RMD Retired 12/31/13

[Just Me]

Participant over age 70 1/2 retired on December 31, 2013. When is the first RMD payment? The Code/Regs say the distribution year is the year in which the participant retired. Somebody is arguing that since the participant worked on December 31, they didn't really retire until January 1, 2014.

[My 2 cents]

I think that the first payment is due by April 1 of the year following the later of the year in which the person turns 70 1/2 or the year in which they "retire" (which is generally interpreted as separating from service).

Was anything paid on or before April 1, 2014?

[Lou S.]

Participant over age 70 1/2 retired on December 31, 2013. When is the first RMD payment? The Code/Regs say the distribution year is the year in which the participant retired. Somebody is arguing that since the participant worked on December 31, they didn't really retire until January 1, 2014.

Was he paid for work in 2014? If not he retired in 2013 and the first RMD was due 4/1/14.

[chc93]

We also had a CPA argue that since the participant worked through Dec 31, 2013, the participant didn't retire in 2013, but retired in 2014. So 2014 was first distribution year, required beginning date was Apr 1, 2015.

[edit] Also, while doing some research on this, apparently the code and regs (and the IRS) do not define "retiring".

[mbozek]

Did the participant receive a 1099 for 2013?

[chc93]

In my case, the distribution was made in January 2014 with 1099R will be for 2014. No distribution in 2013, no 1099R for 2013.

[ForksnKnives]

A common use interpretation suggests his retirement date is his last date of service with the company, so 12/31/13.

My mindset with the retiree is to ask whether the tax implications of acting as though 1/1/14 is the correct date is so significantly different from the tax implications of acting as though 12/31/13 is the correct date that it makes sense to pay the potential cost of fighting the IRS plus the risk of paying the greater taxation on money that will eventually be taxed. I find it hard to imagine that taking an RMD for 2013 is not the cheaper route for the retiree.

[Jim Chad]

Good call, Forksnknives. This thought makes a lot of sense to me.

[mbozek]

The IRS explanation of what year RMDs commence for an employee who continues to work after age 70 1/2 is the calendar year in which the taxpayer retires from the employer maintaining the plan. I have never seen any IRS definition of what is the year of retirement is which leads to the conclusion that the IRS leaves it up to the employer to decide whether an employee who retires on Dec 31 retires in that year or on Jan 1. There is a logical basis to conclude that an employee whose last day of work is Dec 31 retires the following day because you cannot be both employed and retired on the same day. This was the treatment accorded to Chc 93 when he retired in 2013 because no 1099 was issued for 2013 tax year.

[BG5150]

There is a logical basis to conclude that an employee whose last day of work is Dec 31 retires the following day because you cannot be both employed and retired on the same day. This was the treatment accorded to Chc 93 when he retired in 2013 because no 1099 was issued for 2013 tax year.

What about someone who quits or gets fired on 12/31? Do you give her a 1/1 termination date because you can be employed and unemployed on the same day?

[My 2 cents]

There is a logical basis to conclude that an employee whose last day of work is Dec 31 retires the following day because you cannot be both employed and retired on the same day. This was the treatment accorded to Chc 93 when he retired in 2013 because no 1099 was issued for 2013 tax year.

What about someone who quits or gets fired on 12/31? Do you give her a 1/1 termination date because you can be employed and unemployed on the same day?

Firing someone over 70 1/2? On New Year's Eve? That's cold.

[mbozek]

For unemployment the same answer is applicable- what is deemed to be the date of termination. Unlike the date of retirement the last date of employment is defined in state unemployment laws. In most cases it is the last date the employee is paid by the employer. Unemployment begins the next day. But there are exceptions as defined by state law.

[Lou S.]

For what it is worth this was addressed on today's IRS webcast. The speaker from the IRS said a person whose last day is 12/31/xx is considered to have separated on that date. Again this is not formal IRS guidance as it is a merely a webcast.

[K2retire]

There is a logical basis to conclude that an employee whose last day of work is Dec 31 retires the following day because you cannot be both employed and retired on the same day. This was the treatment accorded to Chc 93 when he retired in 2013 because no 1099 was issued for 2013 tax year.

What about someone who quits or gets fired on 12/31? Do you give her a 1/1 termination date because you can be employed and unemployed on the same day?

For plans with a last day allocation condition, we always include participants with a 12/31 termination date. But some of the software I've used requires you to change it to 1/1 to make it work. This seems to be a similar situation.

[mbozek]

Informal statement by IRS employees is not a binding interpretation of the IRC. If the IRS wants to define retirement on Dec 31 as being the termination of employment then it can issue a formal ruling on this trivial matter. Then employees will formally retire on Jan 1 to avoid having to pay taxes on the RMD at a higher marginal rate due to working for the entire year. The current appropriations bill being voted on by Congress cuts the IRS budget by $350 million which reduce the resources available for such trivia.

[My 2 cents]

I may be showing my ignorance, but it is my understanding that the first minimum distribution is taxable in the year in which paid, not in the year for which it is a minimum distribution (if the years are not the same). That is, if someone is treated as separating in 2014 (having attained age 70 1/2 by the end of that year), is it not the case that the 2014 minimum distribution, if paid in 2015 (as is certainly permitted), while representing a minimum distribution for 2014, would actually be treated as taxable income in 2015? Granted, another distribution may be required by 12/31/15, for 2015, but if the first was paid in 2015, then nothing would be added to taxable income for 2014, so the fact that the person earned compensation throughout 2014 would not put the entire 2014 MRD at the top of the participant's marginal tax bracket.

[GMK]

^True, if an RMD for 2014 is paid in 2015, it adds to the person's 2015 taxable income.

But the interesting question is whether an RMD is even due for 2014, that is, if an age 70-1/2 person retires on 12/31/2014 and is paid for working on their last day of work (12/31/2014), but then is not on the payroll on the 01/01/2015, is an RMD due for 2014?

[jpod]

If my status as an active employee and my work obligations to my employer end at 5pm on 12/31, I have entered into retirement on 12/31. Stated differently, unless that status and those obligations end at the instant the ball drops on Times Square, I would view myself as having retired in the current year.

[austin3515]

A-2. (a) Except as provided in paragraph (b) of this A-2 with respect to a 5-percent owner, as defined in paragraph (c) of this A-2, the term required beginning date means April 1 of the calendar year following the later of the calendar year in which the employee attains age 701⁄2 or the calendar year in which the employee retires from employment with the employer maintaining the plan

I'm with jpod and BG150.  Someone's term date / retirement date is universally defined as the last day on  which they did work - NOT the first day on which they did not work.  The IRS does not need to define what is meant by retirement because it is commonly understood and universally applied in the same manner. 

I googled this topic because I am currently answering this question for a client and this thread came up.  So sorry for bumping an ancient topic, but I'd venture a guess that this is the time of year this will come up (as we get back our censuses and find out which Septuagenarian's retired (I had to google this word!)!

[Kevin C]

14 hours ago, austin3515 said:

Someone's term date / retirement date is universally defined as the last day on  which they did work - NOT the first day on which they did not work. 

It's a picky distinction, but if you change it to the last day employed rather than last day worked, I agree with you.  If you give your employer a letter saying you are retiring on January 1 and they agree to it, you are retiring on January 1, even if the 31st and 1st fall on a weekend and you don't work those days. 

We have this discussion with our clients when we find out a 70.5+ participant is planning to retire at the end of the year.  Those who want to delay the initial RMD change their retirement date to January 1. 

 

[austin3515]

Well there is no accounting for a layperson might think is a reasonable definition of retirement.  I'm talking abuot HR people across the country, to the 99.99th degree, would all put the retirement/termination date as the last date someone was in the office,.  They just all would.  All of them.

[Calavera]

Gray Book 2004-42

Other DB Plan Issues: Date of Retirement and 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. If December 31, 2003 is the employee’s last day at work, and the last day for which he is paid or entitled to payment of wages, is that the date of “retirement”. Or is January 1, 2004, the first day he is not employed, the retirement date? When is the employee’s required beginning date?

RESPONSE

“Retirement” is the last day worked, not the definition of retirement date in the plan. What date is an employee’s last day worked is a facts and circumstances determination. The facts and circumstances are based on the employer’s practice concerning the last day an individual is considered an employee.

[Kevin C]

Austin, our clients must have missed that memo.  I've seen a lot of end of month terminations/retirements when their office is closed on that day. If it makes you feel any better, I agree that the employer (HR if you prefer) ultimately decides when the employment relationship ends.

[austin3515]

38 minutes ago, Calavera said:

“Retirement” is the last day worked, not the definition of retirement date in the plan. What date is an employee’s last day worked is a facts and circumstances determination. The facts and circumstances are based on the employer’s practice concerning the last day an individual is considered an employee

So the IRS apparently has the same position then.

39 minutes ago, Kevin C said:

I've seen a lot of end of month terminations/retirements when their office is closed on that day

But KEvin C, here's the real question for your clients.  If they put a termination date on their census response back to you that says someone's termination date is 2/27/2019--Does that mean:

a) the last day they were in the office was 2/27/2019, OR

b) that the last day they were in the office was 2/26/2019 and 2/27/2019 was the first day they did NOT work for the employer,

Cause I'll be shocked if you're working on the assumption that the term "termination date" is defined in b).  And of course it is relevant in certain situations such as last day rule, or even determining if someone is employed on a plan entry date.

[david rigby]

Be careful about "last day in the office".   Many examples of employees with a few days of accrued leave/vacation, and retirement/severance is after those days are used up.  Most of our clients specify "last day worked" and "last day paid".

 

[austin3515]

I agree that makes it more complicated, but please comment on the simple example first :)/.  Then we can throw the complications in there.  Most of the time it really is as simple as I'm suggesting.

[Kevin C]

Austin,

Neither.  As the IRS response says, the determination is made based on the employer’s practice concerning the last day an individual is considered an employee.  If a client says a termination date is 2/27/2019, that is the last day the person was considered to be an employee. Or, as I phrased it before, their last day employed.  I don't care what their last day in the office was, because that information is irrelevant. 

It's actually more simple than what you are suggesting.  Use the termination date the client determines is correct.  You don't need to second guess them. 

As for your a) or b) question, a termination date of 12/31 is employed on the last day of the year and a termination date of 12/30 is not. 

 

[austin3515]

So a client calls you and says "someone's last day in the office was 2/27th, what should I enter on your census file as their termination date?"  To which you say what exactly?  

Never mind, I actually give up.  I wish some others would chime in and confirm my suspicion that the term "termination date" is not in dispute, but that's all I will say abut that.

Over and out.

 

 

[david rigby]

Relevant prior discussion?

https://benefitslink.com/boards/index.php?/topic/60348-rmd-rules/&tab=comments#comment-268311