MRD Starting Date

[bzorc]

Here is an unusual fact situation:

Participant in 401(k) Plan is a 5% owner through 12/31/03, when he is bought out and his ownership goes to 0%. The participant turns age 70 1/2 in November of 2004, and continues to be employed.

Question is whether the participant is required to receive a 2004 MRD by 4/1/05, due to his being a 5% owner on 12/31/03, which is the determination date as to whether an employee is considered a "key employee" for 2004, or can he defer his distribution until he actually terminates employment. In addition, if he does take a 2004 MRD by 4/1/05, does he need a 2005 MRD by 12/31/05, or can he start to defer it due to the fact that he is no longer a 5% owner?

Any replies would be helpful. Thanks.

[jevd]

401(a) (9) Regs

2.2 Q-2. For purposes of section 401(a)(9)©, what does the term required beginning date mean?

A-2. (a) Except as provided in paragraph (b) of this A-2 with respect to a 5-percent owner, as defined in paragraph © of this A-2, the term required beginning date means April 1 of the calendar year following the later of the calendar year in which the employee attains age 70½ or the calendar year in which the employee retires from employment with the employer maintaining the plan.

(b) In the case of an employee who is a 5-percent owner, the term required beginning date means April 1 of the calendar year following the calendar year in which the employee attains age 70½.

© For purposes of section 401(a)(9), a 5-percent owner is 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 70½.

(d) Paragraph (b) of this A-2 does not apply in the case of a governmental plan (within the meaning of section 414(d)) or a church plan. For purposes of this paragraph, the term church plan means a plan maintained by a church for church employees, and the term church means any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)).

(e) A plan is permitted to provide that the required beginning date for purposes of section 401(a)(9) for all employees is April 1 of the calendar year following the calendar year in which an employee attains age 70½ regardless of whether the employee is a 5-percent owner

I believe once a 5% owner in the year age 70.5 acheived, always a 5% owner for purposes of RMD. Once RBD is established, it can't be changed IMHO.

Also, check plan for plan's definition of RBD

Also, key employee status is one thing. 5% owner is another. Your client is not a 5% owner in the year he turns 70 1/2 so according to the regs and definition of 5% owner in 416, he is allowed to delay until 4/1 of year after retirement

[bzorc]

Jevd, if the plan allows an employed participant to delay distributions until they actually terminate employment, can this participant delay, per the definition shown in the reply? They were not a 5% owner in the calendar year in which they turned age 70 1/2.

[jevd]

that is my understanding.

Here is Noel Ice's site and commentary on the regs

http://www.trustsandestates.net/MRDRegs/MR...htm#_Toc9937165

[mbozek]

If the ownership interest in the plan sponsor is 0% at the end of the year prior to the year the ee turns age 70 1/2 he is not a 5% owner for MRD purposes. The reference to 416 is to define who is a 5% owner not when he is a 5% owner which under the MRD regs occurs only if there is a >5% ownership as defined under 416 in the year age 70 1/2 is attained.

[Guest Factor]

Above, JEVD hypothesizes "I believe once a 5% owner in the year age 70.5 acheived, always a 5% owner for purposes of RMD. Once RBD is established, it can't be changed IMHO."

I find myself facing this issue - 5% owner reached 70.5 a couple of years ago, reached his RBD, but is no longer an owner (but is still employed). Has anyone else encountered this situation, and/or have any thoughts as to whether or not his RMD can be stopped?