forced RMD

Submitted by Michael Porfido on Mon, 2019-12-09 22:42

I have a client age 77 who is still working, but the company was sold this year. She is still getting pay checks from the company, but apparently they have terminated the 401(k)/PSP plan. She just received notice that they processed her RMD for 2019 with no authorization from her. She was told that once the plan is terminated the RMD must be paid out regardless of if she has not been terminated from payroll.
Is this correct?



Submitted by Alan - IRA critic on Tue, 2019-12-10 01:47

She should be receiving official notice of the termination and implications thereof within a reasonable time from the date of sale. The details of that notice are necessary to answer your question. The RMD is a major implication, in fact the entire plan assets must be distributed within a reasonable time (a few months) from termination. Is she now an employee of the new company? If so, she might be subject to “severance from employment” even if she is still doing the same work at the same desk. In that situation, it could be that 2019 is her first RMD distribution year, but her RBD is still not required until 4/1/2020. If that is the case she should have been given the option to delay this RMD until next year.  It seems that communication is lacking between her and the plan or perhaps she has not been paying attention to highly technical information which includes the full nature of the sale of the company. Note that if she gambles that this is not a statutory RMD, but merely a plan RMD and therefore rolls it over to an IRA, and later finds that it WAS a statutory RMD, she will have to report it as 2019 taxable income and remove the excess contribution from the IRA. She will have 60 days to determine if this can be treated as just a plan RMD, and if so the rollover would stick. 

Submitted by [email protected] on Wed, 2019-12-11 18:57

So, she is not an employee of the new company, but is still on payroll of the company that was sold.  I am not clear on what you mean that this was a statutory RMD but just a plan RMD? She would not rollover the RMD amount in either case.

Submitted by Alan - IRA critic on Wed, 2019-12-11 20:27

  • The following main bullet point is a chopped up copy from Wolter Kluwer and may be helpful
  • Fact Pattern VII •A 401(k) plan is terminating and assets will be paid  out by 12/31/2017  •The plan has two active (non‐owner) employees  that are over age 70 ½ •Both employees will roll over their balances to an  IRARequired Minimum DistributionsThe Question…“Do the employees have to take an RMD distribution  before rolling their balances to an IRA?”Required Minimum DistributionsThe Answer… •It depends. Plan termination, in and of itself, does  not cause RMDs to become due. •Unless the participants are otherwise required to  receive RMDs under the terms of the plan, their  entire balances would be eligible for rollover.
  • If correct, the plan should not have made a distribution to the client. Since they did, it would be treated as a “plan RMD” required by the plan, but not by the IRS. As such, the distribution would be eligible for rollover if client wants to. Plan only (not statutory RMDs required by the IRS) RMDs are eligible rollover distributions. While not conclusive, if 20% withholding was taken on the distribution, that is another indication of a plan only RMD.

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