Avoid RMDs - start a new company after age 70 1/2

What does everyone thing of the following idea?  Would it work?

A lot of clients are in the enviable position of not needing the income from the RMDs.  Therefore they are continually looking for ways to defer or reduce minimum distributions.

Let's say a client, age 73, retires from his company in 2019  Prior to rolling the assets to an IRA he takes his 2019 401k RMD.  He wont be subject to an IRA RMD until 2020.  

Later in 2019, he sets up his own business (consulting, Uber Driver, app developer, etc) and establishes a one-person 401k and subsequently rolls his IRA in the newly established 401(k).  It would appear to me that the owner (even though they own more than 5% of the business) would not be subject to RMDs until they separate from service

I believe this to be true due to section 401(a)(9)(C)(i)(l) "in the case of an employer is a 5% owner with respect the plan year ending in the calendar year in which the employee attains age 70 1/2...."  In other words it seems language does not require for an ownership test each year

Thoughts?

It is correct that the RBD is based on whether or not you were a 5% owner in the year you turned 70-1/2, so if the company did not exist in that year then you cannot be a 5% owner for purposes of 401(a)(9).

HOWEVER:

If the entity that would be adopting the plan is a sole proprietorship, then consider that a sole proprietorship is considered to be indistinguishable from the owner. Does an individual own 100% of themselves? At all times or only when business activity begins? It is not clear what the implications of this are for RMDs.

If the plan you were intending to adopt is a profit sharing plan, then there must be recurring and substantial contributions in order to have a bona fide plan. If it is just set up to hold an rollover for an indefinite period of time then it would be considered terminated.

Also, consider the risks if the IRS decides that the arrangement is not legit for whatever reason. The penalties for non-payment of RMDs is quite steep. I wouldn't play games with it.

Is this loophole - i.e., the definition of "5%" owner - something that everyone knows about except me?  It seems wholly inconsistent with the objectives of the MRD rules.  Let's take a more likely example.  Joe Smith retires as CEO of a Fortune 100 company at 70.  He has $3MM in that company's 401(a) plan which he leaves there except for annual MRDs.  After retirement he sets up an S Corp through which he acts as a consultant to some large companies, raking in fees every year in the health 6 figures.   At age 72 his S Corp sets up a DC plan to which he makes generous annual contributions AND rolls over the remaining balance from his former employer's plan (net of the MRD for that year).  The assumption here seems to be that he does not have to take MRDs from his S Corp plan, even MRDs attributable to the rolled over amount.  This surprises me.     

It definitely does seem like it goes against the spirit of the RMD rules, but the definition is pretty black-and-white. Besides the code section mentioned above, see also reg 1.401(a)(9)-2 A-2(c). It's also been discussed on these boards before, I'll see if I can't dig up a link.

For what it's worth, I agree with your example, assuming that the S-corp did not exist until after the end of the calendar year in which he turned 70-1/2.

Here are a couple of older discussions I found:

And another one discussing the topic from the other angle, i.e. what if you started RMDs while still employed because you were a 5% owner, then subsequently become not a 5% owner, do you have to continue taking RMDs (yes you do):

CB Zeller, I think the S Corp would have to be set up after April 1 of the year after he turned 70-1/2, but I agree I did not specify that in my example.  (That's another odd thing:  If you set up the S Corp on April 1 the loophole doesn't work, but it works if you wait until April 2.)  I also agree that the statute and the regulation say what you say they say.  I am just having a tough time wrapping my arms around the rollover gimmick, but unless there is no caveat about rollovers buried in the regulations elsewhere I guess it works.  This enables my Fortune 100 Executive to avoid RMDs for so long as he keeps working, which may be forever.   

Kitces had a very good article about this last year.