Owner takes IRA RMD from his Profit Sharing Plan

[kwalified]

What is the correction method if an owner has been taking his IRA RMD out of his PSP? This has been going on for a few plan years.  Amended 1099?

[Mike Preston]

I don't see where any correction is available (other than to pay the excise taxes for missed RMD's from the IRA's).  It is likely that the owner was entitled to the distributions under the plan's in-service distribution rules so the distributions were no doubt allowable and, to the extent not rolled, appropriately taxable.  

[david rigby]

What he said.

BTW, to emphasize Mike's comment, the correction needed is personal, and is not related to the plan (at least, based on the facts presented).

[kwalified]

True, the holder of the plan assets has been allowing the IRA RMD to be drawn from the qualified plan for the past 4 plan years. Total IRA RMD over that period is $10,530.  It was only in the current plan year that they advised that a co mingled RMD could not occur from the plan.  I suspect the custodian of his IRA gave him no advice on the IRA RMD.  With the excise tax being 50%, could he just throw himself at the mercy of the IRS? Form 5329?

[CuseFan]

By "owner" do you mean of the business? So RMDs were required from both PSP and IRA - but only taken from PSP? Echoing the above - no "correction protocol" for IRA except to take out the missed RMDs and pay the excise tax. It MAY be possible to petition the IRS to get them to waive the excise tax if this person  took enough from the PSP to cover both, so the right taxes were ultimately paid for those years, but I have no experience with IRS in this area and don't know if they're reasonableness/sympathy extends to IRA compliance.

[kwalified]

He WAS an owner of the company.  His son currently is 100% owner. He is an officer. The RMD recipient still draws an income from the plan sponsor and hours worked are reported.

[jpod]

You can file the 5329s and claim a waiver of the excise taxes and keep your fingers crossed.  I think if you provide a thorough explanation demonstrating with appropriate calculations and copies of 1099-Rs how he mistakenly "covered" his IRA MRDs by taking extra MRDs from the PSP you would have a very strong case for a waiver.  Of course, you better make sure that the in-service withdrawals beyond the PSP MRD amount were permissible otherwise you are admitting to an operational violation. 

[kwalified]

I'm thinking he could have success requesting a Waiver of the tax on the 5329. My concern now is if he even had to take the RMD since he was not an owner when he turned 70.5.

[Mike Preston]

That isn't a concern.  Ownership has no bearing on IRA RMD's.

[kwalified]

RMD not from  the IRA,  but the PSP

[Mike Preston]

If not owner in year turned 70 and 1/2 then no RMD's until separation from service (if elected by plan).

[Kevin C]

1 hour ago, kwalified said:

He WAS an owner of the company.  His son currently is 100% owner. He is an officer. The RMD recipient still draws an income from the plan sponsor and hours worked are reported.

Sorry, but his son's ownership makes him a 5% owner for RMD purposes.  1.401(a)(9)-2 Q&A 2(c)  refers to section 416, which refers to section 318, which says he is considered to own the stock owned by his son.  Was his son 100% owner in the plan year ending in the calendar year he attained age 70.5?

[kwalified]

yes, so family attribution applies.  good news

[My 2 cents]

Why is it good news that RMDs are required from both the 401(k) plan and the IRA?  If he weren't a 5% owner, would the withdrawals from the 401(k) plan have been improper?

In any event, withdrawals from the 401(k) plan don't excuse the failure to take RMDs from the IRA, do they?

 

[RatherBeGolfing]

24 minutes ago, My 2 cents said:

Why is it good news that RMDs are required from both the 401(k) plan and the IRA?  If he weren't a 5% owner, would the withdrawals from the 401(k) plan have been improper?

In any event, withdrawals from the 401(k) plan don't excuse the failure to take RMDs from the IRA, do they?

 

Perhaps it is good news that the practitioner did not make an error in making the participant take a taxable distribution from the plan? 

[CuseFan]

Here's some other potential issues:

IRS may still insist on those missed RMDs being taken from the IRA even if they waive the excise taxes.

If they don't require that correction and accept the payments from PS as IRA RMDs, the question is whether the PS distributions were enough to cover both. That is, did a prior year IRA RMD amount paid from PS reduce the PS balance used to determine a subsequent year PS RMD?

[jpod]

CuseFan.  Interesting point.  But, on the other hand, the calculated IRA RMDs were "overstated" because the IRA balance had not been reduced from year to year by RMDs. 

[kwalified]

16 hours ago, My 2 cents said:

Why is it good news that RMDs are required from both the 401(k) plan and the IRA?  If he weren't a 5% owner, would the withdrawals from the 401(k) plan have been improper?

In any event, withdrawals from the 401(k) plan don't excuse the failure to take RMDs from the IRA, do they?

 

It's good news because his PSP doesn't have the problem.  It would have been a much bigger issue had he not been a 5% owner

[kwalified]

Excellent points CuseFan and Jpod. Should be interesting to see how the IRS comments on this

[kwalified]

Update:  After an explanation on 5329, the IRS decided in favor of the participant.  "no further action was due"

[Mike Preston]

Wow! Very good result for the participant.