Jump to content

RMD Required for now less than 5% owner?


Recommended Posts

Suppose you have a former 25% partner in a firm that has sponsored a 401(k) plan for many years. The partner has been winding down and will have less than a 5% capital and profits interest in the firm before his required beginning date in 2022. He eventually just plans on being an employee indefinitely with great work hour flexibility. 

Since his interest went below 5% in the year before the year he would normally begin taking RMDs (and will stay below 5%), I would think he would qualify for the RMD exception. Anyone agree or disagree?

Link to comment
Share on other sites

To be clear are you saying this person will not be 72 and a 5% owner at the same time? 

Or you saying this person will simply not be a 5% owner by the 4/1 that is the first required payment date? 

I just like to be very clear on these questions as I think it is easy to get the facts confused.   RMDs are very fact driven determinations.  

Link to comment
Share on other sites

As of now (in the 2021 year) he is a 4.5% owner and will be as of 12/31/2021.

His birthday is 3/16/1950. So he will be age 72 on 3/16/2022 (in the 2022 calendar year).

So before he turns age 72 in 2022 he is a less than 5% owner (on 12/31/2021).

Link to comment
Share on other sites

Consider the statute, Internal Revenue Code of 1986 § 401(a)(9)(C)(ii)(I):

Subclause (II) of clause (i) [“the calendar year in which the employee retires”] shall not apply—except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 72[.]

And the rule, 26 C.F.R. § 1.401(a)(9)-2/Q&A-2:

(c)   For purposes of section 401(a)(9), a 5-percent owner is an employee [or deemed employee] who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70½ [72].

Even if applying these law sources yields a clear answer, a plan’s administrator might read the plan’s governing documents to consider whether the plan provides an involuntary distribution earlier than is needed for the plan to tax-qualify.

Further, a plan’s administrator might evaluate whether a “winding down” partner who perhaps has “flexibility” about how little he works might be retired within the meaning of § 401(a)(9)(C)(i)(II).  In doing so, one might read the partnership agreement to consider the obligations it provides or omits.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...