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ESOP RMD Question


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2018-7-22 the ESOP RMD Question

 

The client is a participant (employee) in a ESOP which holds 100% of the "employer securities" of the Plan Sponsor corporation (employer).

 

A. The client is almost 70 years of age, is currently employed and plans on continuing to work for the corporation until age 75 (W-2 income). The client-employee is presently inquiring regarding possible approaching RMD requirements and distributions.

 

1. We are informed that if the client-employee continues to be employed beyond age 70 1/2, then RMD distributions are not required until retirement.

 

2. We are also informed that if the client-employee is a "5% owner", then the exception deferring RMD distributions until retirement may not apply.

 

3. We are also informed that for purposes of determining the "5% owner" rule of the plan sponsor, the employer securities held by the ESOP are not used in determining the "5% owner".

 

QUESTION 1: Is this correct? And do you have any legal authority or citation on this issue?

 

B. Under the terms of the ESOP plan, the client-employee-participant can be offered a partial or lump-sum distribution of the employer securities (e.g. annually) which, if elected is distributed to the participant by the ESOP as employer securities under a "repurchase-buyback" provision required by the plan sponsor corporation who buys back the distributed shares resulting in the retirement income to the participant ( 1099-R).

 

QUESTION 2 : Can the client received both W-2 income and 1099-R distributions beyond age 70 1/2 as long as he is still employed?

 

Thank you

 

tdslaw@cox.net

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Question 1:  Yes that is correct.  https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans

The only part that cite doesn't cover is the idea the shares in the ESOP don't count towards 5% ownership.  There isn't a cite per say.  The simple fact is the ESOP trust owns those shares and the participant is a beneficiary of the ESOP trust.  So those shares don't count.  If the ESOP really owns 100% of the outstanding stock than there are no 5% owners for RMD purposes. 

 

Question 2:  You question 2 is vague.  Does the plan allow for in-service installments or all these installments only after they terminate?  Your question doesn't tell us this important information.   It would be rare for an ESOP to allow installments for in-service distributions.  You can find ESOPs that allow people over a given age to take an in-service distribution.   However, they typically require an election every time you want such an in-service distribution.   You need to get clarification from the plan if these installments payments are part of a termination/retirement distribution or in-service distribution. 

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I thought not counting the ESOP shares towards 5% ownership comes from 318.  1.401(a)(9)-2, Q&A 2(c) sends you to 416 for the definition of 5% owner.  1.416-1, Q&A T-17 sends you to 318.

Quote

 

318(a)(2)(B) From trusts

(i) Stock owned, directly or indirectly, by or for a trust (other than an employees' trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuarial interest of such beneficiaries in such trust.

 

 

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41 minutes ago, Kevin C said:

I thought not counting the ESOP shares towards 5% ownership comes from 318.  1.401(a)(9)-2, Q&A 2(c) sends you to 416 for the definition of 5% owner.  1.416-1, Q&A T-17 sends you to 318.

 

I had forgotten about that.  It has been so long since someone asked me to cite the reason.  I just know it is true and it is a rare day anyone questions it any more.  

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22 hours ago, tdslaw said:

 

 

QUESTION 2 : Can the client received both W-2 income and 1099-R distributions beyond age 70 1/2 as long as he is still employed?

 

In general terms, yes - participants who are still employed by the sponsor take in-service withdrawals receive 1099-Rs and W-2s. Some even take them as cash (non-rollovers) in which case the 1099-R generally shows the income as taxable (different for Roth and after-tax). 

As long as the withdrawal is allowed under the terms of the plan, and the participant is making the written election, its probably fine. The 1099-R and W-2 combo occurs quite often, even for non-RMD participants. 

Maybe you are thinking there is a conflict if the participant was receiving 1099-Misc as an independent contractor + W-2 as common law employee? That's a different discussion. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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