401(a)(9) ownership change after year of 70 1/2

[JJRetirement]

Active Participant will attain 70 1/2 in 2014. He currently owns more than 5% of profits interest, but he will reduce his ownership by 12/31/13 to not more than 5%. Plan Year = Calendar Year. No RMD for 2014 if he continues working.

Suppose in 2015 he continues working, but increases ownership to greater than 5%? Literal reading of 1.401(a)(9)-2 Q&A 2© says no required minimum distribution as long as he continues to work because the ownership test is done in the year of attaining 70 1/2.

"© For purposes of section 401(a)(9), a 5-percent owner is 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 70 1/2. "

Agree that if he isn't a 5% owner in 2014, becoming a 5% owner later won't matter for RMD purposes?

[masteff]

Agree. Just as a 5% owner in the year they turn 70 1/2 does not later become a non-owner, a non-owner in the year they turn 70 1/2 does not later become a 5% owner.

It's not an easy search using the board's search function, but google advanced search does manage a number of hits:

https://www.google.com/search?as_q=rmd+owner+5&as_qdr=all&as_sitesearch=benefitslink.com%2Fboards&as_occt=any&safe=images&as_rights=#as_qdr=all&q=rmd+owner+5+site:benefitslink.com%2Fboards

[ESOP Guy]

I would be careful here. The IRS can if the decide to try and look beyond mere legal form to economic reality. Learned about that while working for the IRS. If the way you get them to drop to below 5% is in a effect a mandated sell-buy where their ownership is really not at risk of not being owned in the future after the year they are not a 5% owner you might have a fight. I guess what I am trying to say is if this person sells their portion of the business but the sale agreement mandates it has to be sold back to the original owner the next year the IRS could try and fight you. The courts have always said that the IRS can claim shame transactions done for no economic purpose other then tax savings can be undone or ignored for tax purposes.

Since you don't give the specific facts not saying that is being done here. But one can get too clever in tax planning and trying to out smart the rules. Although as a rule in order for the IRS to win an economic substance argument they have to go to court as your side will keep saying, "we followed the rules to the letter of the law". Some thing to look into.

http://www.irs.gov/Businesses/Codification-of-Economic-Substance-Doctrine-and-Related-Penalties

[JJRetirement]

Thank you for your comments. I absolutely agree that is it important to make sure the change in ownership in 2013 isn't conditioned on any kind of deal (whether or not in writing) that he would be entitled to increase his interest in profits (it's a partnership) as soon as the 2014 calendar year ends. Thanks for the link to the IRS directive too.