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RMDs by Jan. 1 not April?


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I have a plan where the required distribution language reads "by January 1st of the calendar year following the calendar year in which he/she attains the age of [70 1/2]".  I suppose this qualifies as meeting the RMD requirements, but it struck me as odd and wanted to ask around and see if I was missing something. Can a plan sponsor select a slightly earlier date for the RMDs and not run afoul of the rules? (They must have gotten a determination letter at some point, so it passed muster in this form.) It's an ESOP if it matters. (And I'm putting aside the SECURE 2.0 Act's updates to the ages for now.) Thanks!

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Could it be the plan simply didn't want to give participants the option to delay the first distribution so they don't have to process 2 in one year?

Though I'm not sure how you get the first one processed by January 1 if say a non 5% owner terminates on December 31st.

 

 

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A few points you might consider:

Internal Revenue Code § 401(a)(9)’s tax-qualification condition sets a restraint about how much delay a plan may allow before the plan provides some involuntary distribution.

Except as ERISA § 203 commands otherwise, a plan may provide an involuntary distribution sooner than a participant’s applicable age described in IRC § 401(a)(9). For example, a plan might provide an involuntary distribution by the last day of the year in which the participant reaches a 60-something age (if the participant then has reached the plan’s normal retirement age).

A sponsor of an employee stock ownership plan might have plan-design or other reasons for providing a distribution in January rather than April 1.

But if the ESOP’s shares are not publicly traded on a national securities exchange, consider whether January 1 is practical in the plan’s administration. Among other factors, how likely is it that the plan’s trustees will have read their appraiser’s report and concluded a December 31 valuation by January 1 or 2?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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It seems this plan wanted to avoid all of the RMD rules around the first RMD payable by April 1st following the Distribution Calendar Year or allowing active non-owners the opportunity to defer payments until severance from service.  As Peter noted, the plan can provide for an involuntary distribution based on a reaching the plan's normal retirement age.  I work with a 401(k) plan that requires lump sum distributions be made to the participant when the participant reaches age 65.  Essentially, there are no RMDs payable from the plan due to reaching age 70-1/2, or 72, or 73, or 75, or any other age past age 65.  The plan also pays lump sum death benefits which pretty much means no RMDs are paid from the plan.

Does this ESOP condition the payment based on the calendar year in which a participant reaches age 70-1/2 regardless of whether the participant is active or terminated?  If yes, and the account is paid on the value of the stock appraisal (assuming it is not publicly traded) received in that year for the end of the prior year, there should be no problem making the payment timely during the year in which the participant reaches age 70-1/2.

If the ESOP is making payments using the RMD calculations as a minimum, then a payment made before the participant reaches the RMD age for a year will not be an RMD.  It would be an eligible rollover distribution.

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Not sure I agree with, but maybe don't follow, Paul I's contention that the Jan 1 distribution as described is not a RMD but a rollover eligible distribution. My understanding is that first money out in any year for which a RMD is due is the RMD and not rollover eligible. Similarly a subsequent distribution in the same calendar year would be the RMD for that year to the extent thereof. Am also curious about comment regarding obviation of RMDs by mandatory account plan payouts at age 65. Are employees mandatorily retired at 65? If not, are they excluded from plan participation if they work past 65?

 

 

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FPGuy, my apologies for any confusion.  A distribution paid today to someone currently age 70-1/2 would be an eligible rollover distribution, even though it otherwise may look like an RMD as if it was made following the rules of 401(a)(9).

The particular plan referenced above does have a mandatory retirement at age 65.  They do allow for company-approved exceptions, and anyone who is allowed to work past retirement age who gets an allocation also gets paid an immediate lump sum.

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