what is "retired" for purposes of required minimum distributions

[TaxLawyer1978]

Reg. 1.409(a)(9)-2 provides that minimum required distributions out of a qualified plan (e.g. 401(k)) must begin April 1 of the calendar year following the later of the calendar year in which the employee turns 70 1/2 or the calendar year in which the employee retires from employment with the employer.  The term "retirement" is not defined for purposes of 401(a)(9).  

If a law firm partner is still technically a partner in a firm, but doing hardly any work, is he considered "retired"? Or does retirement mean actual total termination of employment?

[Mike Preston]

I have never seen a cohesive definition.  Hence, it is up to the Plan Administrator to decide.  Whatever criteria they end up using is best if documented in some fashion and then applied to future determinations.  But in the circumstance you posit it doesn't sound like retirement is an accurate description.

[QDROphile]

There is no bright-line definition.  I agree that the plan  administrator has to figure it out based on all the circumstances.  However, I suggest that a self-employment situation, including (or especially) a law firm, is full of opportunities to abuse, so the plan administrator should be looking for a hook for start of required distributions.  In particular, any change in any perquisites should be examined. I have been through it, and it is not easy because the arrangements can be nebulous and not consciously abusive.  What constitutes "retirement" of a venerable law partner is an issue for law firms beyond 401(a)(9). Remember the purpose of the law.

[david rigby]

…. and also remember the special application for 5% owners.

[TaxLawyer1978]

Thanks, I know.  We don't have any 5% owners.  Appreciate the help.  Thanks again.  

 

[Calavera]

For what it worth from Gray Book 2004-42:

Treas. Reg. §1.401(a)(9)-2, A-2(a) provides that except in the case of a 5%-owner, the “required beginning date” is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70-1/2 or the calendar year in which the employee retires from employment with the employer maintaining the plan. If December 31, 2003 is the employee’s last day at work, and the last day for which he is paid or entitled to payment of wages, is that the date of “retirement”. Or is January 1, 2004, the first day he is not employed, the retirement date? When is the employee’s required beginning date?

RESPONSE

“Retirement” is the last day worked, not the definition of retirement date in the plan. What date is an employee’s last day worked is a facts and circumstances determination. The facts and circumstances are based on the employer’s practice concerning the last day an individual is considered an employee.

[Peter Gulia]

I sometimes encounter similar questions in contexts about nonowner workers.  Perhaps BenefitsLink mavens will help me with some reasoning.

 

If a retirement plan’s administrator were deciding this question about a nonowner, how would we analyze whether a part-timer is “retired”?

 

If someone works one day a month, is she retired?

 

Or does any work at all mean the worker is not yet retired?

 

Does the analysis vary based on whether our question is:

 

Whether the participant has “retired” enough that the plan’s IRC § 401(a)(9) provision compels a distribution?

 

Whether the participant has a severance-from-employment to permit a distribution the plan otherwise does not provide?

 

[CuseFan]

Great questions - welcome to the facts and circumstances nebula, also known as the Twilight Zone. We often have these arguments with clients. It would be nice if IRS and/or DOL would just draw a line in the sand that everyone could see and abide by.

But, if you need facts and circumstances, we usually suggest looking at how the employee is treated (retired vs. employed/not retired) with respect to all the other employer's plans and benefits - life, health, etc. (still covered, offered COBRA). If the person is treated as retired (or not) for all other purposes by the employer, chances are you can justify same for retirement plan(s) - consistency over accuracy - that's what the actuaries kept telling me for years!

[Mr Bagwell]

Larry had this strong opinion in a thread I posted called "Retirees, Working but not Much".  Similar context.

"Umm.... they are NOT retirees if they are still working! They have simply gone to a more part time status.  You have already been told they have to get the SH.

As to making them 1099 employees, that is a very bad recommendation and something that can get your clients in big trouble.  If they are employees, they are employees.  You cannot MAKE THEM 1099; they either are independent contractors or they are not. In your case, they have been employees and they still will be employees and will have to be treated as such."

Thanks

[QDROphile]

Owners (such as partners in a law firm) present particularly sensitive circumstances.  One aspect to consider is whether or not: 1) the post full-time work is performed at the request/demand of the employer/firm or is fully discretionary with the individual.  If the performance of services is not regular and substantial and is at the discretion of the individual, it should be given a hard look.  Hobby employment should not be treated as a block to required distributions.  The IRS would be faced with the other side of the coin:  What is meaningful employment for the benefit of the employer/firm?  Law firms and other professional service firms often give nonproductive partners various privileges that allow them to dabble, mostly for social reasons, in a way that yields token compensation.   I think that amounts to retirement in many instances with respect to section 401(a) (9).  Other clues can help, such as start of nonqualified deferred compensation and unavailability of certain other pre-"retirement" perquisites.  I would go easier on a rank and file employees because an employer would be more likely to take a no-nonsense approach.  If such an employee is keep on at a low or irregular level of work/compensation, then the employer is probably engaging the person for benefit of the employer.  Yet we have all seen sham employment for various purposes convenient to the employer, whether the employer likes it or not.

[JRN]

Seems to me that if the participant is still receiving a W-2 or K-1 from the Employer, the participant is not retired.

[TaxLawyer1978]

Thanks everyone.  Can someone tell me what this Gray Book 2004-42 is exactly?  This may be all I have to show the plan's trustee that is actually written about this (outside a very vague paragraph in the BNAs)

[Calavera]

From http://www.ccactuaries.org/archives/meeting-materials

Released annually at the Enrolled Actuaries Meeting between 1990 and 2015, the "Gray Book" was an essential compendium of questions from actuaries and answers from the IRS. The Super Gray Book consolidates these materials on a USB with searchable indices for the each set.

Note: Due to reallocation of resources at the IRS & Treasury, competing priorities, and government concerns surrounding reliance upon responses in the Gray Book, the Gray Book will no longer be produced.

[TaxLawyer1978]

What if the partner is simply "on the books" but getting no compensation?  Do we err on the cautious side and consider him "retired"? I'd say yes but getting push back 

[QDROphile]

This is exactly the problem situation (or variation) that comes up regularly.  If the IRS ever got into this, it would look abusive and scammy. Why push it?  The whole tax-deferred savings aspect of the tax code is a huge benefit.  The accrual is the big benefit, that is done, and the intended legitimate purpose has been achieved.  Don't be a pig for purposes of estate planning or whatever greedy factor is at play .  

[Peter Gulia]

TaxLawyer1978, while I don’t give you or anyone advice, consider whether there might be some arguments in another direction.

 

A Federal income tax rule suggests arguments that a self-employed individual is an employee for a year in which she has any earned income, and also for a year in which she rendered some personal services (even if her business provided her no earned income):

 

(b)   Treatment of a self-employed individual as an employee.

       (1)   For purposes of section 401, a self-employed individual who receives earned income from an employer during a taxable year of such employer beginning after December 31, 1962, shall be considered an employee of such employer for such taxable year.  Moreover, such an individual will be considered an employee for a taxable year if he would otherwise be treated as an employee but for the fact that the employer did not have net profits for that taxable year.  Accordingly, the employer may cover such an individual under a qualified plan during years of the plan beginning with or within a taxable year of the employer beginning after December 31, 1962.

 

26 C.F.R. § 1.401-10(b)(1)  https://www.ecfr.gov/cgi-bin/text-idx?SID=2ed955aaf30998b5f81b0ccb8bd185b9&mc=true&node=se26.6.1_1401_610&rgn=div8

 

And the rule doesn’t say ‘for IRC § 401(c)’; it says ‘for IRC § 401, which includes § 401(a)(9).

 

The decision-maker would want to get into the details of the partnership agreement and the partnership accounting to discern whether the 70-something really is a partner.  And did he render some personal services?  Did he at least make a few courtesy calls to placate clients?

 

If we were debating whether an employee has a severance-from-employment to permit a distribution a plan otherwise would not provide, some (perhaps including the IRS) might argue that part-time work—even a substantial reduction “in the number of hours that an employee works”—is not a severance.  See, by analogy, 26 C.F.R. § 1.401(a)-1(b)(3).

 

I don’t suggest these arguments resolve all questions or even lead to a sound conclusion.  But a plan’s administrator might get its lawyer’s advice and find there’s enough to support an interpretation that the plan doesn’t compel a minimum distribution.