RMD or No RMD?

[Lou S.]

PYE = FYE = 6/30

EE attains age 70 on 8/xx/2014

EE attains age 70.5 on 2/xx/2015

RBD is 4/01/2016

First distribution year would be 2015 if RMD applies

EE has owned 100% of stock in the past but sells all of his stock. EE continues on as an employee of the company.

By what date must EE be a less than 5% owner to not have a required minimum distribution from the plan as a non-5% employee?

1 - 6/30/2014 (the last day of the prior fiscal year - so no ownership in the plan in PY 7/1/14 - 6/30/15; the plan year before he turns both age 70 and 70.5)

2 - 8/xx-1/2014 (the day before his 70th birthday)

3 - 12/31/2014 (the day before the 1st calendar distribution year)

4 - 2/xx-1/2015 (the day before he attains age 70.5)

5 - 3/31/2016 (the day before his RBD)

6 - some other date I haven't considered.

I think the answer is 3 - the day before his 1st calendar distribution year but I'm not sure if the the Fiscal Year being 6/30 and not 12/31 changes that. Also I'm having trouble finding the specific citation in the 401(a)(9) regs which I'm about to go through again but if someone knows it off hand, thanks in advance.

[ESOP Guy]

I believe it is 3 also.

[Lou S.]

I found this thread

http://benefitslink.com/boards/index.php?/topic/47056-rmd-change-in-ownership/

And the reference seems to indicate that the "plan year" may be important so the answer might actually be 1 - 6/30/14 since the "plan year" containing his 70.5 is runs from 7/1/14 - 6/30/15 and not the calendar year.

So I'm confused. Be nice if the regs simply said, if you're not a 5% owner as of your 70th or 70.5th birth day, you're not a 5% owner for 401(a)(9). But I guess that would be too simple.

[ESOP Guy]

Actually the whole RMD thing is a great example of taking a sledge hammer to a problem that needs tweezers.

I get it you don't want people who have large balances to keep it in tax deferred accounts for various reasons.

What we got is one of the most complex set of rules in the whole field. Just look at how often there are questions about these rules.

Then after all that in the 20+ years I have done this I can't tell you how many <$100 RMD checks I have helped get issued. And I won't even talk very much about the number <$1 RMD checks I have seen. Compared to the RMD checks from say accounts with >$100,000 the numbers are a joke.

So much time, effort and cost to solve a problem that happens not very often.

They could repeal the law and I am convinced they wouldn't see much change in total tax revenue from the money kept in the plans.

[Lou S.]

ESOP, you're preaching to the choir.

[Mike Preston]

"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."

Employee attains 70 1/2 in the 2015 calendar year. Plan year ending in 2015 is the plan year from 7/1/2014 through 6/30/2015.

416 gives no guidance as to how a 5-percent owner is determined "with respect to a plan year". I have chosen to interpret the meaning as if they wrote: "at any time during" rather than "with respect to". Hence, stock must be sold on or before 6/30/2014.

Of your choices, I choose 1, although your explanation doesn't exactly reflect the reg.