RMD's in a new Plan

[Belgarath]

Seems like the regulations produce a possibly unintended consequence, and I'd just like to see if I'm way off base on this.

A person starts a new business when he is 75. According to 1.401(a)(9)-2, Q&A-2©, this person wouldn't be a 5% owner, becasue he wasn't a 5% owner with respect to the plan year ending in the calendar year in which he attained age 70-1/2.

Under the prior regulations, there would have been a different result, and the RBD would have been April 1, 2013. But the (current) final regulations changed this - whether intentionally or unintentionally I don't know.

Does anyone disagree with this? It makes a difference, because if my reading is correct, then any distribution taken at this point would NOT qualify as an RMD, and would be an ERD and subject to 20% withholding.

[masteff]

You always have some of the better head scratching questions.

My only comment is that the reg does conform with the current Code at 401(a)(9)©(ii).

"(ii) Exception.— Subclause (II) of clause (i) [retirement] shall not apply—

(I) except as provided in section 409 (d), in the case of 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, or

(II) for purposes of section 408 (a)(6) or (b)(3). "

I suppose we could get into a weird philosophical discussion if it's a sole proprietorship because we could maybe argue over what date the proprietorship came into existence.

[Tom Poje]

according to the ERISA Outline book, this was a valid question at one time, but went away in 2002, because IRC 416(i) as amended by EGTRRA 613 determines a 5% owner by looking at ownership for the plan year. Chapter 6, Part B.1.d page 6.412.

[BG5150]

So, if you start a business (or buy into a business) after the year you turn 70 1/2, you don't have to take an RMD because you weren't a 5% owner the year you turned 70.5?

[Belgarath]

Hi Tom - not trying to put words in your mouth - so are you agreeing? I looked up the reference in Sal's book that you provided, and going on to 1.d.4)b) and c) (Page 6.413) it appears that this would also agree with my reading of the situation?

[Bird]

Belgarath, I agree with you, on both the original point and what it says in Sal's book.

I was going to say that I'd calc and treat any money coming out as an RMD...but I think it's actually pretty clear that it's not, and in fact that may be intentional.

Thanks, I learned something today. (Not sure I'll retain it though.)

[Tom Poje]

that is what the book seems to say

at least in the examples you pointed out.

[Belgarath]

Thanks all. It just seemed very much against the "normal" thrust of the RMD regulations, which is why I wanted to see if I was missing some crucial point.

I wonder whether the client would have to fight with an IRS auditor if this was questioned? Most of my experiences with IRS auditors is that they are untroubled by such trivialities as adhering to their own published regulations. Hopefully we'll never find out.