Terminating Plan - RMD Required?

A safe harbor 401(k) Plan will be terminating 12/31/2018. 2 active participants are over age 70.5 but are not 5% owners and have not separated service.

Are they required to receive a 2019 RMD from the Plan if they are still employed at the time the distribution is made in 2019?

If the are not required to take an RMD and they rollover 100% of their balance due to Plan termination but later  separate service after the rollover but before 12/31/2019, is a retro active RMD triggered for 2019? 

I think the answer to the first questions is no as long as they are employed at the time of payment.

I think the answer to the second question is "yes".  I don't have a cite for you.  

Unfortunately I think I agree with you on both counts, including the "no cite" that I've been able to find either.

21 hours ago, Lou S. said:

A safe harbor 401(k) Plan will be terminating 12/31/2018. 2 active participants are over age 70.5 but are not 5% owners and have not separated service.

Are they required to receive a 2019 RMD from the Plan if they are still employed at the time the distribution is made in 2019?

If the are not required to take an RMD and they rollover 100% of their balance due to Plan termination but later  separate service after the rollover but before 12/31/2019, is a retro active RMD triggered for 2019? 

 

The answer to Q1 is no. They have not retired, are still working, and a non-owner, so any distribution made at that point is eligible for rollover and not an RMD.

I disagree with the prior answer to Q2. Once rolled over to the IRA, they are now subject to the IRA rules.  They will have an RMD next year (2020) based on the 12/31/19 year end values.  FWIW,  I'm amazed anyone would think otherwise. 

1 hour ago, Larry Starr said:

I disagree with the prior answer to Q2. Once rolled over to the IRA, they are now subject to the IRA rules.  They will have an RMD next year (2020) based on the 12/31/19 year end values.  FWIW,  I'm amazed anyone would think otherwise. 

So is your thinking that because the plan doesn't exist when the termination happens there are no RMD requirement for the year? 

2 hours ago, Larry Starr said:

The answer to Q1 is no. They have not retired, are still working, and a non-owner, so any distribution made at that point is eligible for rollover and not an RMD.

I disagree with the prior answer to Q2. Once rolled over to the IRA, they are now subject to the IRA rules.  They will have an RMD next year (2020) based on the 12/31/19 year end values.  FWIW,  I'm amazed anyone would think otherwise. 

I hope you are correct but what if the situation was a 401(k) refund required after rollover? Because in that case it is clear that even though at the time you could roll it over to an IRA, it retroactively becomes classified as a refund that was not eligible for rollover and has to be removed from the IRA. The oddities of the pension tax code that don't always seem to follow logic is the only reason I question it and I can see the IRS arguing that termination of employment in 2019 even after plan termination and rollover creates an RMD for 2019 based on 12/31/18 balance that must be removed from the IRA.

I honestly don't know if the IRS would take that position, but I can see them doing so.

19 hours ago, Larry Starr said:

I disagree with the prior answer to Q2. Once rolled over to the IRA, they are now subject to the IRA rules.  They will have an RMD next year (2020) based on the 12/31/19 year end values.  FWIW,  I'm amazed anyone would think otherwise. 

Well, with neither 401(a)(9) nor the regs listing an exception to the RMD rules for a plan that terminates during the calendar year and the definitions of required beginning date and distribution calendar year not being conditioned on the plan remaining in effect, I think otherwise.  

If the plan remained in effect and a 70.5+ participant rolled over a distribution and then retired later that calendar year, part of the rollover becomes the RMD under 1.402(c)-2 Q&A 7.  Unless you can show me something that says the result is different when the plan terminates, I will continue to think otherwise.

On 12/12/2018 at 6:41 PM, ESOP Guy said:

So is your thinking that because the plan doesn't exist when the termination happens there are no RMD requirement for the year? 

I'm confused by the statement.  The plan doesn't exist when the termination happens? What does that mean?  Which termination are you talking about?

On 12/12/2018 at 7:26 PM, Lou S. said:

I hope you are correct but what if the situation was a 401(k) refund required after rollover? Because in that case it is clear that even though at the time you could roll it over to an IRA, it retroactively becomes classified as a refund that was not eligible for rollover and has to be removed from the IRA. The oddities of the pension tax code that don't always seem to follow logic is the only reason I question it and I can see the IRS arguing that termination of employment in 2019 even after plan termination and rollover creates an RMD for 2019 based on 12/31/18 balance that must be removed from the IRA.

I honestly don't know if the IRS would take that position, but I can see them doing so.

Suppose the plan doesn't terminate but the participant takes a 100% in-service withdrawal and transfers it to an IRA.  I think we all agree that's OK and the RMD will start next year based on this year's end of year value.  If the plan then terminates 6 months later (but in the same year), are we suggesting that changes the rollover?

I just don't see it.  I think the 401(k) refund is different. There it's a clear rule that says the amount rolled over was not allowed to be rolled over because it was wrong when it was done (but just not known or determined yet).  In question 2, it was RIGHT when done, and I see nothing than can invalidate that.  I don't think it's a loophole; I just think that's the way it works.  If someone in this position rolls their IRA into their employer's ongoing plan, all of a sudden the IRA RMDs disappear. Is that a similar loophole?  Again, while an excellent planning opportunity, it's just the rules we have to play with and by.

I stand by my original comment. And then there's the practical issue.  If we don't believe it's a violation of the RMD and we don't self-report it, then it's a close to zero chance it will ever be brought up by IRS.  And I believe the argument that it was an allowable rollover of 100% at the time it was done trumps (small "t") anything anyone else might think.  FWIW.

I don't think 1.402(c)-2 Q&A 7 is determinitive.  The regs were written before the change in RMD rules.  I think this provision of the reg:

(b)Distribution before age 70 1/2. Any amount that is paid before January 1 of the year in which the employee attains (or would have attained) age 70 1/2 will not be treated as required under section 401(a)(9) and, thus, is an eligible rollover distribution if it otherwise qualifies.

is applicable but should be read to include the logical change to include the ... "or, if not a 5% owner and not terminated at the time of the distribution..."

Just one opinion.....  I'll continue to treat it as a 100% legitimate rollover.

8 hours ago, Larry Starr said:

Suppose the plan doesn't terminate but the participant takes a 100% in-service withdrawal and transfers it to an IRA.  I think we all agree that's OK and the RMD will start next year based on this year's end of year value.  If the plan then terminates 6 months later (but in the same year), are we suggesting that changes the rollover?

You may be reading the original question incorrectly as I think no one would agree if they took a 100% in-service and after that point terminated their services not having an RMD taken if fine if they are 70.5 in that year. 

The timeline is as follows as I read the question.

Plan terminates on 12/31/2018.  But the assets aren't paid from the plan until 2019.  The people in question are 70.5 by at least some time in 2018. 

The plan pays 100% of the assets to the participants in 2019.

The people terminate in 2019 but after all the assets are paid.

Must an RMD amount be taken from the IRAs in that case based on their 12/31/2018 balance in the 401(k) plan? 

I don't see how the answer isn't "yes". 

4 hours ago, ESOP Guy said:

Must an RMD amount be taken from the IRAs in that case based on their 12/31/2018 balance in the 401(k) plan? 

 

While the end result is the same, I think the regs are clear that when 2019 becomes a distribution calendar year, a portion of the 2019 rollover distribution from the plan becomes the RMD from the plan, is not eligible for rollover and must be removed from the IRA. 

That being said, I handled an IRS audit for a plan a few years back where a participant who had an RMD due in a terminating plan was allowed to roll over his entire balance to an IRA without taking the RMD. After making it clear that it was an operational failure, the agent checked to see if at least the plan RMD amount was distributed from the IRA during the RMD year. Since it was, he did not require any corrective action.  However, he made it clear that if the participant did not have a taxable distribution from the IRA that year of at least the plan RMD amount, a correction would be required. 

I have a new question that goes along with this thread:

More than 5% owner attains 70 ½ in 2019 (first distribution calendar year is 2019).  He can defer is first RMD until 4/1/2020. 

However, the plan is terminating 9/30/19.  He wants to roll his balance to an IRA.  Wouldn’t he need to take his RMD before rolling to the IRA?

Yes, because the first dollars from the plan is the RMD per the regulations.  

He has a 2019 RMD which must be taken prior to the rollover.

He can delay the RMD until 2020 but the plan would have to remain open into 2020 and he would have to take his 2019 and 2020 RMD from the plan prior to rollover.

20 minutes ago, MarZDoates said:

I have a new question that goes along with this thread:

More than 5% owner attains 70 ½ in 2019 (first distribution calendar year is 2019).  He can defer is first RMD until 4/1/2020. 

However, the plan is terminating 9/30/19.  He wants to roll his balance to an IRA.  Wouldn’t he need to take his RMD before rolling to the IRA?

Question 7 is the cite fo what Lou S and I are talking about. 

https://www.law.cornell.edu/cfr/text/26/1.402(c)-2