I’ll let the other Alan tackle this one, however the RMD on the profit saharing plan was not eligible to be rolled over and may be treated as an excess contribution to the IRA.

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Al Fry is correct.
Even with the direct rollover from the PSP, this is treated as a distribution and rollover to the IRA for RMD and general reporting purposes. Therefore, part of the 400,000 is considered the plan RMD and therefore the RMD for the plan has actually been satisfied.

The IRA would have no RMD this year, but in the process of correcting the excess contribution, a distribution will have to be made that will include an earnings calculation for the time the transfer remained in the IRA. No further RMD need be issued from the PSP until next year. The IRA custodian should be told that the distribution is to be considered the correction of an excess regular contribution to the IRA. There are no penalties here, just ordinary tax on the RMD and the earnings on the RMD.

Hopefully, he had been taking plan RMDs since age 70.5.

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Hi Bruce,

The main issue here is that 2008 is an RMD distribution year for the plan owner because he is more than a 5% owner, notwithstanding his ability to continue to contribute to the plan.

Any direct transfer or distribution from the plan is deemed first to be the RMD and therefore is not an eligible rollover distribution per following copied from Sec 402 of the IRS Regs (see (2)):
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Q–3: What is an eligible rollover distribution?

A–3: (a) General rule. Unless specifically excluded, an eligible rollover distribution means any distribution to an employee (or to a spousal distributee described in Q&A–12(a) of this section) of all or any portion of the balance to the credit of the employee in a qualified plan. Thus, except as specifically provided in Q&A–4(b) of this section, any amount distributed to an employee (or such a spousal distributee) from a qualified plan is an eligible rollover distribution, regardless of whether it is a distribution of a benefit that is protected under section 411(d)(6).

(b) Exceptions. An eligible rollover distribution does not include the following:

(1) Any distribution that is one of a series of substantially equal periodic payments made (not less frequently than annually) over any one of the following periods—

(i) The life of the employee (or the joint lives of the employee and the employee’s designated beneficiary);

(ii) The life expectancy of the employee (or the joint life and last survivor expectancy of the employee and the employee’s designated beneficiary); or

(iii) A specified period of ten years or more;

(2) Any distribution to the extent the distribution is a required minimum distribution under section 401(a)(9); or

(3) The portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation described in section 402(e)(4)). Thus, for example, an eligible rollover distribution does not include the portion of any distribution that is excludible from gross income under section 72 as a return of the employee’s investment in the contract (e.g., a return of the employee’s after-tax contributions), but does include net unrealized appreciation.

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Note that if he were less than a 5% owner, but the plan still required RMDs at 70.5, those are PLAN RMDs and not statutory RMDs. As such, those RMDs can actually be rolled over to an IRA without becoming an excess contribution because they are eligible rollover distributions. This one is not really related to your point, but could come up in some cases and is not what one would expect to be the case.

Returning to the circumstances in the post, if the plan administrator takes documented action to withhold the RMD and keep it separate in the plan for later distribution, the excess contribution might be able to be avoided. The Regs are not real clear when the plan must actually distribute the RMD, at the time of the IRA transfer or can hold it separate in the plan for distribution later in the year……….

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Bruce,
The following is more definitive regarding the transferor plan responsibility and confirms that the plan can allocate the RMD amount and distribute it by year end and thereby avoid an excess contribution. The problem would mainly occur in a total transfer where the transferor plan overlooked the RMD requirement altogether. The following is copied from 1.401(a)(9)7 – Rollovers and Transfers:

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Q–3. In the case of a transfer of an amount of an employee’s benefit from one plan (transferor plan) to another plan (transferee plan), are there any special rules for satisfying section 401(a)(9) or determining the employee’s benefit under the transferor plan?

A–3. (a) In the case of a transfer of an amount of an employee’s benefit from one plan (transferor plan) to another (transferee plan), the transfer is not treated as a distribution by the transferor plan for purposes of section 401(a)(9). Instead, the benefit of the employee under the transferor plan is decreased by the amount transferred. However, if any portion of an employee’s benefit is transferred in a distribution calendar year with respect to that employee, in order to satisfy section 401(a)(9), the transferor plan must determine the amount of the required minimum distribution with respect to that employee for the calendar year of the transfer using the employee’s benefit under the transferor plan before the transfer. Additionally, if any portion of an employee’s benefit is transferred in the employee’s second distribution calendar year but on or before the employee’s required beginning date, in order to satisfy section 401(a)(9), the transferor plan must determine the amount of the minimum distribution requirement for the employee’s first distribution calendar year based on the employee’s benefit under the transferor plan before the transfer. The transferor plan may satisfy the minimum distribution requirement for the calendar year of the transfer (and the prior year if applicable) by segregating the amount which must be distributed from the employee’s benefit and not transferring that amount. Such amount may be retained by the transferor plan and must be distributed on or before the date required under section 401(a)(9).

(b) For purposes of determining any required minimum distribution for the calendar year immediately following the calendar year in which the transfer occurs, in the case of a transfer after the last valuation date for the calendar year of the transfer under the transferor plan, the benefit of the employee as of such valuation date, adjusted in accordance with A–3 of §1.401(a)(9)–5, will be decreased by the amount transferred, valued as of the date of the transfer.

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Teaching? No, formal work career is over 🙂

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Your second paragraph is correct. The problem is only with the 68k portion of the direct rollover, which must be corrected as an excess regular contribution would be. The IRA custodian is also correct in that a negative earnings calculation will actually result in less than 68k being distributed from the IRA, and it is the actual distributed amount that they will show on their 1099R, not the 68k.

The IRA custodian does indeed need two 1099R forms because the distribution coding is different for corrective distributions than for normal distributions. The two forms will have different numbers in Box 7.

The IRS is fairly passive about employer plan RMDs because they assume professional plan administration vrs that of the typical IRA owner. There is no 5498 reporting of year end value or of the RMD amount. So while the IRS expects the RMD to have been issued by the plan, they are not set up for any of the red flags provided by info returns to alert them of the failure. All they will see is the 1099R showing the direct rollover and they may or may not catch the fact that there was no other 1099R for the separate RMD, but they should know that the RMD is deemed as distributed per the IRS Regs. Are they always smart enough to suspense the IRA for the corrective distribution? Probably not in many cases, as they lack consistency in compliance with several related transactions. But if the error is not corrected and explained with an explanatory statement on the tax return, the taxpayer risks several years of 6% excise taxes on 68k.

The taxpayer should attach this explanatory statement to the return explaining that the 68k was rolled over in error on 1/14/2008 and represents the plan RMD, that the corrective distribution was worth only (68k – $X) and was distributed on xx/xx/2008. It does not matter that less than 68k is actually distributed since that is the official procedure for timely corrections.

I suggest that the taxpayer report the direct rollover as usual on line 16a of Form 1040, but show the 68,000 on 16b as the taxable amount.

On line 15a the corrective distribution will be shown along with the regular IRA RMD taken previously. 15b should show only the former IRA RMD. The corrective distribution will not be taxable because no deduction was taken for the contribution and there are negative earnings which will result in less than 68,000 being returned from the IRA in the corrective distribution. The correct amount of tax will be paid and the funds will end up outside any of the retirement accounts as required. The usual 1099R forms should suffice, but it will be critical for the IRA custodian to code the IRA distribution as the correction for an excess contribution. The explanatory statement will explain to the IRS why the taxpayer is showing 68,000 in taxable income for funds that were actually rolled over.

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