RMD for an as-needed employee

Dentists are know for having "prn" employees.  These people fill in vacations, etc.  Often they've worked in the past but left.  So on one hand they terminated some time in the past but they are still getting paid now and then and getting a plan contribution since they were previously eligible.  So if the person is 73, I supposed best to do an RMD to be safe.

Tom

Many businesses use pro re nata, as-needed, on-call, or other intermittent employees.

Unless the plan’s governing document provides an involuntary distribution on the participant’s reaching a specified age, the plan’s administrator should decide whether the individual is severed from employment.

A required beginning date refers, in part, to “the calendar year in which the employee retires.” I.R.C. (26 U.S.C.) § 401(a)(9)(C)(i)(II). For this context, the statute does not define “retires”.

The Treasury department’s rule refers to “the calendar year in which the employee retires from employment with the employer maintaining the plan.” 26 C.F.R. § 1.401(a)(9)-2/Q&A-2(a) https://www.ecfr.gov/current/title-26/section-1.401(a)(9)-2. The rule does not define “retires”.

Following the rule’s text that “retires” is “from employment with the employer”, many interpret “retires” as severance-from-employment.

The Treasury department’s rule to interpret Internal Revenue Code § 401(k)(2)(B)(i)(I) states: “An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan.” 26 C.F.R. § 1.401(k)-1(d)(2) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(2).

In evaluating whether the individual “has a severance from employment”, the plan’s administrator might consider whether the employer removed the individual from the roster of those the employer might call for an as-needed work shift.

Some administrators might look to an absence of a Form W-2/W-3 wage report for a whole calendar year as a clue to ask the employer whether it removed the individual from the roster.

If the PRN is for work that requires a professional or occupational license, a nonrenewal of the individual’s license might suggest the individual no longer is available for the work.

Managing a retirement plan for an employer that has PRN, on call, per diem, gig worker and other similar categories of employees is challenging.  Retirement plans have a presumption that the employer knows when an employee is no longer employed by the employer.  That is not always the case.

Best practice is for the employer should document the criteria that will be used to determine when a termination of employment occurs.  This could be in an employment contract, a job description, an employee handbook or other similar written document.  For example, an employee could be considered if the employee has not worked for specified time period (e.g., 90 days, a calendar quarter, ...).  An employee is considered terminated if the employer communicates to the employee that the employee is considered terminated.  An employee is considered if they file for unemployment.

These types of policies create bright lines that can help the plan to determine when distributable events occur, to determine eligibility service and vesting service, and potentially apply allocation conditions such as a last day rule.

If formal policies are not in place, then decisions such as determining an employee's status under the plan can be contentious.

Like most policies, put it in writing, communicate it, and apply it uniformly and consistently.