RMD / Retirement / RBD

[JPIngold]

I have a strange situation and looking for advice:

I have a salesman who has slowed down as he turned 70 on September 5, 2015.

He is still trying to make some sales, but decided on February 5, 2016 (before he even turned age 70-1/2) to take an in-service distribution and roll it to his IRA as he felt the grass was greener in the IRA. He received a commission check in January, 2016, but didn't receive another one until September, 2016 (I told you he slowed down). Not sure he'll ever make another sale.

If this is the case, I could see the IRS having the opinion that his retirement date falls in 2016 and, as a result, his RBD is 4/1/2017, making his first distribution calendar year 2016. Suddenly, that in-service distribution, which looked ok in February as he was still working, becomes a distribution that included his RMD.

I feel I need to suggest to the Trustee and the custodian platform that they split that rollover distribution into two 1099-R's, one for the RMD amount (taxable) and one for a non-taxable rollover. We then need to advise the participant that he should request a distribution of excess contributions from the IRA for the RMD amount on or before the due date of his 2016 tax return.

Agree???

Thanks in advance.

James

[ESOP Guy]

To me this is up to the company the salesman works for to determine. Is the guy terminated or not is the question. If he is out there still making sales calls on behalf of the company and they still have him on their payroll system as an employee then why isn't he an employee? Getting paychecks seems like one of the worse determining factors for this question.

To me if his boss says he is still employed and they can show he still does some work even if he doesn't get a commission check then he isn't terminated. If the boss says he is no longer employed as he no longer tries to sell for us then he is terminated and they should be able to get you a termination date.

This simply isn't a plan issue it is a sponsor issue. Does the sponsor say he is employed? If so he is. If not then he isn't.

[jpod]

There could be plenty of other indicia of continued employment besides getting regular compensation. In this case, you would want that employment to continue to at least until January 2017, right? Will he continue to participate in company health insurance as an active participant beyond December 31? Will he continue to be eligible for the company 401k or other retirement plan as an active participant beyond December 31? Will the company still be paying workers comp and unemployment insurance premiums for him beyond December 31 (although maybe is a statutory employee for Federal tax purposes and, therefore, a common law employee for all other purposes)?

[JPIngold]

Thanks .... both great responses. That was the discussion I planned to have with the employer, but just wanted to make sure others felt the same. Didn't know if anyone had been down this road with an IRS agent.

[TPApril]

Assuming though the employee in question terminated in 2016, and since the distribution was fully rolled over, is it a plan responsibility for there to be an RMD for 2016 even though RBD is 4/1/17 ie is James' proposed solution the correct approach?

[JPIngold]

I based my proposed solution on information found in Sal's ERISA Outline Books.

[GMK]

If the employee is no longer employed by the company at some time in 2016, then that person is required to take an RMD for 2016 has an RBD of 4/1/17.

When a person has an RBD, then the first portion of any distribution during the year in which the person retired is deemed to be RMD. JP's solution appears to be the correct one.

That said, from what I've read at BenefitsLink, if there is still enough money in the employee's account to cover the 2016 RMD now, and if those funds are distributed to cover the 2016 RMD soon after the employee's employment ends, then there probably wouldn't be an issue about not taking it from the distribution last February (when no RMD was due). But if the 2016 RMD isn't covered now, then a portion of the rollover in February was not eligible for rollover. As JP proposes, the plan issues the two 1099-R's, and the person has to get the cash back from the IRA.

[TPApril]

Would you suggest that simply the RMD amount would be withdrawn from the IRA, or would you increase with earnings through date of withdrawal since the earnings would not have been included in the IRA to begin with?

[GMK]

The amount of the RMD for 2016 is based on the balance in the plan at the end of the previous year, i.e., as of 12/31/2015.

Earnings in 2016 would not change that balance, so yes, the participant should simply withdraw the RMD amount from the IRA.

[JPIngold]

Yes, withdrawing the RMD from the IRA is going to be my suggestion. The interesting part is that the custodian of the 401(k) refuses to issue two 1099-R's and says they will only issue the one 1099-R reflecting the rollover. I guess as long as the IRA will issue the 1099-R for the taxable RMD it is a no harm no foul situation. However, I told them that based on the rules in place, they are not complying with them. [in the end, it will probably be easier than trying to get the custodian and the IRA to both report it correctly. I can just imagine trying to get the IRA to not report it as a taxable distribution!!!]

Thanks for all of your input and happy Thanksgiving!

[My 2 cents]

Yes, withdrawing the RMD from the IRA is going to be my suggestion. The interesting part is that the custodian of the 401(k) refuses to issue two 1099-R's and says they will only issue the one 1099-R reflecting the rollover. I guess as long as the IRA will issue the 1099-R for the taxable RMD it is a no harm no foul situation. However, I told them that based on the rules in place, they are not complying with them. [in the end, it will probably be easier than trying to get the custodian and the IRA to both report it correctly. I can just imagine trying to get the IRA to not report it as a taxable distribution!!!]

Thanks for all of your input and happy Thanksgiving!

If it has to be taken out as an RMD, isn't it inevitably a taxable distribution?

[TPApril]

Should the Plan recognizes its responsibility of the RMD for 2016, and issue 2 1099-R's, is it possible the participant will receive 2 1099-R's for the taxable amount, one from the IRA as well? Or is that responsibility satisfied by a letter stating the taxability, and then the recordkeeper could more easily issue the 1099-R for exactly what happened on its end, with the IRA issuing its 1099-R?