Does 50% excise tax apply in this case?

[John A]

A 401(k) plan active participant who turned 70 1/2 in 1998 was given the option to start minimum distributions or defer to termination of employment. The participant chose to start. The required minimum distribution for 4-1-99 was calculated incorrectly. The question is: when an active participant chooses to start, is the distribution truly a required minimum distribution (RMD) with all associated characters (can't be rolled over, 50% excise tax applies if amount is not made or if amount is too small, etc.)? Or can the distribution be treated more like an in-service withdrawal (can be rolled over, no excise tax applicable, etc.)?

[Michael Devault]

John, you might take a look at IRS Notice 97-75. It's my understanding from reading Q&A 10 of that notice that the distribution you describe would NOT be considered a required distribution, thus it would be eligible for rollover.

After looking at the notice, I would appreciate your interpretation, as well as that of others, to make sure I'm on the right track.

Hope this helps.

Mike

[John A]

Michael, thank you. This is exactly what I was looking for. I agree with your interpretation.

[david shipp]

Take a look at Q&A-9 of Notice 97-75. The amount distributed under a plan's MRD provisions prior to the statutorily required date *will not* be an eligible rollover distribution if it is calculated under the 401(a)(9) rules (which are normally what the plan will use for determining the amount of distribution). Q&A-9 indicates that such payments will be considered a series of substantially equal payments over the life of the employee, and thus not eligible for rollover.