RMD - Definition of "Retirement" (Lawyer Changes Firms due to Mandatory "Retirement" Policy)

[Yesrod5]

A "senior" lawyer recently became employed by our firm on a full-time basis after leaving his prior firm due to its mandatory "retirement" policy (age 70). He reached age 70.5 in the second half of 2013. He will be rolling his 401(k) plan account from the prior firm into our 401(k) plan. He intends to work for several more years (believe it or not !). He will not be a 5% owner of our firm.

Although he has "retired" from his former firm, he has not "retired" from the practice of law. He would prefer to avoid receiving a RMD for 2013 (which, if required, would need to be received by April 1, 2014).

Sal Tripodi writes in his respected ERISA Outline Book that "Presumably, retirement means that the employer-employee relationship with the employer that maintains the plan has ceased." He also notes, however, that "Nowhere in §401(a)(9), nor in the legislative history or any of the regulations is retirement defined for §401(a)(9) purposes . . . ." See Chapter 6, Section VII, Part B.1.e.

We believe that a strong argument can be made that the policy behind the the SBJPA provision permitting RMDs to be delayed for those who are not 5% owners was to avoid forcing employees (other than 5% owners) to receive RMDs while they were still gainfully employed. Thus, we would assert, where the individual continues gainful employment with another employer (particularly in the same field) there should no "retirement" for RMD purposes.

I would be most interested in any thoughts on this question.

P.S. Incidentally, it appears that even if an RMD is required for 2013, none would be required for subsequent years until the year of "retirement" from our firm (assuming such retirement also encompassed retirement from the practice of law). Rev. Rul. 2004-12 (once rollover funds hit the recipient plan they take on the character of the recipient plan).

[QDROphile]

While I am familiar with the concern that ostensibly self employed persons (partners) remain self-employed as they move from firm to firm and therfore never have a retirement or severance from employment, I look to section 401© to normalize employment arrangements. Therefore, leaving a firm and joining another is a severance from employment and allows a distribution. Leaving a firm after normal retirement age is retirement from that employer for purposes of section 401(a)(9). Working at a firm past normal retirement age means the person is not retired from that employer (or that employer's plan, including amounts rolled over into that plan) for purposes of section 401(a)(9). Trouble begins when firms allow "retired" partners to continue to dabble in practice. They are "retired" in many senses, such as they no longer participate in firm administration or receive benefits such as health coverage. However, they generate revenue for the firm and are compensated, may on W-2, maybe on K-1. Their continued presence as an elder may be very valuable to a firm or it may be an accommodation out of respect, affection, or lack of backbone. They are working, albeit at some reduced schedule. Are they retired for purposes of section 401(a)(9)? I am am concerned that if working in any capacity after normal retirement age is not retirement for section 401(a)(9) purposes, it is a great opportunity for abuse of the rules. But how does one measure a level of work that is bona fide? Do we look to section 409A standards for separation from service and say that 20% is the mimimum level to avoid retirement? Or do we play safe and say that any post-retirement age significantly reduced work status that also involves loss of other attributes of regular employment status (e.g. health benefits) will be treated as retirement for section 401(a)(9) purposes? Reduction to part-time work is not retirement, but where does it cross the line for persons who are or were owners (partners), whether or not at 5% ownership?

[Yesrod5]

QDROphile,

Thank you for your response. Given that we are a P.A. and the lateral hire is working as a full-time employee (as are all the rest of us here at the firm), need I look any further than your third sentence to grasp your position on the question?

[ESOP Guy]

I think he has to take an RMD as he is terminated from the firm that had the plan. Once he rolls it over to a new plan the RMDs could stop but I don't see how you avoid the first RMD.

[Yesrod5]

ESOP Guy,

Thank you for your reply.

[QDROphile]

Yes. That is why it appears that a required distirbution will occur for the 2013 distribution calendar year even if the distribution/rollover occurs in 2013. If the distribution occurs in 2014, a required distribution will occur for both the 2013 and 2014 distribution calendar years. No required distribution from your plan until retirement from your firm.

[ESOP Guy]

Yesrod5:

You are grasping at straws. No plan is going to risk disqualification by not paying an RMD to a former employee who has terminated from their firm on the basis of your argument. Are you prepared to indemnify the previous employer if the IRS disqualifies the prior employer's plan for failure to make the RMD? If not and I was the prior employer I would laugh at your argument and write the person a check for the RMD. If they in turn roll that RMD to an IRA it isn't my problem as a plan administrator/sponsor. As a former IRS agent I would classify any such rollover as not a qualified rollover to an IRA and let the litigation begin. Is this person really willing to risk a 50% excise tax on the RMD amount if you are wrong?

I just don't see the risk/reward as being worth it on a practical level even if the RMD is a rather large amount.

Your argument that the intent of the law is not to pay a RMD here is an argument only a person trying to rationalize their position would like.

[Yesrod5]

ESOP Guy,

Thank you for your response - - and next time please don't sugar coat it !

My instinct is that you and QDROphile are correct in your analysis. However, I continue to believe this is a gray area. As noted in my initial post, Sal Tripodi writes that "Presumably, retirement means that the employer-employee relationship with the employer that maintains the plan has ceased." (emphasis added). In other words, Sal does not appear to be as firmly convinced as you are (yet I understand that Sal and other authors often must be circumspect in their writings). As also noted in the initial post, Sal also says, however, that "Nowhere in §401(a)(9), nor in the legislative history or any of the regulations is retirement defined for §401(a)(9) purposes . . . ."

Just one follow-up question, I don't see any basis for the prior employer plan sponsor making any claim against our plan for accepting the full rollover; the prior plan is responsible for paying any required minimum distirbution independent of any action (right or wrong) that our plan may take in regard to any check received. The prior plan must stand on its own legs. Additionally, Reg. §1.401(a)(31)-1, A-14 provides a correction method for the recipient plan (i.e., the amount of the invalid rollover is distributed within a reasonable time after it is determined that a portion of the rollover was invalid (assumes that the plan administrator of the recipient plan initially made a reasonable determination that the full amount received was a valid rollover - which you may find a stretch in the given situation)).

Again, thank you for your comments.

[GMK]

We believe that a strong argument can be made that the policy behind the the SBJPA provision permitting RMDs to be delayed for those who are not 5% owners was to avoid forcing employees (other than 5% owners) to receive RMDs while they were still gainfully employed. Thus, we would assert, where the individual continues gainful employment with another employer (particularly in the same field) there should no "retirement" for RMD purposes.

Really?

Don't get hung up on the word "retirement." After you reach age 70-1/2 and are no longer employed by the employer who sponsors the plan, you have a Required Beginning Date for that plan, and you have to take an RMD from that plan by your RBD.

[masteff]

In defining the RBD, Reg 1.401(a)(9)-2 Q&A-2(a) uses the phrase "from employment with the employer maintaining the plan". The Regulation clearly (at least to me) disregards that the person continued working at an unrelated employer.

My question is does the person have any ongoing work relationship with the prior law firm? QDROphile covers a number of issues in which it might be ambiguous, but you have yet to describe anything which indicates to me that the person has any continuing form of employment with the prior firm. About the only possibility I see unanswered is: if he was accruing benefits in the prior plan by using earnings from self employment, then will he have any future earnings from self employment from that firm (perhaps by some aspect of his contract w/ the prior firm) that will also accrue a benefit? This will require you to communicate with the prior firm.

You might read thru the following thread which does not directly discuss your "not retired" argument but does hit on a couple of related issues w/ some useful cites: http://benefitslink.com/boards/index.php?/topic/47337-rmd-and-in-service-distribution/

Yes. That is why it appears that a required distirbution will occur for the 2013 distribution calendar year even if the distribution/rollover occurs in 2013. If the distribution occurs in 2014, a required distribution will occur for both the 2013 and 2014 distribution calendar years. No required distribution from your plan until retirement from your firm.

I just want to emphasize what QDROphile says here given that it's now Dec 30th.... if the rollover to your plan has not been distributed from the prior plan by tomorrow, then it will count as being in that plan for purposes of determining his 2014 MRD, meaning he'll have to take one. (By virtue of Reg 1.401(a)(9)-7, an in-transit rollover counts as being received by the receipient plan for purposes of determing the MRD.)

[QDROphile]

As a practical matter the plan that is making the distribution will not send the entire balance as a direct rollover. The required distribution amount will be sepeartately distributed to the participant. The distributing plan could distribute the entire balance to the participant (less the 20% withholding on the rollable portion) and the distributing plan would have no care or claim if the new employer's plan improperly accepted the entire distribution (plus the amount withheld). The accepting plan would have some qualification issues. It has reason to beware of the required distribution issue with this participant and cannot accept a rollover without reasonable belief that the amount accepted is an eligible rollover distribution.

[Yesrod5]

GMK and Masteff,

Thank you for your responses.

Masteff, thank you for alerting me to §1.401(a)(9)-2, A-2. I am chagrinned that I did not ferret that out. I believe this regulation forecloses any argument that there was no RMD requirement for 2013. And, incidentally, the lateral hire has no lingering affiliation with the prior firm.