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RMD for non-owner employed beyond age 70.5


Kevin C
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a 401(k) Plan is terminating at the end of this month. One non-owner employee is beyond age 70.5 but still employed. Assuming he remains employed at least until 1/1/2017, does the plan termination trigger a 2016 RMD?

I'm not finding anything that says it does and I realize that a 2016 RMD would be triggered if he retires in 2016.

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I guess the question becomes what happens if the employee actually terminates employment after the rollover distribution is processed but before 12/31?

Does that trigger a required minimum distribution for the year due by April 1 of the year following separation based on the prior 12/31 account balance that has now been rolled over? That is does it retroactively make a portion of the rollover ineligible for rollover as it is now a RMD?

Might this be analogous to an HCE in a 401(k) plan who rolls over his distribution to an IRA upon termination of employment only to find months later that a portion of his rollover is now ineligible because he has a required a refund of excess contribution to pass the 401(k) nondiscrimination test?

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what happens if the employee actually terminates employment after the rollover distribution is processed but before 12/31?

Does that trigger a required minimum distribution for the year due by April 1 of the year following separation based on the prior 12/31 account balance that has now been rolled over? That is does it retroactively make a portion of the rollover ineligible for rollover as it is now a RMD?

My understanding is that it is does create an RMD for the year of termination, and the RMD amount, which was part of the rollover, is then not eligible for rollover. The participant asks the rollover receiving account to return the RMD amount to the participant, or (if I correctly recall early threads on this topic) if there is still enough remaining in the participant's plan account, it could be distributed to the participant in cash from the plan to cover the RMD for the year the participant terminated.

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what happens if the employee actually terminates employment after the rollover distribution is processed but before 12/31?

Does that trigger a required minimum distribution for the year due by April 1 of the year following separation based on the prior 12/31 account balance that has now been rolled over? That is does it retroactively make a portion of the rollover ineligible for rollover as it is now a RMD?

My understanding is that it is does create an RMD for the year of termination, and the RMD amount, which was part of the rollover, is then not eligible for rollover. The participant asks the rollover receiving account to return the RMD amount to the participant, or (if I correctly recall early threads on this topic) if there is still enough remaining in the participant's plan account, it could be distributed to the participant in cash from the plan to cover the RMD for the year the participant terminated.

GMK's understanding is my understanding also.

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There was an old thread on this and somebody named masteff provided a code cite on how retiring prior to 12/31 would trigger RMD rollover rule for the calendar year. (Reg 1.402(c )-2 Q&A-7)

http://benefitslink.com/boards/index.php/topic/55090-rmd-v-in-service-non-owner/

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  • 4 weeks later...

I may be old and crochetty, but Bird's argument was on 'employer maintaining the plan' which in this instance is no longer operative. The plan terminated, so even if the employer was still working, the employer is no longer maintaining the plan. So how does the cited regulation apply when there is no longer a plan?

Actually, I think there is no authority from the law, regulations, or IRS on this particular point, and so one is left to their own devices or interpretations. TIme to call in Gandalf the Grey.

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I may be old and crochetty, but Bird's argument was on 'employer maintaining the plan' which in this instance is no longer operative. The plan terminated, so even if the employer was still working, the employer is no longer maintaining the plan. So how does the cited regulation apply when there is no longer a plan?

But, it you take that approach, once the plan terminates, none of the 401(a)(9) regulations would apply and there would be no RMD regardless of what happens in the rest of the 2016 calendar year. I agree there is no clear guidance. I think a more reasonable approach is to consider the regs to apply through the end of the calendar year that includes the final distribution. Then, if someone who didn't have an RMD requirement before their distribution is paid retires during the calendar year, they are treated the same way they would be if the plan continued and part of their distribution becomes their RMD.

In our case, after being told he could roll over the entire distribution, the participant decided to take part of his distribution directly and roll over the remainder. The amount to be received directly is sufficient to cover a 2016 RMD if one were to apply.

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