RMD used for req. contr. due

[Guest jmrodrig]

I am fairly certain of the answer to my question, but now a days I can never be too sure of anything.

I have a one participant DB plan with participant becoming 70.5 by end of 2009. The participant thought they would be able to use part of their RMD for the 2009 required contribution due. We did not give the participant this idea.

I am fairly certain that since the RMD cannot be rolled over into another plan, that it would not be able to be used for the required contr. due.

However, the participant's practice is no longer operating at an income level. It's basically a dormant company as of now.

Long story short, the RMD should not be deductible but could it still fulfill the req. contribution for the plan? Even if the contribution is technically not coming from the company?

Your response is greatly appreciated.

[Andy the Actuary]

Well, the RMD would have to be distributed to the participant as a taxable event. That is clear. Who makes then makes the contribution is another question. If the participant was a sole proprietor, then the participant would turn around and make a contribution. If the company is a corporation, then it would seem than the corporation would need to make the contribution, which would mean that the participant might have to loan money to the corporation. It doesn't seem reasonable that anyone can make a contribution to any plan. This question needs a response from an accountant and not from an actuary (me) who operates out of two shoe boxes.

The curious question is what is the reason the plan has not been terminated?

[Guest jmrodrig]

Andy,

Thanks for your response. I agree with you about needing to address an accountant. I was more concerned with interim regs and an actuaries POV.

Termination is most likely the next step. This is an off calendar plan and this issue has just come up.

[SoCalActuary]

I am fairly certain of the answer to my question, but now a days I can never be too sure of anything.

I have a one participant DB plan with participant becoming 70.5 by end of 2009. The participant thought they would be able to use part of their RMD for the 2009 required contribution due. We did not give the participant this idea.

I am fairly certain that since the RMD cannot be rolled over into another plan, that it would not be able to be used for the required contr. due.

However, the participant's practice is no longer operating at an income level. It's basically a dormant company as of now.

Long story short, the RMD should not be deductible but could it still fulfill the req. contribution for the plan? Even if the contribution is technically not coming from the company?

Your response is greatly appreciated.

As Andy pointed out, you have two parties to this transaction, the participant and the business owner.

The participant must take a taxable distribution from the pension trust.

The business owner may be required to make a deductible or non-deductible contribution to the plan.

If the owner does not have business income, then the contribution might not be deductible.

[Guest jmrodrig]

"If the owner does not have business income, then the contribution might not be deductible."

SoCal,

Here is where my question lies. I understand the contribution most likely would not be deductible unless as Andy stated, the company is a Sole Prop. Its actually an S corp. But I am not concerned with whether the contribution is deductible.

it is my impression that the participant, who is the owner, will be taxed on the RMD since they must undergo a taxable event. However, regardless of the deductibility, could the RMD be used to satisfy the minimum required contribution to avoid late charges etc.

Maybe the next step is to address this to an accountant. But has anyone ever been in this situation or read guidance on this? I looked and I cannot find anything definitive.

Thanks

[Andy the Actuary]

Would you please boil this down.

It sounds as if you're asking, "can you simply not take an RMD, leave it in the Plan, and recharacterize it as a (timely) contribution?"

Is this your question?

Also, by late charges, do you mean late quarterly contribution penalty interest (i.e., 5%) that is charged on the SB?

[SoCalActuary]

"If the owner does not have business income, then the contribution might not be deductible."

SoCal,

Here is where my question lies. I understand the contribution most likely would not be deductible unless as Andy stated, the company is a Sole Prop. Its actually an S corp. But I am not concerned with whether the contribution is deductible.

it is my impression that the participant, who is the owner, will be taxed on the RMD since they must undergo a taxable event. However, regardless of the deductibility, could the RMD be used to satisfy the minimum required contribution to avoid late charges etc.

Maybe the next step is to address this to an accountant. But has anyone ever been in this situation or read guidance on this? I looked and I cannot find anything definitive.

Thanks

First, you must confront the fact that you need a taxable distribution, including a 1099R showing the payment. Next, you need to show that the distribution occurred in the trust records in the event of an IRS audit. This should include any specifics of the optional form of payment that might have been elected. The payment needs to be at least the amount of a 100% J&S benefit annuity payment (if that is the option elected.)

Second, the funds will be in the hands of the employee. If that money is deposited back into the plan, it must be tracked for tax treatment. Is it an employee after-tax contribution, or a contribution by the employer? If the employer makes the payment, what will be the tax treatment of the funds? Is the deposit coming from the bank accounts of the S-Corp plan sponsor? Don't ignore the fact that the contribution is from the assets of the S-Corp, and the deduction is on the S-Corp's 1120-S form. If the money is deposited as an after-tax employee contribution, then it should come from employee wages as a payroll deduction, not as a separate employee check.

If you don't make the payment out nor the payment into the trust, then you have no defense that you complied with 401(a)(9).

[Guest jmrodrig]

First, you must confront the fact that you need a taxable distribution, including a 1099R showing the payment. Next, you need to show that the distribution occurred in the trust records in the event of an IRS audit. This should include any specifics of the optional form of payment that might have been elected. The payment needs to be at least the amount of a 100% J&S benefit annuity payment (if that is the option elected.)

Second, the funds will be in the hands of the employee. If that money is deposited back into the plan, it must be tracked for tax treatment. Is it an employee after-tax contribution, or a contribution by the employer? If the employer makes the payment, what will be the tax treatment of the funds? Is the deposit coming from the bank accounts of the S-Corp plan sponsor? Don't ignore the fact that the contribution is from the assets of the S-Corp, and the deduction is on the S-Corp's 1120-S form. If the money is deposited as an after-tax employee contribution, then it should come from employee wages as a payroll deduction, not as a separate employee check.

If you don't make the payment out nor the payment into the trust, then you have no defense that you complied with 401(a)(9).

SoCal,

I get the concept. The steps you outlined is more or less what i was interested in/looking for. Thank you. I had similar thought bubbles.

Andy,

Practically I am talking about recharacterization, but technically I was thinking a full RMD would be made and the trust statements would show this. Next I would inform the participant of the req. min. contr. due and work with the accountant to determine how this is going to pan out. I was never suggesting actually distributing the NET amount of the RMD. I think that was what your thought process was...

And by late charges i meant the 10% excise tax.

[masteff]

Insist that it be done as two separate arms length transactions... insist on money in and money out of the plan. Don't let them just wash a payable with a receivable. My reason being the prohibited transaction rules. It's worth an extra 10 minutes of work to be sure they don't tempt fate.

Also note: once the RMD is outside the plan as a taxable distribution, you no longer care where the money came from. It loses its RMD character at that moment. Now it's just regular ol' cash that's outside the plan. (subject of course to the participant vs business owner and other issues already discussed above)

[david rigby]

Ditto advice from SoCal and masteff. This may not a "wash" as you imply, so do each step separately and completely.

As implied in Post #1, this situation will recur. If so, Andy correctly advises a plan termination, before the next RMD is due.