Required distributions in a 401(k) plan

[Jim Chad]

Are they retired on the last day they work or one year later?

My situation, 71 year old employee left 11-8-06 and doesn't want to take any money out. He is planning on coming back next summer for the busy season. If he does and I have paid his RMD by April 1st, I have caused him unnecesary taxes.

If I don't pay him (his health is not good) and he does not come back, I have missed the RMD.

Further question along these lines, If we are supposed to use the last day worked as retirement date, how will we spot the people who retire late December. I do the RMD's for all of my Plans long before December 31st. Do other people look at all 70 and a half people again during the first quarter?

I sure hope someone can give me a cite showing that I can wait until he is gone for a year. I haven't found anything under break in service rules yet, but I am still looking.

[QDROphile]

You must distribute.

[Jim Chad]

Let me play the devil's advocate here. If he comes back next summer, does he have any options as far as not paying the taxes? We will be past 60 days, so too late to rollover to an IRA. It sure looks to me like he will have cause to hold me or his employer responsible, especially since he said he is coming back.

[John Feldt ERPA CPC QPA]

Being considered an employee is dependent on the relationship with the Employer. If the Employer-Employee relationship has truly ended in 2006, then you are required begin making RMD's by April 1, 2007.

Perhaps the employer can keep him "employed" on some sort of "leave" and not sever the relationship with a hard date of termination.

[Guest Pensions in Paradise]

Hmmm, lets see. You have two options.

Option 1 - follow the code and pay out his RMD by April 1st next year. Worst case scenario is that the participant gets mad. He could file some sort of claim but would lose.

Option 2 - don't pay out his RMD. Now participant is subject to 50% excise tax for failure to receive RMD.

[PLAN MAN]

I agree with J4FKBC. The employee's required beginning date is based on the date he retires from the employer. If the employee-employer relationship is ended, then he is considered retired and must begin his required minimum distributions. The rule for a non-5% owner is the required beginning date is the later of the date the employee turns 70-1/2 or retires. I don't know where you got the idea of a year later to make the determination.

If the empoyer does not end the relationship with the employee, then the employee would not be considered retired. Do you know if any other benefits continued for the employee after Nov. 8, 2006? If so, you could determine the employee is not retired if he is considered active for those benefits.

Also, if the employee returns to work before April 1, 2007, he would no longer be considered retired and you may be able to consider a later retirement date for the RMD.

With regards to your other question, you must look at the retirement date to determine the required beginning date. I'd advise you to track retirement in December closely, because someone may want to take their 1st distribution by Dec. 31 and not wait until April 1 of the following year when they will have to take two distributions in one year.

[Guest mjb]

before determining if MRDs are required you need to determine the ee's status. Is the ee terminating employment or is there some other status such as being on vacation or taking a leave of absence until the end of the yr? Its not unusual for senior employees to take extended absence periods at the end of the yr on a paid or unpaid basis w/out terminating employment. Does the ee have an employment contract?

[J2D2]

I'd like to tweak Jim Chad's situation. Suppose the employee left the plan sponsor at age 68; he has now reached age 70 1/2 and is working for an employer that is unrelated to the plan sponsor. Is the employee retired for purposes of the RMD rules? I'd like to say "yes" on the grounds that those rules are geared to the plan sponsor, but the statute and regs refer to an individual who has retired, not separated from service.

Has anyone had occasion to address this situation?

[Blinky the 3-eyed Fish]

There is no question the person is terminated and must receive the RMD.

[Bird]

I think it's questionable that the person is retired and must receive the RMD. The original poster said he "left" and "... is planning on coming back next summer for the busy season."

If he dies, or doesn't come back for the busy season, then that's when he retired. As long as he had comp in 2006 I can't imagine the IRS trying to pinpoint a "retirement" date in 2006.

[Blinky the 3-eyed Fish]

Bird, I was responding to to J2D2's post.

[Bird]

Blinky,

Sorry; I agree 100% with that comment.

[PensionPro]

I have a senior management employee over 70 1/2, no ownership in the plan sponsor. He is not actively employed, but he is on-call and works on certain projects. In some years there is not work for him. He has NOT been formally terminated. Must be receive his minimum distributions? Thank you!

[Guest KennyH]

I have a senior management employee over 70 1/2, no ownership in the plan sponsor. He is not actively employed, but he is on-call and works on certain projects. In some years there is not work for him. He has NOT been formally terminated. Must be receive his minimum distributions? Thank you!

If he has not terminated employment, I don't think he has reached his RBD. I am not aware of a minimum hours rule for this purpose. And before someone points out that this could easily be manipulated, yes it could, but the key is really is this person truly on call or is it simply an attempt to avoid taking the distribution.

[Guest KennyH]

Let me play the devil's advocate here. If he comes back next summer, does he have any options as far as not paying the taxes? We will be past 60 days, so too late to rollover to an IRA. It sure looks to me like he will have cause to hold me or his employer responsible, especially since he said he is coming back.

Hold you or his employer responsible for what? Having to pay taxes he was obligated to pay on a distribution he was obligated to take under the Internal Revenue Code?

That's funny....

It was also 6 years ago.

[PensionPro]

I have a senior management employee over 70 1/2, no ownership in the plan sponsor. He is not actively employed, but he is on-call and works on certain projects. In some years there is not work for him. He has NOT been formally terminated. Must be receive his minimum distributions? Thank you!

If he has not terminated employment, I don't think he has reached his RBD. I am not aware of a minimum hours rule for this purpose. And before someone points out that this could easily be manipulated, yes it could, but the key is really is this person truly on call or is it simply an attempt to avoid taking the distribution.

There is no intent in this case to skirt the rules, merely a desire to know and follow the rules. My initial reaction is the same as yours - as long as the employment relationship exists RBD has not been attained.

[ESOP Guy]

The question is-- was this person termed or not. If termed RMD is needed if not no RMD.

While what I am about to say isn't 100% this is how I try and help my clients with these kinds of issues. The problem is retirement law doesn't do a very good job of defining when someone is retired for these issues. On the other hand many other aspects of employment law do define it well.

For example when he left and went on call did the company issue a COBRA notice about his health insurance because they thought he was terminated for that purpose? It seems to me it is hard to argue he is termed for COBRA but not for the plan for example. ( I seem to recall COBRA notices can happen besides termination so one needs to be clear on this one)

Since he is in upper management is he in a non-equalized plan that only pays when he terminates and got paid? Once again it is hard to argue he is termed for one but not the other.

I think you get the idea. Look and see how the company treated him outside of the retirement plan. Did they treat him as terminated and the coming back is a rehire, or did they treat him as an on call employee. If the company is consistent on this issue I think they have a much stronger case whichever way they go.

Like I said not 100% but some times retirement people just look to our rules and that strikes me as too narrow of a way to look at the problem.

[PensionPro]

The question is-- was this person termed or not. If termed RMD is needed if not no RMD.

While what I am about to say isn't 100% this is how I try and help my clients with these kinds of issues. The problem is retirement law doesn't do a very good job of defining when someone is retired for these issues. On the other hand many other aspects of employment law do define it well.

For example when he left and went on call did the company issue a COBRA notice about his health insurance because they thought he was terminated for that purpose? It seems to me it is hard to argue he is termed for COBRA but not for the plan for example. ( I seem to recall COBRA notices can happen besides termination so one needs to be clear on this one)

Since he is in upper management is he in a non-equalized plan that only pays when he terminates and got paid? Once again it is hard to argue he is termed for one but not the other.

I think you get the idea. Look and see how the company treated him outside of the retirement plan. Did they treat him as terminated and the coming back is a rehire, or did they treat him as an on call employee. If the company is consistent on this issue I think they have a much stronger case whichever way they go.

Like I said not 100% but some times retirement people just look to our rules and that strikes me as too narrow of a way to look at the problem.

ESOP Guy: you are correct, it relates more to employment law than pension law. For the most part we rely on our clients' HR Dept to make the determination of employment status. However, there are times when we have to probe further and it helps to ask the right questions. Your insights are appreciated. The issue here is the employee has been on-call for two years but has not worked or been called or paid during the time frame.

[GMK]

Did they treat him as terminated and the coming back is a rehire, or did they treat him as an on call employee.

ESOP Guy hit the nail on the head here. Whether or not he's called, does the company keep him on the books?

Other questions might be if he is counted as an eligible or ineligible person for health coverage or in the plan census, etc.

COBRA's a good example, but it applies if you lose coverage due to reduced hours, too, so ...

[Belgarath]

One might speculate that not working for two years could be a red flag if the IRS ever questions why an RMD wasn't taken...

What if he's "on call" for 10 years without working? Where is the cutoff?

I don't have those answers, but given that the penalties are Draconian, I'd sure be inclined to err on the side of caution. At the very least, require WRITTEN instruction from the plan sponsor that this person has in fact not terminated and that no minimum distribution is required.

[mbozek]

Do the termination rules for MRDs at 70 1/2 apply to:

1. seasonal employees who work only during peak periods (Christmas season Oct to Dec)

2. part time employees (whether working the same hours each pay period or on an as needed basis)

3. employees on a leave of absense

[masteff]

While this reg specifically relates to the elapsed time method of crediting service, I'd argue one year of no service as being the limit.

1.410(a)-7(b)(2)

"(2) Severance from service date. For purposes of this section, a “severance from service” shall occur on the earlier of—

(i) The date on which an employee quits, retires, is discharged or dies; or

(ii) The first anniversary of the first date of a period in which an employee remains absent from service (with or without pay) with the employer or employers maintaining the plan for any reason other than quit, retirement, discharge or death, such as vacation, holiday, sickness, disability, leave of absence or layoff."

[KateSmithPA]

This may be beating a dead horse, but we have a similar situation. Woman works for local hotel/restaurant company and has always worked full time. Due to the economy, for the first time, she has been laid off but expects to go back to work next year. Based on termination in 2012, her RBD is 4/1/13.

If she returns to work prior to 4/1/13, would she still have to take an RMD for 2012?

Thank you.