Still working exception

Submitted by Thomas Buchanan on Fri, 2023-08-18 03:19

Taxpayer is an employee of Employer A, a partnership. Taxpayer was not an owner during the year he attained age 70 1/2. He has used the still working exception to delay his RMD withdrawals from the retirement plan of the employer.

Taxpayer is a partner (more than 5% during the year he attained age 70 1/2) in a partnership. He has taken his RMD since attaining his required beginning date.

Is it possible to structure a merger of the two partnerships which would permit the still working exception to remain in effect?



Submitted by Alan - IRA critic on Fri, 2023-08-18 14:19

I assume taxpayer was born prior to 7/1/1949, indicating that the year they turned 70.5 is the correct year for >5% ownership determination. Probably the easiest way to reduce RMDs would be to first take the RMD for employer B’s plan, then do a direct rollover of the balance into Employer A’s plan in December of each year. That will result in a very low balance in A’s plan at year end and a very low 2024 RMD. Of course, plan A would have to accept rollovers from other plans. If that plan will accept IRA rollovers but not from other plans, taxpayer could roll B’s balance to a rollover IRA, then do another to Plan A. This would eliminate the complexities of mergers of the two employers and having to terminate the plan of B. Taxpayer should also consider that deferral of several RMDs using the exception could result in having very large RMDs when they finally start. This is a larger problem if taxpayer plans to work to 80 or beyond.

Submitted by Thomas Buchanan on Fri, 2023-08-18 16:40

The taxpayer plans to work until passing.  The rmd from Plan B is very small so it is not a concern.  His question is whether a merger of the two partnerships (he would have been more than a five percent partner in one at 70 1/2 while not in the other) can be accomplished without terminting Plan A since the employer would no longer be in existence.  He would no longer be “still working” for Employer A so possibly the still working exception would not be available.

Submitted by Alan - IRA critic on Fri, 2023-08-18 21:06

Correct. If employer B is the succeeding employer and plan A is absorbed by plan B, the entire balance in plan B will be subject to annual RMDs, so the RMDs for B will be much larger than when B was separate.  It is also possible that these employers might have been under “common control” and should only have had one plan all along. 

Submitted by Thomas Buchanan on Wed, 2023-08-23 16:07

Taxpayer is employee of Partnership A while a partner (thirty per cent interest) in Partnership B so it is my understanding that “common control” is not an issue.  If plan B were to be absorbed into plan A, with employer A being the succeeding employer, would the plan be subject to RMDs?  Taxpayer would be more than 5% owner but was not an owner at age 70 1/2.

Submitted by Alan - IRA critic on Wed, 2023-08-23 17:20

Yes, common control is not an issue here. If A acquired B now, 5% ownership would not matter since it will be attained after the determining year when taxpayer reached 70.5. The current year RMD from B would have to be satisfied for the year of the acquisition, but in the following year all RMDs would cease.

Submitted by Thomas Buchanan on Wed, 2023-08-23 20:07

Thank you so very much for your help.

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