Required Minimum Distributions

[Lori H]

We have a SH 401(k) that is terminating.  One of the owners (more than 5%) is over 70 !/2 and will need to take his 2017 RMD.  This participant has an outstanding loan balance.  If he decides to default on the loan can the outstanding value of the loan be used to satisfy the RMD?  The plan's assets also include some real estate.  If this same participant wants to retain ownership could the value of the property be used as part of the RMD?   Thank you for your responses

[ESOP Guy]

Regarding the loan that is distributed it can be used to fulfill the RMD.  I have helped with that kind of transaction before.

If we focus on just the RMD and not all the other possible problems with distributing land in kind I don't see why not.  They received a distribution that is taxable and it wasn't rolled over.  I just have never been part of that kind of transaction in the past.

[Peter Gulia]

If (to complete the plan's termination) the plan pays and delivers the plan's final distributions of money and property before the end of 2017, won't everything be distributed?  If so, would the Form 1099-R tax-information reports be one report for the year's minimum-distribution amount and another report for all else?

[Belgarath]

Just be careful that it is in fact an offset and not a "deemed distribution." A simple "deemed distribution" doesn't satisfy the RMD requirement. Sounds like you have an offset situation, so should be ok.

Q-9. Which amounts distributed from an individual account are taken into account in determining whether section 401(a)(9) is satisfied and which amounts are not taken into account in determining whether section 401(a)(9) is satisfied?

A-9. (a) General rule. Except as provided in paragraph (b), all amounts distributed from an individual account are distributions that are taken into account in determining whether section 401(a)(9) is satisfied, regardless of whether the amount is includible in income. Thus, for example, amounts that are excluded from income as recovery of investment in the contract under section 72 are taken into account for purposes of determining whether section 401(a)(9) is satisfied for a distribution calendar year. Similarly, amounts excluded from income as net unrealized appreciation on employer securities also are amounts distributed for purposes of determining if section 401(a)(9) is satisfied.

(b) Exceptions. The following amounts are not taken into account in determining whether the required minimum amount has been distributed for a calendar year:

(1) Elective deferrals (as defined in section 402(g)(3)) and employee contributions that, pursuant to rules prescribed by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), are returned to the employee (together with the income allocable thereto) in order to comply with the section 415 limitations.

(2) Corrective distributions of excess deferrals as described in § 1.402(g)-1(e)(3), together with the income allocable to these distributions.

(3) Corrective distributions of excess contributions under a qualified cash or deferred arrangement under section 401(k)(8) and excess aggregate contributions under section 401(m)(6), together with the income allocable to these distributions.

(4) Loans that are treated as deemed distributions pursuant to section 72(p).

(5) Dividends described in section 404(k) that are paid on employer securities. (Amounts paid to the plan that, pursuant to section 404(k)(2)(A)(iii)(II), are included in the account balance and subsequently distributed from the account lose their character as dividends.)

(6) The costs of life insurance coverage (P.S. 58 costs).

(7) Similar items designated by the Commissioner in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin. See § 601.601(d)(2)(ii)(b) of this chapter.

[T.D. 8987, 67 FR 18994, Apr. 17, 2002, as amended by T.D. 9130, 69 FR 33293, June 15, 2004; T.D. 9319, 72 FR 16894, Apr. 5, 2007]

[Bri]

right - if the plan allows distributions beyond a stated age (such as 59.5 or NRA), then defaulting on the loan "should" trigger a benefit offset, which could satisfy the RMD.

[CuseFan]

Agree with all, but back to the real estate - be careful, the plan must provide for in-kind distributions AND they must be offered to everyone. All it takes is one disgruntled smart-@ss employee or former employee participant to demand his/her slice of that property. Of course nothing like that ever happens in real life (which if you believe, I've got bridge to sell to someone's profit sharing plan!).

[ESOP Guy]

The other big issue with the real estate is a value.  If the owner gets the real estate and then sells it shortly after it leaves the plan for a large profit the charge the owner cheated the other participants by under valuing an asset in the plan can be made