For minimum distribution, when is an employee retired?

[Peter Gulia]

If designed to require no more than IRC 401(a)(9) requires, a retirement plan (other than an IRA) need not compel a distribution to a participant who is not a 5% owner until after "the employee retires."

Lacking a detailed rule about when for 401(a)(9) purposes an individual-account plan's participant "retires", many administrators treat severance-from-employment as the dividing line.

But is there any range in which someone who remains on the employer's roster as an employee works so little that she should be treated as retired to invoke a required beginning date?

For some examples, how about an employee who works:

20 days in one month (with no work in the other 11 months)?

one day every month?

a half-day every month?

one day each quarter-year?

a half-day each quarter-year?

(All these describe real situations.)

Is it good enough for 401(a)(9) purposes to treat an employee as not retired until a calendar year's W-2 wage report shows zero wages?

 

[QDROphile]

If you are talking about an owner (whether or not 5%) or owner's spouse, I think there is sensitivity, but I do not have any authority or experience to offer that the IRS has that sensitivity.  This is even less definite than sham terminations in the context of distribution, which get a lot of discussions and have at least some IRS attention.  I believe this is particularly acute in professional organizations, such as law firms, that allow partners to maintain hobby employments after "real" work production is finished, although this phenomenon is dwindling in the cruel realities of the marketplace.  Finding bright lines is difficult; you have to go with gestalt. Unless the plan fiduciary is comfortable with the "come get me" approach -- which frankly is pretty safe in our non-enforcement environment, I would look for indicia of employment and evaluate the services and economic value to the employer to make admittedly subjective judgments about retirement status, and then try to establish some objective criteria to use for administration.   

[Peter Gulia]

QDROphile, thank you for your helpful observations.

All the people I'm thinking about are non-owners, and also have no way (beyond good work) to influence whether the employer continues the employment.

So, it's about how much work means still-employed rather than retired.

 

[QDROphile]

I think the case for non-owner employees being treated as not retired if the employer still treats them as employed is pretty strong, but the elements of being employed have to be there, such as reporting on Form W-2.  The bureaucratic hassle and expense to the employer of maintaining the employment formalities are a safeguard against a charade solely for accommodation of an individual tax dodge.