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An employer maintains a retirement plan that provides no involuntary distribution except as required to meet Internal Revenue Code § 401(a)(9).

 

The employer has a non-owner worker, older than 71, who works in only one month of each year.  The work is real, not a subterfuge.

 

Should the employer/administrator treat that worker as “retired” to compel a minimum distribution?

 

Why or why not?

 

Does it matter whether the worker is or isn’t available to work in the other eleven months (if the employer wanted services of the kind the worker performs)?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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If the work is real I don't see a problem with this person being called active and no RMD needed.

If they want to get a payment to this person amend the plan to allow in-service payments after a given age. 

I would add treating this person as having terminated- ie retired- every year in a DC plan could cause unexpected results.  I have this happen every few years. 

An employee who meets the NRA definition terminates and is treated as a retiree.  The plan has an exception to the last day and 1,000 hour rule for retirees.  So they get a contribution allocation in that year.  The person comes back and works a little bit during some future year and terminates again.  It is clear this person just retired again and didn't have to work on the last day or 1,000 hours to get a contribution.  So they get another contribution via the exception.

So if you treat this person as termed every year to make an RMD and they have a last day and 1,000 exception do you have to give them a contribution every year?  In my mind in order to be consistent it would be a "yes". 

I don't work on DB plans so not sure what would happen there and you put this under general retirement plan category. 

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While this is pretty old, and it's from the Gray Book, perhaps it will help:

Quote

Gray Book 1999-21

Other DB Issues: Definition of Retirement or Termination of Employment

A number of qualified plan rules hinge on a participant's retirement status. Examples include the ability to receive a benefit distribution prior to separation from employment and the requirement to commence distributions at the later of age 70-1/2 or retirement. How are these requirements addressed for participants who view themselves as "semi-retired" or "retired, supplementing pension with part-time work for the same employer"? Would application of such rules hinge on discretionary elections made by the employee (as opposed to the employer)?

RESPONSE

The §401(a)(9) guidance did not address what constituted retirement. Once the status of worker changes from common law employee of the employer sponsoring the plan, the employee has retired. Other situations will be addressed on a case by case basis. Not having enough hours of service to trigger the suspension of benefit service rules is not sufficient to be considered retired. For purposes of the minimum distribution requirement, once the employee has had a bona fide quit, any subsequent re-employment with the same employer does not allow for further delay of the minimum distribution requirement. Similarly, re-employment does not inhibit the ability to permit a distribution on account of "separation from service" based on the earlier termination of employment.

Copyright © 1999, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

IMHO, based on the facts you state, this person does not have a "bona fide quit"; also, the "available to work in the other eleven months" is not relevant.  If the ER desires to encourage a distribution, is there any reason why the ER cannot create a severance of employment?  

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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What other indicia of employment are present during the remaining months of the year after the month during which the worker works?

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ESOP Guy, thank you for the caution about difficulties that might result if someone is treated as retired more than once.  This individual-account plan has no matching or nonelective contribution, only elective deferrals.

 

David Rigby, thank you for the Gray Book information.

 

jpod, thank you.  Other than a once-a-year W-2 report of the wages paid in the preceding year, there might be little or no indicia about whether the worker is an employee.  The employer does not provide security badges for any of its employees.  Likewise, the employer does not furnish e-mail addresses or direct-dial telephone numbers for others, even full-time, in the worker’s group.  The employer “self-insures” worker’s compensation, so there is no list or number furnished to an insurance company.  The employer does not provide health coverage for any worker.

 

All, the employer would prefer not to compel an involuntary distribution unless doing so is necessary to avoid a tax-qualification failure based on a failure to meet IRC § 401(a)(9).  (The plan already permits an in-service distribution grounded on the participant’s age.)

 

Since there seems to be a consensus answer about the not-hypothetical situation, let’s ask about a variation from it.

 

What happens if there is a year in which the worker is not needed?  For example, imagine the worker worked each January in 2011-2019, but in 2020 there is no work for this worker to do.  Would we treat him as severed from employment on December 31, 2020?  Or is it enough that the worker remains willing to work, and the employer will call him to work, if there is work for him to do?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I think your new fact pattern is subsumed by your first fact pattern.  My view of this is that it is entirely reasonable for the PA to take the position that the individual terminates employment each year, and consequently RMDs should be distributed.  I see zero risk in taking this position, either from an IRS audit perspective or from the perspective of a participant Title I lawsuit.  The only risk as I see it is an IRS audit risk by continuing to take the position that no RMDs are due.       

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jpod, thank for your helpful explanation.

BenefitsLink mavens, am I right in guessing there is also some for treating at least the first situation as not requiring a plan's administrator to compel a minimum distribution?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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ESOP Guy makes a worthwhile observation concerning the exception to the last day and/or 1,000-hour rule which we frequently see in plans.  But the facts are what the facts are and the tail can't wag the dog.  

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I agree the facts are what they are.  I merely pointed out the idea of a person might have multiple retirement dates as a possible side consequence of saying this person terms every year.   Since I wasn't sure what the goal of the employer was I just thought I would point it out.    If one was trying to do planning such side issues rightfully ought to be part of the planning process.  If you are dealing with the facts it is less important.  

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As I mentioned, the participant has a right to take a distribution, but no obligation to receive a distribution unless the plan’s IRC § 401(a)(9) provision compels it.

 

In the original situation—in which the employee consistently works one month every year (and the employee and the employer both expect their relationship to continue), what fact, if any, would trigger a plan administrator’s finding that the employee became “retired” or severed from employment?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Based on the history, if the employee worked every January and the expectation was for that to continue, then I would say action by either party to severe that expectation - Employee decides not to work next January, Employer decides we don't need this person this year - results in separation / retirement. This issue comes up with hospitals and their per diem or on-call staff. How long not working, not being called in, turning down calls, etc. becomes a separation? Again, I think a year of severance initiated by either party, unless an authorized leave (but even those are usually limited to a year) is safe to constitute and should generally constitute a separation. Just my humble opinion.

Not that is may really matter in this case, but is this person still considered eligible to defer and included in the ADP test?

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I think this comes within the Plan Administrator's authority to establish a binding, uniform, nondiscriminatory interpretation of the plan's provisions as they apply to individual facts. I would need to know exactly what this person does, why it is only once a year, how much paid, etc., but my inclination would be that this person has retired. For example, if they have a very strong relationship with a client and are brought back once a year for meeting with client, and receive, say, $1,000 for that one day's labor, and it's reported on W-2, etc., but they don't participate in any employee benefits, I would say, "retired." But again, without adopting a policy, you won't know for sure.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Luke Bailey, thank you for reminding us about using an administrator’s powers and discretion.  Recognizing a fiduciary’s duty to use those powers impartially is why my client seeks advice.  My originating example is based on just one of several kinds of situations the administrator must interpret.  And the number of people and situations involved is more than count-em-on-your fingers.  So, I’m still hoping BenefitsLink mavens will help us discover some principles or reasons to apply.

 

One way of looking at the one-month-a-year situation is to assume that wages 1/12 of full-time is not enough to live on, and from that assume the worker is retired.

 

What about someone who works throughout the year, but averages 13 hours a month?

 

Or someone who works every week, putting in 3 or 4 hours a week?

 

Those situations produce wages similar to the one-month-a-year worker, but is the work somehow more regular?

 

If regularity matters, what about someone who works every month, but only one day a month?

 

Does it matter whether the work is physical labor, office skills, or knowledge work?

 

And for all these, why does it matter?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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No disagreement with Luke's comments, but consider the intersection of PA interpretation and HR policy.  Easy to imagine that the PA would prefer looking to existing policy(ies) rather than create them. 

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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20 hours ago, ESOP Guy said:

I would add treating this person as having terminated- ie retired- every year in a DC plan could cause unexpected results.  I have this happen every few years. 

An employee who meets the NRA definition terminates and is treated as a retiree.  The plan has an exception to the last day and 1,000 hour rule for retirees.  So they get a contribution allocation in that year.  The person comes back and works a little bit during some future year and terminates again.  It is clear this person just retired again and didn't have to work on the last day or 1,000 hours to get a contribution.  So they get another contribution via the exception.

So if you treat this person as termed every year to make an RMD and they have a last day and 1,000 exception do you have to give them a contribution every year?  In my mind in order to be consistent it would be a "yes". 

FWIW - in our plans we have language to prevent this. To paraphrase, the language says you only get this once, and if you are subsequently rehired and terminate again, the exception doesn't apply.

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One fact common to the situations I’ve described is that the employer has no money at stake, only its role as an enforcer of Congress’s tax policy.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The employer has money at stake if this is discovered by the IRS on audit and the employer has to make a payment to the IRS in lieu of plan disqualification.

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An employer might not pay to avoid a threatened change to the participants’ tax treatment.  Not every employer needs a deduction for the contributions.

 

But even if an employer would “own” all tax treatments, my observation is that it’s awkward for an employer to be in the role of tax law enforcer when it has no other stake in deciding whether its employee is retired.

 

Why is an employer the arbiter of whether someone no longer gets tax deferral on portions of her retirement savings?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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And what if Congress might provide that no 401(a)(9) minimum distribution is required for the Roth portion of a participant's 401(k), 403(b), or 457(b) plan account.

For counting U.S. Government revenue gains and losses for tax or budget legislation, anything the scorers assume will motivate increased use of Roth pushes revenue gains into earlier years, and the scoring frame is no more than ten years.

 

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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19 hours ago, Fiduciary Guidance Counsel said:

Luke Bailey, thank you for reminding us about using an administrator’s powers and discretion.  Recognizing a fiduciary’s duty to use those powers impartially is why my client seeks advice.  My originating example is based on just one of several kinds of situations the administrator must interpret.  And the number of people and situations involved is more than count-em-on-your fingers.  So, I’m still hoping BenefitsLink mavens will help us discover some principles or reasons to apply.

 

One way of looking at the one-month-a-year situation is to assume that wages 1/12 of full-time is not enough to live on, and from that assume the worker is retired.

 

What about someone who works throughout the year, but averages 13 hours a month?

 

Or someone who works every week, putting in 3 or 4 hours a week?

 

Those situations produce wages similar to the one-month-a-year worker, but is the work somehow more regular?

 

If regularity matters, what about someone who works every month, but only one day a month?

 

Does it matter whether the work is physical labor, office skills, or knowledge work?

 

And for all these, why does it matter?

 

Peter, what you're demonstrating is that the root of the problem is Congress's use of an undefined term, "retirement," which is something we all know when we see it, and yet has no precise definition in the law anywhere that I know of. Problem then compounded by IRS's failure to write regs addressing definition. We're not going to solve it on our own. Just have to do what's reasonable and be ready to back it up if questioned.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Yes, and the plan's fiduciary will use my written advice to show that the fiduciary acted loyally and prudently.

Thank you, everyone, for helping me test my thinking.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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8 hours ago, Fiduciary Guidance Counsel said:

Why is an employer the arbiter of whether someone no longer gets tax deferral on portions of her retirement savings?

 

Because Congress made compliance with 401(a)(9) a qualification requirement.  I'll be a bit more direct than jpod's comment. If the IRS discovers the plan failed to pay a required minimum distribution, the plan will almost certainly end up in Audit CAP and the employer will be facing a penalty. Audit CAP won't cost any less than the VCP filing fee for the failure and it could cost significantly more.

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Yeah, this is really a ridiculous conversation in my opinion because where there is a plausible argument in favor of the theory that there has been a "retirement" why should the PA take ANY risk with respect to the plan's tax-qualified status?  It is difficult for me to believe that the PA would waste energy thinking about this let alone pay an expensive ERISA lawyer to ponder it (unless the participant is related to an insider, which would contradict the "no subterfuge" assumption). 

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