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RMD - Vesting/Start Date Question


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New owner only plan effective 1/1/2017.  Owner reaches age 70 1/2 in 2017.  Vesting is 6-year graded and vesting prior to effective date of plan is excluded.  As of 12/31/2018, the owner would be 20% vested.  When would the first RMD need to be distributed? 

Since we deal with mostly small plans, our actuary uses the 12/31/2017 accrued benefit x 12 to get to what the RMD lump sum requirement is for 12/31/2018 rather than monthly installments.  I'm getting hung up on the fact that although the owner is 0% vested as of 12/31/2017, he is 20% vested as of 12/31/2018.  Would a distribution be required for 12/31/2018 or not until 12/31/2019?  The argument from our actuary is that since the calculation is done based on the prior year accrued benefit, the first distribution wouldn't be required until 12/31/2019.

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see 1.401(a)(9)-6 Q-6

you figure out the amount needed as of the prior year, and then base vesting as of the distribution calendar year.

Q-6. If a portion of an employee's benefit is not vested as of December 31 of a distribution calendar year, how is the determination of the required minimum distribution affected?

A-6. In the case of annuity distributions from a defined benefit plan, if any portion of the employee's benefit is not vested as of December 31 of a distribution calendar year, the portion that is not vested as of such date will be treated as not having accrued for purposes of determining the required minimum distribution for that distribution calendar year. When an additional portion of the employee's benefit becomes vested, such portion will be treated as an additional accrual. See A-5 of this section for the rules for distributing benefits which accrue under a defined benefit plan after the employee's first distribution calendar year.

 

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FWIW - when setting up new plans in such situations for an owner only, might be worth considering using cliff vesting. Delays the distributions a bit longer if that is something they want. I'd certainly consult the plan actuary before actually recommending it to a client.

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5 hours ago, Belgarath said:

FWIW - when setting up new plans in such situations for an owner only, might be worth considering using cliff vesting. Delays the distributions a bit longer if that is something they want. I'd certainly consult the plan actuary before actually recommending it to a client.

Thank you!  We should definitely consider that moving forward.

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8 hours ago, Tom Poje said:

see 1.401(a)(9)-6 Q-6

you figure out the amount needed as of the prior year, and then base vesting as of the distribution calendar year.

Q-6. If a portion of an employee's benefit is not vested as of December 31 of a distribution calendar year, how is the determination of the required minimum distribution affected?

A-6. In the case of annuity distributions from a defined benefit plan, if any portion of the employee's benefit is not vested as of December 31 of a distribution calendar year, the portion that is not vested as of such date will be treated as not having accrued for purposes of determining the required minimum distribution for that distribution calendar year. When an additional portion of the employee's benefit becomes vested, such portion will be treated as an additional accrual. See A-5 of this section for the rules for distributing benefits which accrue under a defined benefit plan after the employee's first distribution calendar year.

 

Thank you!  It sounds like we should be using the 12/31/2017 accrued benefit but since the owner would be 20% vested in 2018, the RMD is due by 12/31/2018.

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Not for nothing, but the RMD delay might be the only reason I'd see setting up an owner-only plan with a vesting schedule at all.  I mean, when he terminates the plan it's going to make him fully vested anyway if he hadn't hit 100% by then.

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On 10/31/2018 at 9:57 AM, Bri said:

Not for nothing, but the RMD delay might be the only reason I'd see setting up an owner-only plan with a vesting schedule at all.  I mean, when he terminates the plan it's going to make him fully vested anyway if he hadn't hit 100% by then.

Agreed, the goal was to delay the RMD.

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Great thread. Just had a colleague with similar issue regarding DC plan. Datair was calculating on the full amount and owner is only 40% vested as of 12/31/17. I assume Datair calculation is incorrect and the RMD is based on 40% (or 60% based on above DB RMD) of the 12/31/17 balance? Please confirm-thanks-

 

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