RMD after termination

Participant terminated 1/2/2018 and was 72 at the time of termination. Not a 5% owner.  Under the RMD rules he could postpone his first RMD until 4/1/2019.   If he did, he takes a second RMD in 2019 for 2018.

The participant rolled his account balance to an IRA on 5/1/2018. The IRA custodian is now telling the participant he had to take his first RMD before the funds were rolled. The 401(k) recordkeeper is saying he did not have to take the RMD before rolling the funds.

I do not agree with the recordkeeper.  I say the participant HAD to take the 2018  RMD before the funds were rolled.  The first RMD is technically for  2017, the second is for 2018. Even though he could postpone the payment until 4/1/2019, the rollover to the IRA triggered the RMD.

Need some help in understanding what and when the payment needed to be issued.  To complicate matters, the Rep from the Recordkeeper said when they spoke to the  IRS about this matter, ( called the 800 number) IRS rep  told her the funds did not have to be returned to the 401K trust and paid. The payment could be made from the IRA. Anyone else have issue with this response?  

The regulations are very clear the first dollars leaving the plan in 2018 were the RMD and they could not be rolled to an IRA. 

The money needs to come out of the IRA. 

Does the money have to go back to the plan?  To me the answer is no. 

The plan should issue two 1099-R reflecting the RMD and the rest as a rollover. 

The IRA should get the money out of the IRA and not issue a 1099.  That is typically the hang up.  The IRA will want to issue a 1099 because that is how their computers work.  Money leaves the IRA a 1099 is created.  One way to stop that would be a trustee to trustee transfer to the plan.  But I don't think any of the correction methods require it.  It might be the practical issues make it required. 

It's my understanding as you stated the participant has until April 1 of the year following the year the participant retired.  If they participant retired in 2018, seems they only need to take an RMD for 2018 under the "still employed" exception to the employer-plan RMD rules.  Since the RMD was not taken prior to distribution, I believe you and an excess contribution to an IRA.  The RMD amount, and any gains attributable to that amount would be considered excess and need to removed.  

These rules are contained in IRC Code Section 401(a)(31), 402(c)(4) and 401(a)(9).    401(a)(31) does not permit RMDs to be rolled over as they are not “eligible rollover distributions” and 401(a)(9) requires every qualified plan to pay the RMD. 

See Treasury Regulation 1.402(c)-2, Q&A #7 (supporting all of the responses above).

I agree with jpdrews. Per IRC sec. 401(a)(9)(C)(i)(II), if not a 5% owner and did not retire until 1/2/2018, his RBD is 4/1/2019. And 2018 is not a "distribution calendar year" for this guy. See Treas. reg. 1.401(a)(9)-5, Q&A-1(b). In this case, the year preceding the RBD year is not a distribution calendar year.

5 hours ago, Luke Bailey said:

I agree with jpdrews. Per IRC sec. 401(a)(9)(C)(i)(II), if not a 5% owner and did not retire until 1/2/2018, his RBD is 4/1/2019. And 2018 is not a "distribution calendar year" for this guy. See Treas. reg. 1.401(a)(9)-5, Q&A-1(b). In this case, the year preceding the RBD year is not a distribution calendar year.

Huh?  Are you saying that the distribution in 2018 DID NOT REQUIRE an RMD and therfore could NOT be rolled over (which is incorrect, which is what I believer everyone else is saying)?  I actually don't understand what jpdrews said, nor what you are saying is correct.  

For the record, the distribution rolled over in 2018 needed to have an RMD taken first and that RMD amount was imperishably rolled over to the IRA and must be corrected. 

5 hours ago, Luke Bailey said:

I agree with jpdrews. Per IRC sec. 401(a)(9)(C)(i)(II), if not a 5% owner and did not retire until 1/2/2018, his RBD is 4/1/2019. And 2018 is not a "distribution calendar year" for this guy. See Treas. reg. 1.401(a)(9)-5, Q&A-1(b). In this case, the year preceding the RBD year is not a distribution calendar year.

I read the Q&A and I don't see where it says the year preceding the RBD year is not a DCY.  What am I missing?

I don't think you are missing anything. Q&A-1(b) very specifically says, "If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee retires, the employee's first distribution calendar year is the calendar year in which the employee retires."

Seems pretty clear.

And we agree there is no 2017 RMD, right?

3 hours ago, BG5150 said:

And we agree there is no 2017 RMD, right?

Why are you confusing this discussion with 2017? He terminated in 2018; 2017 has never been under discussion.  Did you mean 2018?  If so, NO!  there IS an RMD required in 2018.

10 hours ago, Larry Starr said:

Huh?  Are you saying that the distribution in 2018 DID NOT REQUIRE an RMD and therfore could NOT be rolled over (which is incorrect, which is what I believer everyone else is saying)?  I actually don't understand what jpdrews said, nor what you are saying is correct.  

For the record, the distribution rolled over in 2018 needed to have an RMD taken first and that RMD amount was imperishably rolled over to the IRA and must be corrected. 

Correction of typo: should be:. ... and therefore COULD be rolled over (which is incorrect...).

Could they have made this more complicated?

On closer examination, I think that those of you who think that the first dollars out were RMD and not ERD may be right, but it's not completely clear to me. As for bringing 2017 into the picture, when I think we are all in agreement it is not in the picture, the original question of 52626 asserted that he thought the first dollars out in 2018 could not be rolled over because they were the 2017 RMD.

We also all agree, I think, that this person's RBD is 4/1/2019, and, contrary to what I said yesterday, I agree that the third sentence of Treas. reg. 1.401(a)(9)-5(b)(1)(b) tells us that 2018 is a "distribution calendar year" for the individual, his first.

Beyond the above, there may still be some ambiguity about what Congress and the IRS have said about this individual's situation.

Treas. reg. 1.402(c)-2, Q&A-7(a) says that "if a distribution is required" for a calendar year, the first dollars out are "treated as RMD's under section 401(a)(9), to the extent that the total RMD for the calendar year has not been satisfied." Here, no distribution is required for this individual in 2018, because his 2018 RMD can be delayed until 2019. So reading only so far, one could argue pretty strongly, I think, that all of what he received in 2018 is an ERD.

However, 1.401(a)(9)-5, Q&A-1(b) equates a "distribution calendar year" with "a calendar year for which a distribution is required," so one could read that equation, plus the fact that 2018 is a "distribution calendar year" for this individual, into the rule of Treas. reg. 1.402(c)-2, Q&A-7(a). So maybe a distribution IS required for 2018 for this individual. Moreover, the rule of Treas. reg. 1.402(c)-2, Q&A-7(a)(b), which says that any amount paid before January 1 of the year in which an individual turns 70-1/2 is not an RMD, implies that any amount paid in the year the person turns 70-1/2 (presumably, if the person retired in a prior year or is a 5% owner) is RMD, even if paid before the individual attained 70-1/2, and that in turn could be read as implying that the same rule (i.e., any amount paid on or after January 1 of the year in which an individual who is not a 5% owner retires) is RMD.

However, 1.402(c)-2, Q&A-7(a) doesn't actually say that, and certainly that rule is highly impractical, since retirement, unlike attainment of age 70-1/2 or dying, is not necessarily a predictable event, and in the case of a plan that permits in-service distribution to someone of any advanced age (e.g., 59-1/2 or NRA), it would be impossible to administer in the case of a distribution requested in the year of retirement, but before retirement.

Maybe there is other guidance on this that someone can find, but for me at this point, it's not really clear what Congress and the IRS are saying, here, thus making the position of the plan administrator, as described by 52626, not baseless, to say the least.

I would describe it as follows:

the minimum distribution is always 'due' by 12/31.

now, we will let you delay the actual distribution the first year until 4/1 of the next year (April's Fool, how appropriate), but that is just the timing of it being in his hands.

let's suppose the person was 70 1/2 and quit 12/30. Of course most of you folks would be ready to pay him out 12/31. But the govt realized there are folks like me that wouldn't be ready or even lucky to find out about it by 4/1. I actually modified my report so the min distribution report (distributions due by 12/31/2018) prints a message on any active participant over 70 1/2 'you will be due a min distribution if you quit during 2018'

I respectfully disagree with your analysis of 1.402(c)(a)(7)(a). A distribution is in fact required for the distribution calendar year. The fact that you can delay it until April first of the following year does not alter that fact. The April 1 distribution taken in the following year is the required distribution for the PRIOR year. then you take the second distribution - the one for the current year - be December 31.

IMHO you are overthinking this.

32 minutes ago, Tom Poje said:

I actually modified my report so the min distribution report (distributions due by 12/31/2018) prints a message on any active participant over 70 1/2 'you will be due a min distribution if you quit during 2018'

As an aside we do this also.  This is even more important in plans like ESOPs where I might not get the prior year's census until well after 4/1 the following year.  

I just think it's not completely clear under the statute and regs. All I'm saying. I can understand why the plan administrator and the IRA custodian are taking different positions as described in the original question. This is the IRC. It doesn't necessarily answer all questions or always make sense. It is still early enough in the year to fix. They just need to decide how important it is to them, pick a path, and go with it.

If they can't agree, then perhaps someday the IRS will get involved. Most likely, the IRS's position will be the more conservative, i.e. that part of the distribution was 2018 RMD. Doesn't mean that is right or that IRS would win if litigated, although it might. Is this worth litigating? Of course not.

4 hours ago, Belgarath said:

I respectfully disagree with your analysis of 1.402(c)(a)(7)(a). A distribution is in fact required for the distribution calendar year. The fact that you can delay it until April first of the following year does not alter that fact. The April 1 distribution taken in the following year is the required distribution for the PRIOR year. then you take the second distribution - the one for the current year - be December 31.

IMHO you are overthinking this.

Luke,

This is one of those times where I tell the lawyers I work with: "Trust me, I (we!) are right."  The RMD HAS TO COME OUT before the rollover.  It is well established and everyone on the site is telling you the same thing. 

Larry, I'm not disagreeing with you. I'm done on this one (I hope). Thanks.

Just to sum up, in case the practical answers got lost for the original poster...

Quote

The money needs to come out of the IRA. 

Does the money have to go back to the plan?  To me the answer is no. 

The plan should issue two 1099-R reflecting the RMD [as taxable] and the rest as a rollover. 

Yes.  My addition in italics/brackets.

Quote

For the record, the distribution rolled over in 2018 needed to have an RMD taken first and that RMD amount was imperishably rolled over to the IRA and must be corrected. 

And that is done by requesting a return of an "excess contribution."  That way it is reported properly, i.e. not as a taxable distribution, since it will have been reported as taxable on the 1099-R issued by the plan.  There's just no way to get an IRA custodian to refund or otherwise disgorge money without reporting it, so it is critically important that the participant not just "take it out" in which case it would be taxable (a second time).

 I see I'm late to the party on this one.

The regulations indicate that the plan sponsor is responsible for ensuring the RMD is paid in the year attaining age 70 1/2 or in year retiring if later (for non-5% owners).  The first year requirement may be delayed until 4/1 of the following year; however, full payment from the plan should satisfy regulatory corrections (known at the time) or a RMD. 

The premise for this is because the plan sponsor is the only party knowing the prior year-end balance to calculate the RMD, and knowing if the RMD has already been satisfied for the year.  The IRS recognized if the sponsor did not distribute the RMD (plan document qualification requirement) with the May 2018 distribution, the IRA RMD program wouldn't pick up the RMD requirement until the 2019 payment was due as the only year-end balance in the IRA would be the 12/31/2018 balance.

The sponsor, pursuant to the plan's 401(a)(9) document language should be sure to obtain confirmation of the RMD payment or have agreement with IRA to make the payment for corrective purposes.  Otherwise, the sponsor could petition the IRA for return of an ineligible rollover and process the RMD.

Curious what everyone's thoughts are on the following twist:

Let's say the 401k RK processed a rollover of this individual's entire account balance during the 2018 DCY.  The regulations state that the plan is treated as having satisfied its duty to make the RMD even if the RMD amount is rolled over.  And the participant has an excess contribution to the IRA (unless by chance he/she is eligible to make nondeductible contributions to the IRA for that year). 

Do you agree that, despite the rollover of the entire account balance, the 401k RK must prepare two 1099-R's for 2018 -- one showing the taxable RMD amount and another showing the nontaxable balance?  See the General Instructions for Form 1099-R that appear to require this.

And, if the above is required (and two 1099-Rs are prepared), do you agree the participant has taken his RMD (because he gets a 1099-R showing the RMD amount as a taxable distribution), and so is not exposed to a 50% excise tax?

Finally, if you agree two 1099-Rs must be produced, do you agree the 401k RK could be exposed to penalties for failure to file the second 1099-R and/or for failure to include accurate information on the 1099-R? 

36 minutes ago, IHC said:

Curious what everyone's thoughts are on the following twist:

Let's say the 401k RK processed a rollover of this individual's entire account balance during the 2018 DCY.  The regulations state that the plan is treated as having satisfied its duty to make the RMD even if the RMD amount is rolled over.  And the participant has an excess contribution to the IRA (unless by chance he/she is eligible to make nondeductible contributions to the IRA for that year). 

Do you agree that, despite the rollover of the entire account balance, the 401k RK must prepare two 1099-R's for 2018 -- one showing the taxable RMD amount and another showing the nontaxable balance?  See the General Instructions for Form 1099-R that appear to require this.

And, if the above is required (and two 1099-Rs are prepared), do you agree the participant has taken his RMD (because he gets a 1099-R showing the RMD amount as a taxable distribution), and so is not exposed to a 50% excise tax?

Finally, if you agree two 1099-Rs must be produced, do you agree the 401k RK could be exposed to penalties for failure to file the second 1099-R and/or for failure to include accurate information on the 1099-R? 

The regulations state that the plan is treated as having satisfied its duty to make the RMD even if the RMD amount is rolled over.

I don't agree with that statement.  The regulations are very clear the first dollars out of the 4k plan are the RMD and RMDs aren't eligible for rollover.  So the plan should not have cut one check.  It should cut two checks not just two 1099-Rs.   Two 1099-Rs doesn't mean the plan did it right. 

If the plan cut one check to the IRA and that was 100% of the person's balance the plan made a mistake period end of story.  

The only conversation after that point is what does it take to fix the mistake.   

ESOP guy, Treasury Regulation Section 1.401(a)(9)-7, Q&A-1 states "f an amount is distributed by one plan and is rolled over to another plan, the amount distributed is still treated as a distribution by the distributing plan for purposes of section 401(a)(9), notwithstanding the rollover."  

I agree with you that the first dollars out are the RMD amount, and that the RMD amount is not eligible for rollover.  But I also believe if an RMD amount is rolled over by a plan, the plan is treated as having distributed the RMD.  

Would still love to here thoughts on my other questions . . . 

IHC, I think you have probably accurately described the consequences.

1 hour ago, IHC said:

ESOP guy, Treasury Regulation Section 1.401(a)(9)-7, Q&A-1 states "f an amount is distributed by one plan and is rolled over to another plan, the amount distributed is still treated as a distribution by the distributing plan for purposes of section 401(a)(9), notwithstanding the rollover."  

 

Sorry for being dumb here but then why this long thread?  Why wasn't the correct answer to the original answer issue 2 1099-R s and the plan is done? 

No one seems to act like that is the correct answer.  Everyone seems to think the plan has some duty to make sure the RMD amount gets out of the IRA.  More importantly the whole time I have worked in the DC world if I was setting up a payment to a person who needed an RMD and had 100% of the balance going to an IRA I would be told to redo the work.  The answer wasn't ever well that is what the participant wants as long as we issue two 1099-Rs the RMD has been paid we are done here. 

What am I missing in what are you saying because I suspect you aren't saying just cut a check and issue two 1099-Rs but that seems to be the obvious conclusion of what is being said here. 

3 hours ago, IHC said:

ESOP guy, Treasury Regulation Section 1.401(a)(9)-7, Q&A-1 states "f an amount is distributed by one plan and is rolled over to another plan, the amount distributed is still treated as a distribution by the distributing plan for purposes of section 401(a)(9), notwithstanding the rollover."  

I agree with you that the first dollars out are the RMD amount, and that the RMD amount is not eligible for rollover.  But I also believe if an RMD amount is rolled over by a plan, the plan is treated as having distributed the RMD.  

Would still love to here thoughts on my other questions . . . 

3 hours ago, IHC said:

ESOP guy, Treasury Regulation Section 1.401(a)(9)-7, Q&A-1 states "f an amount is distributed by one plan and is rolled over to another plan, the amount distributed is still treated as a distribution by the distributing plan for purposes of section 401(a)(9), notwithstanding the rollover."  

I agree with you that the first dollars out are the RMD amount, and that the RMD amount is not eligible for rollover.  But I also believe if an RMD amount is rolled over by a plan, the plan is treated as having distributed the RMD.  

Would still love to here thoughts on my other questions . . . 

The problem is that you are confusing terms.  A distribution (as used in the reg) is NOT a rollover,  A rollover is actually when the participant gets the money in their hand and THEN transfers to an IRA within 60 days.  In this situation, the plan made a direct trustee to trustee (or custodian) transfer, which is NOT a rollover,  Therefore, the plan MUST make sure it distributes the RMD before transferring the rest of the funds via a direct transfer.  There is no such thing as a "rolll over by the plan".  Does that help?

14 hours ago, ESOP Guy said:

Sorry for being dumb here but then why this long thread?  Why wasn't the correct answer to the original answer issue 2 1099-R s and the plan is done? 

Agree.  Sometimes things get downright weird here...

14 hours ago, ESOP Guy said:

No one seems to act like that is the correct answer.

Well, that's what I said but who's keeping track? 

1 hour ago, Bird said:

Agree.  Sometimes things get downright weird here...

Well, that's what I said but who's keeping track? 

When I said no one seems to think that is the correct answers I was referring to the idea you could just issue 2 1099-Rs  and move on.  

I agree you had the correct answer.  I think I gave it also.

I think Larry has cleared up the reg in question.  It makes sense to me to say if a plan makes a distribution to a person the RMD is made.  It isn't the plan's problem if the person in the next 60 days puts that RMD into an IRA.  Also, the person is going to be subject to the penalty for failing to receive an RMD.  The person got the RMD and will have to include it in their income which is the point of the rules.  

Ah, yes, I knew I forgot something -- and why I didn't allow rollovers back into plans after rollover to another institution had been completed.

Based on the regulations, even though the account was rolled over, the 1099-R tax reporting was adjusted to show a taxable RMD payment and the remainder as a non-taxable rollover.  A letter was sent to the participant -- and rollover institution at times -- to indicate the amount that was not eligible for rollover.  This would allow the participant to obtain the distribution from the rollover institution.  The bad part of that is not being able to control if the rollover institution coded the withdrawal of ineligible rollover amounts as a taxable distribution.

16 hours ago, CJ Allen said:

The bad part of that is not being able to control if the rollover institution coded the withdrawal of ineligible rollover amounts as a taxable distribution.

As noted previously, it is important that the participant request the withdrawal as a refund of an overcontribution.  None of this is mysterious or subject to the whims of institutions if done properly.