Is it an RMD if taken before the RBD?

[MrKnowItLittle]

An RMD was done before a participant required beginning date. The plan does not allow for in-service withdrawals, and only allows for lump sum distributions. Can we still call this an RMD? Participant was still employed, over 70.5, but not a 5% owner.

[GMK]

If the plan allows RMD's while the participant is still employed, I'd say it's an RMD. More common though is that RMD's are not required while the participant is employed by the plan sponsor. So, I'd check the Plan Document to see what applies.

[MrKnowItLittle]

The document says this:

1) Required beginning date. The Participant's entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant's "required beginning date."

There is no further definition defined in the document, so I would refer to the regulations. Which is this case basically say the distribution was not required. Am I miss-construing the word "required."

[chc93]

The regs allow for the plan to have RMD's for everyone at age 70-1/2 regardless of ownership. If the plan is silent, I would guess that a consistent interpretation of the plan document and regs is OK.

[ESOP Guy]

I think you need to look harder to find the definition of the RBD. I don't think I have ever seen a document that doesn't have that defined. That is because there is a choice so the choice has to be recorded. If you have to go back to whoever provided the document and get them to interpret their document. But I just find it nearly impossible to accept the idea that the answer isn't in the document.

[Mike Preston]

I think people are focusing on the wrong technical term. A distribution in the year a participant reaches age 70 and 1/2 is attributable to the first "distribution calendar year". A distribution (of sufficient amount) made in the first distribution calendar year satisfies the rules of 401(a)(9). The fact that it took place in the year before the RBD is irrelevant. I agree with the others that a plan can be designed so that the rules of 401(a)(9) don't kick in for a non-5% owner until separation from service, but if this plan calls for the rules of 401(a)(9) to apply at 70 and 1/2 even for non-5% owners I find it hard to believe that a distribution in the first distribution calendar year is a problem.

[MrKnowItLittle]

So I dug down into the document again. What do you know there is a special glossary definitely definition, stuck in the middle of the BPD not in the front definitions section that defines the RMD terms.RBD is the later of 70 1/2 and termed, or termination after 70 1/2 and not a 5% owner. They do not have checked in the AA appendix to elect start RMD at 70 1/2 ragardless. Also the document only allows for lump sums (they didn't check the box for partial withdrawals only allowed for RMDs). Does that mean the participants only option should have been a lump sum if this was allowed?

[GMK]

You said that the plan does not allow in-service distributions, and since the RBD is not yet determined, there is no RMD. Correct me if I'm wrong, but it looks to me like the participant's only option was to leave it all in the plan, no RMD, no lump sum.

[MrKnowItLittle]

That is correct. And for curiosities sake, even if the participant was allowed to have an RMD, because a lump sum is the only form of benefit allowed and they did not tick the box for to allow partials for RMDs, the only option was a lump sum correct?

[GMK]

That's how I'd read it. You have to do what the Plan Document says.

When this employee retires and is then required to take an RMD, the employee will receive a lump sum distribution, part of which will be the RMD with the remainder eligible for rollover.

[ESOP Guy]

That is correct. And for curiosities sake, even if the participant was allowed to have an RMD, because a lump sum is the only form of benefit allowed and they did not tick the box for to allow partials for RMDs, the only option was a lump sum correct?

Are you asking if the only way to meet the RMD requirements is to pay out the whole balance because the plan only allows for a lump sum?

If so, I doubt it. (But can't be 100% sure without looking at the document) Re-read the RMD section it almost certainly says you must pay out at least the RMD amount or says you must pay out the RMD amount. I have always read this to mean you can pay out just the RMD amount even if for a regular termination payment (after the person completes the forms) you are only allowed to pay a lump sum.

Or put another way one section tells you what to if the person is terminated and over 70.5 and doesn't ask for a distribution you then pay the RMD amount and another section of the plan document tells you that the plan must pay a lump sum if they request a distribution after termination.

I don't think I have ever seen a document that requires you to pay a person 100% of their balance in order to satisfy the RMD rules. But if the document really says you have to pay 100% of the person's balance to meet the RMD rules then you do have to follow the document. I am just thinking you might not be reading the document right. Once again if you think you are you might want to go to the people who wrote the document to make sure you are reading it right.

If you are not asking the question I opened with then I am not sure what your question means.

[Bird]

Also the document only allows for lump sums (they didn't check the box for partial withdrawals only allowed for RMDs).

Is the word "only" (my emphasis in the quote) really in there? If so, I don't understand. Why would a plan say "lump sum only" and also have that option? I could understand if "only" wasn't in there.

As noted, it would be unusual for a plan to force a lump-sum payout when RMDs are due.

[MrKnowItLittle]

The plan says the RMD must abide by the forms of distribution allowed in AA. The AA has a special box for partial payments of RMDs in this section but it was not checked, only lump sum was. The plan uses the 70 1/2 and 5% owner rules, and did not make the election for 70 1/2 regardless of employment. They conveniently did not put these in the definitions section of the document and buried them 3 pages into the RMD rules section. This means the participant never met the RMD trigger, and furthermore could of only satisfied the RMD from the plan as a lump sum.

[ESOP Guy]

The plan says the RMD must abide by the forms of distribution allowed in AA. The AA has a special box for partial payments of RMDs in this section but it was not checked, only lump sum was. The plan uses the 70 1/2 and 5% owner rules, and did not make the election for 70 1/2 regardless of employment. They conveniently did not put these in the definitions section of the document and buried them 3 pages into the RMD rules section. This means the participant never met the RMD trigger, and furthermore could of only satisfied the RMD from the plan as a lump sum.

I suppose that is one way to get your terminated people out of the plan in the long run. You have to take a lump sum when you turn 70.5. Seems extreme to me but that is just one guys take on the issue.

[QDROphile]

Lump sum only distribution is a perfectly viable design. It depends on what the employer wishes to accomplish with the plan. It is a bit funny for owners because the account is zeroed every year after the benefit is accrued for the year.

[GMK]

I know of an ESOP that requires a lump sum distribution at age 65 or retirement, whichever occurs later. With the rollover options available these days, it's not so terrible for participants, and it gets them more diversified.

It's certainly a different situation than with a 401(k), but I don't think it's fundamentally detrimental to 401(k) participants to be forced out after retirement, not that we do it.

From the plan's view, there's something to be said for passing the administrative burden of on-going caretaker duties for retiree accounts to others who are better equipped to handle it.

[mbozek]

Why not just amend the plan to allow for withdrawals in year 70 1/2 is attained because you cant put toothpaste back in the tube?