Required Distribution - non 5 percent owener

[luissaha]

In order to comply with IRC 401(a)(9), a defined contribution plan has a provision which requires the entire interest of an employee's account to be distributed not later than the required beginning date. The plan does have language providing for payment of RMD's under IRC 401(a)(9)(A)(ii), but operationally the plan does not make RMD's (i.e., the enitre account balances are distributed prior to the required beginning date). I know this is strange. I've never encountered it before.

An employee (non 5 % owner) in the plan described above turned age 70 in August 2012. He applied for a distribution in November 2012 and requested a direct rollover of his entire account balance. The employee reached age 70 1/2 in February 2013 before the distribution had been made (the reason for the delay was the participant's failure to properly complete some forms). Now there is an issue as to whether the employee can rollover the entire account balance.

The plan is taking the position that the entire account balance can be rolled over because the entire account is being distributed prior to the employee's required beginning date in accordance with IRC 401(a)(9)(A)(i). The financial institution for the employee's IRA is saying that there is an RMD due because the participant reached age 70 1/2 this year. As such, they want the RMD amount calculated and distributed, and then they would accept a rollover of the remaining balance.

Does anyone have an opinion on this?

[BG5150]

My take on it is that an RMD is due from the plan before the RBD for year a participant retires. Period.

Qualified plans cannot be aggregated like IRAs for RMD purposes. So a person can't simply roll the proceeds to an IRA and move the RMD out of there.

[BG5150]

Wait. Just re-read the OP. It says "an employee non 5% owner)".

Is this person still with the company? If so, I think they CAN roll the money to an IRA w/out the RMD, because, as yet, none is due. (from the plan)

[luissaha]

The person left employment in August 2012. The distribution will be made in 2013, after the employee turned 70 1/2.

[GMK]

My understanding is that since the person has reached age 70-1/2 in 2013, an RMD is due for 2013. The person can wait until April 1, 2014, to take the distribution, but the first portion of any distribution in 2013 is deemed to be RMD until the RMD amount for 2013 is satisfied. No?

edit: typo

[luissaha]

GMK - I agree. The plan at issue is making the argument that because it requires the entire interest be distributed prior to the RBD, the entire distribution can be rolled over. I think what they are saying is that the RMD rules don't apply because they require the entire interest to be distributed prior to the RBD. It's an interesting point, I'm note sure what the significance is that the plan requires the entire account be distributed in order to comply with IRC 401(a)(9). I'm not sure it makes any difference. I've just never heard this argument before.

[masteff]

Depending on the age of the plan document, they might have been right at some time in the past but the current regulations are clear. Give them a copy of 1.402(c )-2 Q&A-7

http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&rgn=div8&view=text&node=26:5.0.1.1.1.0.3.101&idno=26

(Credit to Everett Moreland for giving that cite in a 2009 thread (which relates to lump sum from a DB so I'm not linking to avoid confusion).)

And frankly, since the IRA company has stated they won't accept the MRD, the plan gains nothing by being right. Seriously, what do they gain by issuing one check instead of two? They save a few minutes and a couple bucks because they don't have to process withholding on the MRD and they don't have to issue a 2nd 1099-R? That doesn't justify violating the participant's 401(a)(31) right to a direct rollover.

Edit: also Q&A-1 at 1.401(a)(9)-7 which references to the reg above

http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&rgn=div8&view=text&node=26:5.0.1.1.1.0.2.53&idno=26

[BG5150]

They don't even HAVE to withhold if the person doesn't want it.