basically worded as follows:

(1) Amount of Required Distribution for Each Distribution Calendar Year. During the Participant's lifetime, the minimum amount that will be distributed each Distribution Calendar Year is the lesser of (A) the quotient obtained by dividing the Participant's Account Balance by the distribution period in the Uniform Lifetime Table set forth in Regulation §1.401(a)(9)-9, using the Participant's age as of the Participant's birthday in the Distribution Calendar Year; or (B) if the Participant's sole Designated Beneficiary for the Distribution Calendar Year is the Participant's Spouse, then the quotient obtained by dividing the Participant's Account Balance by the number in the Joint and Last Survivor Table set forth in Regulation §1.401(a)(9)-9, using the Participant's and Spouse's attained ages as of the Participant's and Spouse's birthdays in the Distribution Calendar Year.

it simply says the minimum amount that will be distributed each year. I see nothing in that paragraph that says more than the minimum can not be distributed.

the definition of required begining date is as follows:

Required Beginning Date. The Participant's entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant's Required Beginning Date.

that says you could distribute the entire amount once someone hits the magic date, but at the very least you have to satrt distributions and they have to be a minimum.

I don't see either of them saying "You can only take the minimum and nothing more", but then maybe that is just me.

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The fact of the matter is that unless there is a rule that says flat out and with no ambiguity that only the mnimum may be distributed, this is not something the IRS would raise as a disqualification issue and in fact it would be quite happy to have the taxes paid on the excess distribution earlier rather than later. Unless someone took great care in drafting the MRD provisions of the plan (as opposed to merely stapling in the 2003 Model Amendment or the LRM Language), you will have ambiguity.

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I agree that the IRS wouldn't care and for the most part wouldn't worry about it. But feeling a wee bit argumentative today, I still think it's a stretch to say that RMD rules override other plan provisions and create rights not otherwise in the plan. Our (Fort William) plans actually make that clear:

(2) Construction. All distributions required under this Section shall be determined and made in accordance with the regulations under Code section 401(a)(9) and the minimum distribution incidental benefit requirement of Code section 401(a)(9)(G).
Nothing contained in this Section shall be deemed to create a type of benefit (e.g., installment payments, lump sum within five years or immediate lump sum payment)
to any class of Participants and/or Beneficiaries that is not otherwise permitted by the Plan.

My guess is that you would find this in most other documents; even if not, I don't believe it's the intent of the RMD rules to create benefits that don't otherwise exist.

FWIW

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Bird, I would say that what you displayed was drafting which someone did with great care. You will find that in some, but not all plan documents.

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but I could read that to say

"just because I hit RMD I can't create an installment benefit if the plan doesn't call for installment benefits"

the document examples I provided (I believe one was Accudraft and the other Corbel -both are worded very similar) definitely say

The Participant's entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant's Required Beginning Date.

so I'm not creating anything.

If I don't distribute the entire balance, I have to begin to distribute something

and the rules only require a minimum to be distributed.

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Tom Poje: I think what Bird was suggesting is that the language he provided as an illustration can be interpreted to mean that the MRD requirement is an exception to the general rule of the plan (presumably) not allowing in-service distributions, and given that it is an exception only the minimum can be distributed.

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I understand his point.

my point is the documents I looked at would seem to suggest it might depend on the document.

my other point was even the FT William document could be viewed as saying its the form of benefit not the amount that is restricted.

regardless, I think all would agree the IRS wouldn't push the issue of the amount, though a particularly disgruntled agent might argeu about no withholding on amounts about the minimum, if there was no withholding.

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Wouldn't you have the same withholding issue whether or not the excess above the minimum was permitted by the terms of the plan?

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Guest Sieve

I'm late to the table here, but has anyone looked at the preambles to any of the iterations of the 401(a)(9) regs? I haven't, so I'm just speculating when I say that I believe (with Bird) the MRD rules are intended to force a minimum distribution only, and not to permit any part of a distribution to occur that is not otherwise permitted under the terms of the Plan--i.e., it is not intended to give carte blanche for any size distribution if the plan doesn't permit it by its terms.

How else can you read 401(a)(9) together with 401(a)(14)? The latter doesn't require a plan to make a distribution at age 70-1/2--so an employee still working, where the plan does not permit a distribtuion until termination of employment, ought not to be able to use 401(a)(9) to override 401(a)(14) except to the extent that 401(a)(9) absolutely requires that a distribution occur. If 401(a)(9) overrode 401(a)(14) entirely, then wouldn't that pretty much make 401(a)(14) superfluous (except for its 10-year participation rule)? (Both of those sections were part of ERISA, enacted/revised at the same time, and therefore should be read consistently and in tandem, and should not be read to be in conflcit with one another.)

Remember, by the way, that the MRD rules were instituted, in part, to override other plan provisions which would not permit distributions at age 70-1/2 (see Treas. Reg. Section 1.401(a)(9)-1, Q&A-3(a))--for example, plan provisions that parrot 401(a)(14). Remember, too, that these regs also apply to IRAs, and were drafted with that in mind.

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