RMD's

[jkdoll2]

We have a client that is an owner. He turned 70 1/2 in August 2010 - but requested an in-service withdrawal in April 2010 (before he was 70 1/2). He rolled over his entire account balance to an IRA. He is still contributing to the plan and also received a profit sharing contribution after the rollover. When we rolled the money to the IRA he was not 70 1/2 yet - should we had taken the RMD before the rollover to the IRA - or do you have to wait until they turn 70 1/2 to take it? He has enough money in his plan right now to take the RMD for 2010 (not delaying it until April 1, 2011).

The rollover company (IRA) is saying that when we e rolled over the money from his plan - we should have kept back the RMD amount

and that the money needs to be distributed before 12/15/2010 otherwise there will be penaltys. I dont think that is correct when he isnt in any violation - he is still taking his RMD before 12/31/2010 (based on 12/31/09 balance) - he is just using money after when the rollover happened. Does it matter what money he uses as long as he takes it before 12/31/2010? Thanks

[GMK]

My understanding is that when an RMD is due, the first dollars distributed are the RMD dollars until the required RMD amount has been distributed. Amounts distributed after the RMD is satisfied can then be rolled over.

But maybe I missed something along the way ...

(edit) and here's a link:

http://benefitslink.com/boards/index.php?showtopic=45398

[Tom Poje]

the min distrib rules are found in 1.401(a)(9), but in this case they refer to 1.402©

its real clear from point (b) that it doesn't matter if the person wasn't 70 1/2 when the distribution took place (unless it was before Jan 1 of the year one turns 70 1/2, but that seems like a moot point)

so it is going to boil down to how you interpret the description in (a)

The example used speaks of 'the first $ distributed will be treated as the RMD', but in this example there were no other distributions, so that would have to be the case, but I'm not sure if it is applicable in all cases.

for instance, if I had a beg bal of $x and the min distrib was $y and I rolled out ($x-y) on Jan 2 and paid out $y in Dec I don't see how I have failed to satisfy the requirements. The first sentence in this paragraph says the rollover is treated as the RMD to the extent the distribution has not been satisfied. (of course, all that is how I read the regulation and I could be way off the mark) You are of course taking a chance you will have enough to satisfy the requirement, and in determining the RMD you have to consider the amount that was rolled over because it was part of the begining balance.

Q–7: When is a distribution from a plan a required minimum distribution under section 401(a)(9)?

A–7: (a) General rule. Except as provided in paragraphs (b) and © of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. For example, if an employee is required under section 401(a)(9) to receive a required minimum distribution for a calendar year of $5,000 and the employee receives a total of $7,200 in that year, the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies. If the total section 401(a)(9) required minimum distribution for a calendar year is not distributed in that calendar year (e.g., when the distribution for the calendar year in which the employee reaches age 70 1/2 is made on the following April 1), the amount that was required but not distributed is added to the amount required to be distributed for the next calendar year in determining the portion of any distribution in the next calendar year that is a required minimum distribution.

(b) Distribution before age 70 1/2. Any amount that is paid before January 1 of the year in which the employee attains (or would have attained) age 70 1/2 will not be treated as required under section 401(a)(9) and, thus, is an eligible rollover distribution if it otherwise qualifies.

[Bird]

I break it down like this:

The IRA apparently had no money in it as of 12/31/09 so there is no RMD from it, or if it did have money in it the IRA's RMD is based on the 12/31/09 balance before the rollover in 2010. The point is, unless they are told that some of the money was not eligible for rollover, they should butt out.

The plan had money in it as of 12/31/09 and therefore has an RMD. As long as it makes the RMD with whatever money it has in a timely manner, there is nothing to discuss.

[Belgarath]

I believe GMK is correct - under the regulations, this RMD amount for the calendar year 2010 is not an eligible rollover distribution.

I'm not sure where the IRA company is coming up with a date of 12/15/2010. Basically, the participant made an improper rollover of the RMD amount. Under IRC 408(d), this may be treated as an excess IRA contribution, and she must withdraw this amount (adjusted for earnings) by the deadline (including extensions) for filing her 2010 income tax return.

The 12/15/2010 deadline, if that's what the IRA custodian is really quoting, sounds like more of an internal administrative deadline.

I think the IRA custodian is making the correct interpretation of the the regulation. The example specifies (my emphasis)that "...the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies" and seems to me to be fairly clear. If you receive multiple distributions during the year, then to the extent the RMD has not already been satisfied, the first dollars distributed are considered RMD's and are therefore ineligible for rollover.

Mind you, I think think this is a ridiculous rule. But that's another story.

[Tom Poje]

the problem is that in the example cited, there is no mention if there was any balance left in the account after the rollover, or if an additional distribution could have been made. the regs do contain the sentence that says "To the extent the minimum distribution has not been satisfied". I don't see anything that says the min distrib must be made before any other rollovers, especially since min distributions aren't due until the end of the year. By that argument, you could never rollover or take a distribution without first taking a min distrib.

the only possible issue in this case, is for awhile, at a given moment in time there was no balnce to pay out the distribution. thats the only situation I could see the IRS arguing the point.

now, under EPCRS, what is the correction for missing a min distribution?

you simply make it.

is there enough to make it? yes.

[jkdoll2]

the problem is that in the example cited, there is no mention if there was any balance left in the account after the rollover, or if an additional distribution could have been made. the regs do contain the sentence that says "To the extent the minimum distribution has not been satisfied". I don't see anything that says the min distrib must be made before any other rollovers, especially since min distributions aren't due until the end of the year. By that argument, you could never rollover or take a distribution without first taking a min distrib.

the only possible issue in this case, is for awhile, at a given moment in time there was no balnce to pay out the distribution. thats the only situation I could see the IRS arguing the point.

now, under EPCRS, what is the correction for missing a min distribution?

you simply make it.

is there enough to make it? yes.

There is enough money in the account still to take the minimum distribution before 12/31/2010. I dont see why there would be an excess rollover if they are still taking the RMD before 12/31/2010. The amount at 12/31/09 includes the amount that was rolled over.

Thanks - I agree with Bird!

[GMK]

there is no mention if there was any balance left in the account after the rollover, or if an additional distribution could have been made.

Does that matter? Distribution dollars in a year when an RMD is due are first treated as RMD until the required RMD amount is satisfied.

Whether that's logical or reasonable or to anyone's liking is not the point.

[Belgarath]

"By that argument, you could never rollover or take a distribution without first taking a min distrib."

Precisely. And if you queried the IRS on this, I'm guessing that's the answer you are likely to get. But I guess we'll agree to disagree.

As an aside, what's the real problem here? Take the blasted distribution amount out of the IRA. Everyone is then happy. Since the distribution must be made anyway, this saves the plan from having to do it later. The plan should merely report the original amount on two 1099's - one as a distribution of the RMD, and one (for the balance) as a rollover.

On a practical level, if they do it that way - if you are right, don't they end up fine either way? If I'm right, then your method subjects them to a penalty tax, so why take the risk. Am I missing something here?

[masteff]

As an aside, what's the real problem here? Take the blasted distribution amount out of the IRA. Everyone is then happy.

Everyone is happy unless the participant put the money into specific investments and doesn't want to liquidate them at this point in time.... in which case the plan does a rollover distribution (equal to the RMD) which is then placed in the IRA in cash and the participant instructs the IRA to make the distribution from cash thus preserving the investments. Both parties are saying "we should make a distribution" so let them both make a distribution, just flipflop which is doing the RMD at this point in time.

And for the record, I vote w/ Tom Poje on this one... "the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied." I read this as an end of year lookback and possible reclassification where if money was not explicitly declared already to be RMD then you reclass a portion of it as such. This would apply, for example, to persons taking monthly installment payments from their plan where those payments are not being coded as RMDs but otherwise count as such.

PS - examples are explanatory not definitive/exclusive.

[Bird]

Unless there is something in the regs that I missed, other than the example cited which says "the first..." when it appears to be talking about a single distribution event, then I still think this is a non-issue. Think about it - the participant, or the plan, is audited, and has to show that it complied with the RMD rules. They show the calcs and proof of the distribution. We've all seen weird stuff, but I can't in my wildest dreams imagine the IRS saying "tsk, tsk, you took it in the wrong sequence and now...[what?]"

[GMK]

Sorry, I am not convinced. I think Belgarath has it right (post 9), although I agree with masteff that the participant might not be so happy.

I don't see it as a look-back option. I see it as a rule that while distributions are being made, they are RMD until the RMD is satisfied.

And it seems to me that "the first $5,000" in the example explains this clearly. Why say "the first" if you mean "any" $5000?

So we disagree (which is OK).

[Belgarath]

FWIW - this discussion got me to wondering if I'm wrong, so I just looked this up in both Sal Tripodi's EOB, and in the Pension Answer Book. Both sources agree with GMK's (and my) interpretation. Granted that these sources are also nothing more than someone's opinion, these are pretty good sources. Again, I don't see the point in taking the risk. But we'll all agree to disagree, and I'll sign off this discussion and not bother you any more!

[jkdoll2]

FWIW - this discussion got me to wondering if I'm wrong, so I just looked this up in both Sal Tripodi's EOB, and in the Pension Answer Book. Both sources agree with GMK's (and my) interpretation. Granted that these sources are also nothing more than someone's opinion, these are pretty good sources. Again, I don't see the point in taking the risk. But we'll all agree to disagree, and I'll sign off this discussion and not bother you any more!

Yes - we can agree to disagree since the correction method is to make the RMD before 12/31/2010 - in which we are going to do that.

you do not have to get it back from the IRA as long as it is paid by 12/31/2010.

Thanks for everyones opinions.

[Belgarath]

Sorry, I said I wouldn't bother you any more, but you have now raised a separate issue, and I believe you have a flaw in your proposed action.

There's no need for the PLAN to do a correction. The Revenue Procedure 2008-50 correction is for when a plan has failed to make a distribution in an amount that satisfies the 401(a)(9) requirements. The fact that the ineligible RMD amount was rolled over to an IRA does NOT make this a plan failure. For 401(a)(9) purposes, the plan is treated as having made the RMD distribution and has satisfied 401(a)(9). Making another distribution from the plan will not "correct" anything. So the plan is already fine. The participant is not.

[Kevin C]

I think 1.401(a)(9)-5 Q&A 9 helps. With a few exceptions that do not apply here, all distributions are taken into account in determining if 401(a)(9) is satisfied. Now, if there isn't enough $$ left in the account to cover the RMD, the plan has a problem.

Although, I handled an IRS audit where a participant rolled over his entire balance because the adminstrator forgot about the RMD. Fortunately, the participant took a distribution from his IRA that year of more than the plan RMD amount. The agent closed the case without making us do a correction.

Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?

A-9. (a) General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.

(b) Exceptions. The following amounts are not taken into account in determining whether the required minimum amount has been distributed for a calendar year:

(1) Elective deferrals (as defined in section 402(g)(3)) and employee contributions that, pursuant to rules prescribed by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter), are returned to the employee (together with the income allocable thereto) in order to comply with the section 415 limitations.

(2) Corrective distributions of excess deferrals as described in §1.402(g)-1(e)(3), together with the income allocable to these distributions.

(3) Corrective distributions of excess contributions under a qualified cash or deferred arrangement under section 401(k)(8) and excess aggregate contributions under section 401(m)(6), together with the income allocable to these distributions.

(4) Loans that are treated as deemed distributions pursuant to section 72(p).

(5) Dividends described in section 404(k) that are paid on employer securities. (Amounts paid to the plan that, pursuant to section 404(k)(2)(A)(iii)(II), are included in the account balance and subsequently distributed from the account lose their character as dividends.)

(6) The costs of life insurance coverage (P.S. 58 costs).

(7) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See §601.601(d)(2)(ii)(b) of this chapter. [Reg. §1.401(a)(9)-5.]

[Belgarath]

Kevin, I'm not disputing that the plan has already satisfied 401(a)(9). It clearly has - although I didn't cite it in my last response, see 1.401(a)(9)-7, Q&A-1. But anyway, now that I've said my piece on this latest question, I'll shut up again unless a new question is raised. This has been an interesting discussion because this is a situation that actually occurs now and then.

[Tom Poje]

I'd stick to my initial comments that its unclear - at best at how you read the regs.

And I'm glad most people agree that all comments mentioned are only 'opinions'

if the regs said "to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not YET been satisfied." then I would agree you absolutely are stuck.

so it all hinges if one applies the term 'first' in an example to all cases.

ee has balance of 10,000. min distrib is 100. all $ in non interest bearing account so you can't have a decrease in any value, just for the sake of the argument.

ee rolls 9000 to an IRA in January, takes 1000 min distrib in Feb. (or for that matter, I guess if 2 checks were cut the same day, but the rollover was printed first, you are still screwed because order is important. )

I have my leanings (though I understand the counter argument) saying this is ok, because to the extent the min distrib has been satisfied has been accomplished.

(in addition, even under EPCRS Appendix A section .06) the correction for a missed min distribution is to simply make it - there is no mention of "by the way, if you already rolled some money out you have to treat part of the rollover as an ineligible distrib', but then again, you are back to relying on examples.

fun stuff! (glad I'm not in that position)

...............

stupid English language. I rememebr the last time something like this came up with failed ADP test and how to handle related matches - the expression "related matches may be forfeited" - and people were reading that as "they may be forfeited, but I don't have to". but the 'may' referred to the fact that even though the match might be 100% vested it was permissible (required) to forfeit such amounts.

[mbozek]

Sorry, I said I wouldn't bother you any more, but you have now raised a separate issue, and I believe you have a flaw in your proposed action.

There's no need for the PLAN to do a correction. The Revenue Procedure 2008-50 correction is for when a plan has failed to make a distribution in an amount that satisfies the 401(a)(9) requirements. The fact that the ineligible RMD amount was rolled over to an IRA does NOT make this a plan failure. For 401(a)(9) purposes, the plan is treated as having made the RMD distribution and has satisfied 401(a)(9). Making another distribution from the plan will not "correct" anything. So the plan is already fine. The participant is not.

As noted by B, the reason there is no plan failure for which a sanction can be imposed by the IRS is that a lump sum distribution in the year the employee attains 70 1/2 without withholding the RMD meets the literal requirements for a required distribution under 401(a)(9)(A)(i) in that the entire interest of the employee is distributed by the plan not later than the required beginning date, April 1 of the year following the year the employee attains 70 1/2. Since the plan has complied with the requirements of the IRC for RMDs the only possible correction is to require the employee to take the RMD from the IRA.

The failure to withhold the RMD is no harm, no foul.