401k RMD after IRA rollover

[legort69]

An RMD eligible 5% owner participant has a 401k balance 12/31/2016.

July 2017 - They rollover their balance to their IRA .

Sept 2017 - They make a lump sum contribution to the plan .

Dec 2017 - We force out RMD from the balance created by the contribution.

Participant adamantly stated that they took the RMD from the IRA rollover and that we were not supposed to force his RMD.

Any support to the rules would be greatly appreciated. I will need something to cite.

 

 

[Mike Preston]

Participant is right. A portion of the 7/2017 rollover wasn't eligible for rollover. That amount (plus appropriate earnings, if any) should have been distributed from the IRA in order to avoid an excise tax for over-contributions to participant's IRA.  The good news is that the forced RMD can be rolled as it is within 60 days.

[legort69]

Thank you Mike. He wants us to cancel the RMD and restore his account.

He is not interested in the 60 day rollover since it was 'our fault'.

 Now I have a 1099R and tax withholding issue since these are 2017 transaction adjustments. 

Lastly - lets say he took the RMD from the IRA prior to the rollover. Would that still be a legit RMD?

[Mike Preston]

25 minutes ago, legort69 said:

Lastly - lets say he took the RMD from the IRA prior to the rollover. Would that still be a legit RMD?

Nope.  Can't take plan RMD's from IRA's.

[Lou S.]

Plan has to independently satisfy the RMD separate from any IRA or other qualified Plan.

Personally I'd have taken the position that while the RMD was supposed to be processed at the time of the rollover in July there was an administrative glitch that cause it to not be processed. The glitch was self corrected by the Plan with the December RMD that was discovered when doing a review of the Plan's RMDs for 2017. Update the administrative policy to not do it in the future.

Also if you do reverse the RMD you'll still need to send 2 1099-Rs, one for the that part that was supposed to be RMD from the July distribution since it wasn't eligible for rollover and one for the balance that was rolled over. Then he'll need to argue with his IRA custodian to reverse the 1099-R for the RMD he took or explain to the IRS why he has 2 1099-Rs but only claimed the income one.

edited for clarity (though I may have just made it more confusing)

 

 

[ESOP Guy]

More importantly the plan should have NEVER allowed him to take 100% of his balance and put it in an IRA in the first place.  The plan needs to check/change its procedures.  The regulations governing RMDs are very clear on this point.  In a year an RMD must be paid the FIRST dollars from the plan are the RMD. 

The payment in July 2017 should have been two checks:  1) for the RMD amount 2) the amount made payable to the IRA. 

Not trying to beat anyone up but had that rule been followed and two checks cut in July 2017 the whole problem would have been avoided.  Fix the procedures to conform to the regulations and going forward your life will be easier. 

[Larry Starr]

Mike says the participant is right; I'm not sure that is true.

The participant was due an RMD in 2017.  He never took it.  Instead, he took a distribution and rolled 100% of it over to an IRA.  If you have someone who is due an RMD, the very first distribution in that year is the RMD (or part of it if not large enough on its own). The problem is that he rolled over his RMD and THAT is not allowed.  Luckily, there were enough funds in the plan (because of the additional contribution) to correct the distribution by making a secondary payment that is equal to the RMD, and I think that is a fine way to correct. It doesn't matter what he did with his IRA and any distribution from that does not count as the RMD from the plan.  Stand your ground; the plan is now correct and the participant is wrong.  The ESOP guy is correct; there should have been two checks in July and the RMD should have been one of them and that amount was not able to be rolled over.

The participant says he took the RMD from the IRA prior to the rollover?  NOT POSSIBLE! RMDs cannot be aggregated between plans and IRAs. I disagree with Mike that the disgorgement from the IRA of the excess contribution is adequate to correct since it is the PLAN that must make the RMD.  That he took money out of the IRA (and before the rollover????) is of no consequence to the requirement of the plan to do the RMD.  STAND YOUR GROUND.

[Mike Preston]

Larry says "The problem is that he rolled over his RMD and THAT is not allowed."  Agreed.  Where we disagree is what the fix is.  Larry says that a subsequent distribution from the plan is a cure.  I disagree.  The only way to fix the problem is to recognize the actual problem (which Larry does: he rolled over his RMD) and cure that problem (disgorge from the IRA in time).  Making a subsequent distribution from the plan and pretending it cures the problem ..... doesn't.

[Lou S.]

2 hours ago, Mike Preston said:

Larry says "The problem is that he rolled over his RMD and THAT is not allowed."  Agreed.  Where we disagree is what the fix is.  Larry says that a subsequent distribution from the plan is a cure.  I disagree.  The only way to fix the problem is to recognize the actual problem (which Larry does: he rolled over his RMD) and cure that problem (disgorge from the IRA in time).  Making a subsequent distribution from the plan and pretending it cures the problem ..... doesn't.

How does the participant taking the RMD from the IRA satisfy the Plan's RMD?

The correct way to fix the problem would have been for the participant to direct the IRA to return the RMD amount back to the Plan and then have the Plan immediately issue the RMD.

Obviously as Larry points out the best way to do it would have been to issue the RMD before processing the rollover but if that happened we wouldn't have this thread.

I think processing the RMD from the Plan in December for 2017 is still a better solution than the Plan never processing an RMD which is the situation you have where the only distribution is a rollover from the Plan to the IRA.

 

[Mike Preston]

You might like it to be different, but like it or not the first dollars out constitute the RMD.  The *PLAN* is fine from a 401(a)(9) perspective the moment the funds left the plan.  It is the participant that is exposed by rolling over those dollars.  The amount disgorged from the IRA doesn't constitute an RMD.  It is a return of monies ineligible for rollover (and therefore treated as an IRA contribution, 100% of which is an excess IRA contribution subject to an ongoing 6% excise tax until corrected).  

Isn't there a writeup on the IRS website somewhere that details how this correction thingy works when a participant rolls over monies ineligible for rollover?

[Phil Royce]

Mike is correct. See the IRS Instructions for Forms 1099-R and 5498. This exact situation is discussed in the instructions. On the 5498 side, the IRA custodian/trustee reports the RMD amount as a regular contribution in box 1 of the 5498 and the rest as a rollover in box 2. The regular contribution is an excess and then is removed under the rules for correcting an excess. The RMD from the plan was satisfied when the money was distributed from the plan, so as Mike says, the plan is okay from a 401(a)(9) perspective.

Also, the plan must correct its 1099-R filing to show the RMD amount as a normal taxable distribution to the participant for 2017, and the rest as direct rollover to the IRA - so two Forms 1099-R will be required. That will fix the original error.

As far as the second issue, forcing an RMD from the contribution made in 2017, I think that is a mistake, but am not sure how to fix it after the fact in this subsequent tax year. Can the plan be made whole at this late date under rules? It can't really be done in the IRA world, but perhaps there is a way to do it in the qualified plan world.

[Bird]

I can't find this scenario in the instructions but I assume it is describing allowing a rollover of an RMD and not the second part; effectively correcting it by making a later distribution.

I agree that without the later deposit, this is fixed by issuing 2 1099-Rs and the participant could/should withdraw that as an excess contribution.  But I also think that the way it was handled was fine; frankly, the IRS doesn't care that much about which distribution was the RMD as long as it was done.  I also think this guy may be surprised and unhappy if you follow the rules - it sounds like he wants a 1099-R showing 100% rolled over, and that would definitely not be correct.  If he has the money and is willing to write a check to the plan but not to the IRA he's just being a jerk and asking for trouble since the 1099-Rs will be spanning two years, and while we might all be surprised at what the IRS does not look at, I'm pretty sure they are matching 1099-Rs to what is reported on the 1040.

Further, if he took the RMD from the IRA as he claims, he probably did it as a regular distribution and not an excess, and (again) if the plan processes the 1099-Rs correctly, he's done the wrong thing and should at the very least get that code changed to an excess, not regular distribution.

Long story short, it sounds like he wants the plan to report based on what he did, not what is correct.  The plan has no way to know that he took the RMD and must report accurately.

[TPApril]

Dealing with a similar situation right now, but not spanning 2 taxable plan years.

Full account balance was rolled over to IRA, including the RMD payable.

IRA is going to distribute to participant that RMD as an excess contribution.

Plan is going to issue 2 1099Rs - 1 for RMD amount and 1 for eligible rollover amount

When recipient receives 3 1099Rs, will it be clear that the amount is only taxable once?