RMD for former owner

[perplexedbypensions]

Hello all!

Participant turned 70 1/2 on 9/1/2019.  In 2018, he was an over 5% owner, but sold his ownership in June 2019, prior to turning 70 1/2.  He is still working.

I have looked in the ERISA Outline book, and it seems pretty clear that he would not have to take an RMD since he was not a 5% owner upon attainment of age 70 1/2.

BUT!!!!!

His son (with whom he formerly shared ownership) is now the sole owner. 

Is this 70 1/2  participant still considered an over 5% owner due to family attribution, and therefore would need to start taking his RMD's?  I cannot see this answered clearly in the EOB's.

Thank you to all for the help!

[shERPA]

I haven't checked the EOB, but if you look at the (a)(9) regs, it sounds like he was a 5% owner with respect to 2019, having just divested himself in June.  As such he is a direct 5% owner for RMD purposes anyway, assuming a January-December plan year.  See -2, Q&A 2.

For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70 1/2.

401(a)(9) references 416 for the 5% owner definition.  416 relies on 318.  318 attributes from children, so he's probably a 5% owner this way too, but looks like this probably does not matter. 

[justanotheradmin]

I agree with shERPA. 

If you think of it as the RMD accrues on 12/31 of the year prior. His 2019 RMD is based on his 12/31/2018 Balance, regardless of when during the year he actually turned 70 1/2. Similarly, you analyze his ownership status when the RMD accrues (well technically 1/1/2019, but you get the idea). If he divests himself on January 2nd, it doesn't matter. 

[Larry Starr]

1 hour ago, perplexedbypensions said:

Hello all!

Participant turned 70 1/2 on 9/1/2019.  In 2018, he was an over 5% owner, but sold his ownership in June 2019, prior to turning 70 1/2.  He is still working.

I have looked in the ERISA Outline book, and it seems pretty clear that he would not have to take an RMD since he was not a 5% owner upon attainment of age 70 1/2.

BUT!!!!!

His son (with whom he formerly shared ownership) is now the sole owner. 

Is this 70 1/2  participant still considered an over 5% owner due to family attribution, and therefore would need to start taking his RMD's?  I cannot see this answered clearly in the EOB's.

Thank you to all for the help!

Your problem with the above is a misreading of the RMD rules.  He has to be a non-owner in the YEAR he turns 70 1/2, not as of the date he turns 70 1/2.  So, he would have had to sell by 12/31/18 to qualify for the non 5% owner rule exclusion (without even thinking about the issue of attribution from the son).  He needs to get his RMD, for 2019 and all future years.

[Larry Starr]

1 hour ago, perplexedbypensions said:

Hello all!

Participant turned 70 1/2 on 9/1/2019.  In 2018, he was an over 5% owner, but sold his ownership in June 2019, prior to turning 70 1/2.  He is still working.

I have looked in the ERISA Outline book, and it seems pretty clear that he would not have to take an RMD since he was not a 5% owner upon attainment of age 70 1/2.

BUT!!!!!

His son (with whom he formerly shared ownership) is now the sole owner. 

Is this 70 1/2  participant still considered an over 5% owner due to family attribution, and therefore would need to start taking his RMD's?  I cannot see this answered clearly in the EOB's.

Thank you to all for the help!

The EOB certainly deals with this (it deals with EVERYTHING! ? ). See last clause in first cite below.

 

1.d. How is it determined whether a participant is a 5% owner.? IRC §401(a)(9)(C)(ii) states that the 5% owner rule applies to a participant who is a 5% owner (as determined under the key employee definition in IRC §416) for the plan year ending in the calendar year in which the employee attains age 70½. Also see §1.401(a)(9)-2, Q&A-2(c), of the 2002 Regulations. Under the key employee definition, an individual is a 5% owner if he/she owns more than 5% of the company (or a related group member - see 1.d.3) below) at any time during the relevant plan year.

also... it deals with attribution thusly:

1.d.2) Attribution rules apply to determine ownership. To determine whether a participant is a 5% owner, the attribution rules under IRC §318 apply. These attribution rules are made applicable through IRC §416, which is cross-referenced in the RBD definition in §401(a)(9)(C). For example, suppose the company employs the mother of the 100% owner of the company. By attribution under §318, the owner's mother is a 5% owner. See IRC §318(a)(1)(A)(ii). The mother's RBD is April 1 of the year following the year she reaches age 70½, even if she continues working for the company. The §318 attribution rules are explained in Part A. of the attribution definition in Chapter 1A.