Required Beginning Date for RMD

[12AX7]

Employee, age 75 (not a 5% onwer) retires on 12/31/12. Compensation is paid in 2013 for services rendered in 2012. Would the RBD be 4/1/2013 and the compensation paid after 12/31/12 would have no effect on the RBD? Does this sound correct? Thanks.

[ETA Consulting LLC]

If the employee has severed employment on 12/31/12, then the RBD would be 4/1/2013. Receiving a trailing paycheck doesn't extend employment. It would probably be another issue if the employer were to report the date of termination as 1/2/2013. I think the employment records of the employer would be a more appropriate basis for making this determination.

Good Luck!

[K2retire]

If the employee's last day worked was 12/31/2012, wouldn't the required beginning date be 4/1/2014?

[Tom Poje]

I haven't seen this addressed before, but it produces an interesting anomaly (probably not thought about by the IRS).

for example lets suppose the person defers (though it doesn't matter, but it probably helps when thinking about it)

for tax purposes, he has a W-2 in 2013 with deferrals : implication he worked in 2013!

he will also show up on the ADP test. If the plan was safe harbor he would receive a safe harbor in 2013. In fact most plans are written a person receives a profit sharing in the year they retire, regardless of any hours condition.

Over the years I've come to hold onto the idea that while a plan is a calendar year, the determination of when someone quits (consider someone who quits 12/27/2012) is based on the compensation that falls within the plan year, and thus, in this case, though the person physically retired in 2012, for all other plan purposes he retired in 2013, so it would actually kick things back a year.

of course even that depends on how you checked your 415 amendment whether to count the comp in the prior or current year

sample language:

(I) Compensation Earned in Limitation Year but Paid in Next Limitation Year. If this paragraph (I) is checked, then effective as of the first day of the first Limitation Year beginning on or after July 1, 2007, Code §415©(3) Compensation for any Limitation Year will include any amounts earned during that Limitation Year but not paid during that Limitation Year solely because of the timing of pay periods and pay dates if: (i) these amounts are paid during the first few weeks of the next Limitation Year; (ii) the amounts are included on a uniform and consistent basis with respect to all similarly situated Employees; and (iii) no Code §415©(3) Compensation is included in more than one Limitation Year.

[Everett Moreland]

If the employee's last day worked was 12/31/2012, wouldn't the required beginning date be 4/1/2014?

See the following from the 2003 ABA JCEB IRS Q&A:

12. §401(a)(9) – Required Minimum Distributions

Treas. Reg. 1.401(a)(9)-2, A-2(a) provides that except in the case of a 5%-owner, the "required beginning date" is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70-1/2 or the calendar year in which the employee retires from employment with the employer maintaining the plan. Assume that the employee is age 73, is not a 5%-ower, and "retires" on December 31, 2003, as the term "retires" (and related term "retirement") is commonly used by the employer and under the terms of the employer’s qualified§401(k) plan. However, in fact what this means is that December 31, 2003, is the employee’s last day at work, and the last day for which he is paid or entitled to payment. January 1, 2004 is the first day he is not employed by his employer. When is the employee’s required beginning date?

Proposed Response: For the purpose of Treas. Reg. 1.401(a)(9)-2, A-2(a) "the calendar year in which the employee retires from employment with the employer maintaining the plan" is 2004, not 2003, and therefore his required beginning date is April 1, 2005. Moreover, the employee’s first distribution calendar year (Treas. Reg. 1.401(a)(9)-5, A-1(b)) is calendar year 2004.

IRS response: The IRS disagrees with the proposed answer. When an employee retires is a facts and circumstances determination, but generally an individual’s last day of work is when the employee retires. Other facts, such as the employee returning to work on a sporadic basis after the official date of retirement, could change the answer. But under the facts presented in this question, the last day of service, December 31, is the date of retirement.

[12AX7]

Tom, for this particular plan, the "few weeks" rule does not apply. The compensation paid in 2013 is for a commission (not an excluded definition of comp). What if the commission was still pending until 2014? It seems difficult to argue that the employee would not be retired (for plan purposes) until that year and the RBD would be 4/1/2015.

What Everett posted is helpful, and although I can read a few things into the IRS response.

[Tom Poje]

the problem with the commission argument is that the 415 regs only pertain to comp earned in the first few weeks, not months down the line.

regardless, all the regs say is the calendar year the person retires. and again that produces the strange situation in which for plan purposes the person really isn't retired until the following year.

I would like to have seen the mim distrib question proposed in a slightly different manner.

I don't think I have ever actually had the situation arise. In our office, when we sent out the 2011 valuations we also include a minimum distribution notice thay says

'so and so' will require a minimum distribution due by 4/1/2013 if they terminate by 12/31/2012 - because we won't receive the census until sometime in 2013, and by then it's quite often too late to do anything about it. not that the client actually reads what we send, but you never know.

[12AX7]

Tom, you seem to be putting some weight on the first few weeks rule provision in making this determination. Let me know if I'm wrong on this assumption. I think the 401 (a)(9) regs predate the 415 regs in this situation, so are the few weeks rule an unintended consequence of determining when someone is retired? I haven't thought about the differences between retirement from employment and retirement for plan purposes, if there is a difference, but that doesn't seem to be so apparent in the regs.

[GMK]

If the employee's last day worked was 12/31/2012, wouldn't the required beginning date be 4/1/2014?

One way to look at is that when the employee left work on 12/31/2012 (and headed off to a very happy new year party), she/he was at that time no longer an employee of the company. The person had cut the ties to the company during the current year and did not have to wait until the new year to be retired.

[Tom Poje]

12AX7 - agree, but possibly only because min distr regs predate the new 415 regs. my only point is there may be a valid reason for considering the person to have worked in '2013'. certainly for plan and tax purposes he has.

we do have other 'regs' we have to work with the best we can.

the one that comes to mind is rehires and the one year holdout rule that makes no sense in a 401k situation. but then the break in service rules were written before the advent of defrrals and stuff.