RMD non-owner Exception

[Vlad401k]

How does the non-owner exception work for RMDs? I have these questions that I wasn't able to find any answers for (assuming the plan document allows the non-owner to delay the RMD)...

1) If the non-owner took his first RMD at, let's say, the age of 75, is he required to keep taking them or is it on a year by year basis, until he retires?

2) If the participant takes above the RMD amount, can the 20% federal withholding apply only to the portion above the RMD amount (since the RMD is not rollover eligible)?

[ESOP Guy]

For question #1 the answers going to be in your document. It is a rare day that I have seen a document that allows a non-owner who is active to even take an RMD much less decide on a year by year basis. This is one of those cases where knowing the law isn't enough. The law allows options so you have to know what the document says.

For question #2 I believe the answer is "yes" the 20% withholding applies to the amount over the RMD because what is happening there is there are really two payments even if only one check is being cut There is an RMD and an in-service distribution. The RMD gets 10% withholding and the in-service gets 20% withholding.

You can find threads on this next subject so I acknowledge there are people on this board who disagree with me on this but this is how I read the rules. (Understand how the document is written makes a big difference here).

But in my mind the only way a person who is active and taking RMDs can take more then the RMD amount is if the plan document allows for it.

So the plan document needs to either have in-service distribution provisions or you MIGHT be able to make a case if the RMD section says the RMD is the minimum amount a person can take. That MIGHT imply they can take more but I for one am uncomfortable with that reading.

[GMK]

1. Check the plan document. He may not be obligated to take an RMD until he reaches age 70-1/2 or retires, whichever is later. Meaning that, if he can take a distribution while he is still employed, none of it may be RMD, because he hasn't retired yet.

2. Withholding on the RMD amount is 10%, but the participant can choose to have more or 0% withheld. The portion of the distribution that is eligible for rollover is subject to the mandatory 20% withholding.

[My 2 cents]

I tend to find it disappointing when there is so much focus on the required withholding. The amount withheld is NOT the tax hit. The withholding serves the primary purpose of bringing the tax liability and the amount withheld into a rough sort of agreement. 10% (or even 20%) will often be insufficient to cover all the taxes due on the distribution (which would almost always be treated as ordinary income, over and above employee compensation when the payment is being made to someone remaining in employment).

Assuming that all distributions from pension plans will be reported on their income tax returns (thanks to the mandated 1099-R filed by the payer), the bottom line is really covering the tax liability for the distribution. Is it not more or less disastrous when there is not enough withheld, and, come the following April 15, the recipient must come up with $$$$ to cover the unpaid taxes?

[ESOP Guy]

I tend to find it disappointing when there is so much focus on the required withholding. The amount withheld is NOT the tax hit. The withholding serves the primary purpose of bringing the tax liability and the amount withheld into a rough sort of agreement. 10% (or even 20%) will often be insufficient to cover all the taxes due on the distribution (which would almost always be treated as ordinary income, over and above employee compensation when the payment is being made to someone remaining in employment).

Assuming that all distributions from pension plans will be reported on their income tax returns (thanks to the mandated 1099-R filed by the payer), the bottom line is really covering the tax liability for the distribution. Is it not more or less disastrous when there is not enough withheld, and, come the following April 15, the recipient must come up with $$$$ to cover the unpaid taxes?

I agree 100%.

[GMK]

We find it useful to participants if we 'splain that the entire cash distribution adds on top of their other income and that withholding is not the tax bill and could easily be less than the tax bill will be (and in some states there will also be a state income tax to pay).

Mandatory withholding at least wakes some people (not all) up to the fact that they will have to pay tax on a cash distribution and increases their interest in what the tax consequences may be for them.

[Tom Poje]

at the 2009 ASPPA Conference the question was answered this way (#43)
Question
A retiree has been receiving MRD payments. He is going back to
work for the employer who sponsored the retirement plan that has
been paying MRD payments. When the employee is back actively
at work for this employer may MRD payments be discontinued?
IRS Response
Once minimum required distributions begin, they continue for that plan without
change, regardless of changed circumstances. So, the MRDs are not discontinued on
rehire.