Question 313: My wife (age 70, born September 1, 1931) and I both work for a small company (C corp) that had an SEP IRA but has recently switched to a calendar year 401(k) plan. My wife would like to roll over funds from the SEP IRA into the 401(k) plan. She would also like to roll other "regular" IRA funds into the plan, as well as some 403(b) funds saved while working for a former employer. The goal is to avoid required minimum distributions. Can we? She is the President of the C corp and owns 4.96%. I am the CEO and own 4.5%.
Answer: Is it possible to roll the funds into the plan? You can roll most (but not all) of the funds, assuming the plan document permits it, but that's not the real issue here. The real issue is whether the rollover will accomplish anything in terms of delaying required minimum distributions ("RMDs"). It will not.
The RMD rules follow the same attribution system that is used to determine if a traditional affiliated service group exists. That system is also used to determine if an individual is a key employee or an HCE.
For purposes of the RMD rules, your wife is deemed to own your stock (and vice versa). That means you are each deemed to own 9.46% of the company. As such you are both "5% owners."
Why does this matter? RMDs must start by your required beginning date ("RBD"). For most people, the RBD for a benefit in a qualified plan is April 1 of the calendar year following the year in which the later of two events occur: the participant retires or the participant attains age 70-1/2.
If that applied to your wife, she could wait until she retired to start RMDs, but it does not. A 5% owner's RBD does not consider actual retirement; it is simply April 1 of the calendar year following the year the 5% owner attains age 70-1/2. Your wife turned 70-1/2 on March 1, 2012, so her RBD is April 1, 2013. Assuming she is then living, the plan must pay her first RMD during the 15 months beginning January 1, 2012 and ending April 1, 2013.
That same RBD applies to her IRA and 403(b) accounts. As a result, your wife does not have the power to roll over the first RMD amounts from those accounts. The RMDs are not eligible rollover distributions. For example, suppose the account has a balance of $261,000 and the RMD is $10,000. Your wife must take a distribution of $10,000. She can roll over the remaining $251,000, but she won't escape future RMDs on those amounts.
Somewhere among my readers there is someone with a bright, if malevolent idea: why not get a divorce to break up the attribution? But that wouldn't work. If a person is a 5% owner on one day of the year he or she turns 70-1/2 (which your wife was, on January 1), he or she is stuck with the 5% owner rule.
Chapter 14 of my book, Who's the Employer (now in its 6th edition), explores these attribution rules in detail.