First becoming a 5% owner after 70 1/2.

[KJohnson]

With regard to 5-percent owners 401(a)(9) has gone through some gyrations. Prior to TRA 86 only 5% owners were required to take distributions from qualified plans at 70 ½. TRA 86 changed this to everyone. SBJPA changed it back to only 5% owners. However, the pre- TRA ’86 rules and the proposed regs had specific rules with regard to what happens if you first became a 5% owner in a year after you reach age 70 ½. (You have to begin taking distributions).

SBJPA and the Final 401(a)(9) regs are silent on this and actually appear to say that the determination date for 5% owners is the plan year ending in the calendar year in which someone turns age 70 ½. It would appear from the language of the Code and the regs that if you become a 5% or more owner after this year you would not be a 5% owner and would not have to begin taking distributions.

The Section of the Code that provides the exception to the rule allowing distributions to be deffered to actual retirement applies only to “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 701/2,”

The regs provide:

(c) 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 70\1/2\.

Therefore it appears that if someone becomes a 5% owner after age the plan year ending in the calendar year in which they are 70 ½ they would not be a 5% owner under the current Code language. I wouldn't have thought that this was the rule, but looking back at the pre-TRA '86 Code provision and proposed regs--where this was specifically addressed--and looking at the current Code language and regs the conclusion appears to be that 5% owners is a one time determination and what happens after that date with regard to corporate ownership is irrelevant. Has anyone looked at this?

[Belgarath]

"It would appear from the language of the Code and the regs that if you become a 5% or more owner after this year you would not be a 5% owner and would not have to begin taking distributions."

I agree. Whether this was truly intentional or not I can't say, but your conclusion is the same one that we reached. (Doesn't really happen all that much, but just often enough to be disconcerting!)