Age 70 1/2 still working exception

Submitted by Jason Hochstadt on Thu, 2017-12-07 19:33

Hello,

For a qualified plan client, the record keeper/TPA, DST, is stating that:

“On a 401k, Active participants that are not greater than 5% owners, cannot take an RMD.”

“That is the IRS rule, if a person is still actively working and does not own 5 percent of the company he cannot take an RMD.”

“They would need to take an in-service withdrawal if they wanted the money. Per their plan document, they do allow for in service withdrawals at the age of 59.5.”

Is the above correct – wherein someone over the age of 70 1/2, still working and not an owner (or a <5% owner) is NOT allowed to take an RMD? I thought the Plan must specifically provide/authorize this - per prior writings from Ed Slott - and that an RMD would not need to be taken but nothing would stop such a participant from doing so.

Please advise/clarify. Thanks. Jason



Submitted by David Mertz on Thu, 2017-12-07 20:14

  • “RMD” stands for *Required* Minimum Distribution.  If one is not required to take distributions under section 401(a)(9), any distribution that they do obtain from the 401(k) is, by definition, *not* an RMD.
  • A regular distribution from the 401(k) that is not an RMD is eligible for rollover and is subject to mandatory 20% tax withholding unless the distribution is a direct rollover to another qualified retirement account.  To avoid mandatory tax withholding, one could request an in-service distribution as a direct rollover to an IRA, then take a distribution from the IRA and specify that no taxes are to be withheld from the IRA distribution.
  • Other than the mandatory withholding on rollover-eligible distributions from qualified retirement plans, I can’t imagine a reason that one would care that a particular distribution is not an RMD (except perhaps to avoid an early-withdrawal penalty on a CD which waives the penalty if the distribution is an RMD).
  • If this individual takes an in-service distribution and later in that same calendar year separates from service, that in-service distribution retroactively becomes an RMD since the separation from service results in the year becoming an RMD year and any distributions made during the year are RMDs until the RMD is fully satisfied.

Submitted by Alan - IRA critic on Thu, 2017-12-07 23:38

There are also some plans that require ALL employees to begin RMDs at 70.5 by overriding the IRS “still working exception”.  Those plans would have the same RBD as an IRA would. However, since such an RMD is a “plan RMD” and not an IRS statutory RMD, the required distribution can be rolled over. A plan adopting such a provision would avoid employees pushing to work enough hours so that they would still be classified as “still working” to delay RMDs from the plan or even on IRA money that had been rolled into the plan to eliminate IRA RMDs.

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