ESOP termination and RMD

[Guest BROKER10]

An ESOP is being terminated and assets being distibuted 50% in 2013 and 50% in 2014. Does the termination of the plan constitute a termination of employment? If yes, must a pp in the ESOP who will be 70 1/2 this year, must an RMD be taken from the ESOP before the distribution is rolled over to an IRA?

[GMK]

As I understand it, ...

No, termination of the ESOP in which I am a participant does not constitute termination of my employment with the company sponsoring the ESOP, but

Yes, when a participant who is over age 70-1/2, whether employed by the plan sponsor company or not, receives a distribution from the plan, the first portion of the distribution is deemed to be RMD until the RMD requirement for the year is satisfied.

[QDROphile]

Please double check the point about being subject to RMD requirements based on age without regard for employment.

[GMK]

Is it not that a current employee over age 70-1/2 is not required to take an RMD (assuming the plan doc says that) if they don't want to, but if they receive a distribution at a time when they are eligible for RMD's, then the first portion of the distribution is RMD? What am I missing?

[ESOP Guy]

I am doing this off the top of my head but I am not aware of any requirement for one to calculate the RMD for an in service distribution or if some how the person got to be over 70.5 and just reached 10 YOP and got a diversification payment for example. RMDs are linked to being over 70.5 AND terminated not merely paid.

[QDROphile]

For defined contribution plans and participants who are not owners, the first distribution calendar year (a calendar year in which a minimum distribution is required is a distribution calendar year) is the calendar year that is the later of the calendar year in which the particpant attains age 70 1/2 or the calendar year in which the participant retires. Treas. Reg. section 1.409(a)(9)-5(b).

An elligible rollover distribution is any distribution, subject to certain exceptions including distributions "to the extent required under section 401(a)(9)." IRC section 402©(4)(B).

It is true that any distribution in a distribution calendar year is to be first attributed to the minimum amount required to be distributed for the year, even if the distribution is before the required distribution date for that distribution calendar year. But if no distribution is required for the year because the distribution is before the first distribution calendar year, no distribution is required under section 401(a)(9) and the distribution may be rolled over, subject to the other exceptions.

I cannot answer your next question: If a particpant is age 72 and receives an in-service distribution during the year, how does the plan know that the particpant will not retire later the same year, making the year the first distribution calendar year and the first dollars of distribution attributable to the required distribution amount and therfore not rollable? The answer to that question may validate your statement that employment is not relevant when a certain age is attained..

[ESOP Guy]

I cannot answer your next question: If a particpant is age 72 and receives an in-service distribution during the year, how does the plan know that the particpant will not retire later the same year, making the year the first distribution calendar year and the first dollars of distribution attributable to the required distribution amount and therfore not rollable? The answer to that question may validate your statement that employment is not relevant when a certain age is attained..

To me that just points to a flaw in the regs. After all how does the plan know the person won't retire? So on what grounds are you refusing to let them put the money directly into an IRA if they never quit? To me the best answer is to use what you know when the payment is made and not base how you prepare the payment based on future what ifs. If the person retires it seems like there are two possible corrections: Get the money out of the IRA (or maybe count it as some form of contribution to the IRA) or make an RMD payment at that time.

I can see objections to either but I don't see how one does the what if thing.

[PensionPro]

How about amending the 1099-R to show that a portion of the distribution was ineligible to be rolled over?

[masteff]

Reg 1.401(a)(9)-2 Q&A-4 says "Lifetime distributions made before the employee's required beginning date for calendar years before the employee's first distribution calendar year, as defined in A-1(b) of § 1.401(a)(9)-5, need not be made in accordance with section 401(a)(9)." So, if the person hasn't retired, meaning they haven't triggered their RBD, then you don't have to count a distribution as an MRD at the time of distribution. But see the following...

I cannot answer your next question: If a particpant is age 72 and receives an in-service distribution during the year, how does the plan know that the particpant will not retire later the same year, making the year the first distribution calendar year and the first dollars of distribution attributable to the required distribution amount and therfore not rollable? The answer to that question may validate your statement that employment is not relevant when a certain age is attained..

Asked and answered, see the last several posts date in 2013 here: http://benefitslink.com/boards/index.php?/topic/47337-rmd-and-in-service-distribution/

[GMK]

Thanks everyone. I think I've got it (at last).

So, in the OP, as long as the participant who is over 70-1/2 remains an employee in 2013 and 2014, there are no RMD's from the distributions of the terminated ESOP in those years, and the entire amount of those distributions to that person is eligible for rollover.