Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

contracts. As far as Professor Mark is concerned, he is not “retired” and he should not have to start taking RMDs as long as he is still working for SOME university that contributed to his TIAA- CREF nest egg. However, under the IRS definition he is “retired” with respect to a particular 403(b) plan if he has left the payroll of the employer that maintains that particular plan. B. Does retirement equal separation from service? For purposes of determining his RBD under a QRP or 403(b) plan, how many hours must the participant work, in what time frame, in order to be considered not “retired?” Neither the regulations, nor any IRS Publication, nor IRS Notice 97-75, 1997-2 CB 337 (which provides guidance to employers on the tax law changes made by the Small Business Jobs Protection Act of 1996) says anything on this point. Thus it is not clear whether “retirement” means a complete termination of employment, or whether some less drastic reduction of employment might be considered “retirement” for this purpose. Courts have looked to the dictionary definition of “retirement” (“withdrawal from one’s position or occupation or from active working life”) to decide what a “retirement plan” is. It is possible that the plan’s own definition of “retirement” or of who is deemed to be an “employee” might be controlling. A person who is on a leave of absence might still be considered an “employee” and thus not retired, but merely receiving compensation (such as severance pay) presumably does not negate “retirement” in the case of someone whose performance of services for this employer has ended. C. Retirement followed by re-employment? Can a person retire more than once? The statute reads as though there is only one “retirement” per employee. The IRS has issued no guidance on this question; accordingly, there is no authority for suspending distributions upon reemployment. Carmen Example: Carmen retires from the Royal Cigar Co. at age 72 and starts receiving RMDs from the RCC plan. At age 73 she goes back to work for RCC (where she is not and never has been a 5-percent owner). There is no authority for suspending her distributions until she retires again . D. Retirement on December 31. If an employee’s last day of work is December 31, Year 1, has he retired “in” Year 1? If so, and if he has attained age 70½, his RBD will be April 1, Year 2. Some conclude that his retirement actually occurred in Year 2, since he worked throughout Year 1, and Year 2 is the first year in which he did no work at all, therefore his RBD is not until April 1, Year 3. Strangely, there is no case, ruling, or IRS pronouncement of any type discussing this question. In my opinion, an employee who goes home for good at the close of business on December 31, Year 1, and does not appear on any payroll in Year 2, has retired “in” Year 1, and his RBD is April 1, Year 2. In my opinion that is probably why the RBD was set a few months later—to give the many people who retire at the end of a calendar year time to take their first RMD without incurring a penalty for lateness. But that’s just my opinion so feel free to disagree.

RBD versus first Distribution Year: The limbo period