Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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participant reaches age 70½, regardless of whether he is “retired.” § 401(a)(9)(C)(ii)(I) ; Reg. § 1.401(a)(9)-2 , A-2(c). For participants who turned age 70½ in 2009, see ¶ 1.4.09 (B). More precisely, the “normal” RBD for QRPs (later of retirement or age 70½; see ¶ 1.4.04 ) is not available for “an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70½ ....” “Once an employee is a 5-percent owner ...distributions must continue to such employee even if such employee ceases to own more than 5 percent of the employer in a subsequent year.” Notice 97-75, 1997-2 C.B. 337, “Background.” § 416(i)(1)(B)(i) defines 5-percent owner as someone who owns “ more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation, or ...if the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer” (emphasis added). Note that someone who owns exactly 5 percent is not a 5-percent owner—you must own more than 5 percent to be a 5-percent owner! In determining ownership percentages under § 416 , a modified version of the “constructive ownership” rules of § 318 applies. Under these complicated rules, a participant could be deemed, for purposes of the 5 percent test, to own stock held by various family members, trusts, estates, partnerships, or corporations; and stock options must be taken into account. Explanation of the constructive ownership rules is beyond the scope of this book. 1.4.04 QRPs, cont.: RBD for non-5-percent owner The RBD for a QRP participant who is not a “5-percent owner” is generally “April 1 of the calendar year following the later of (I) the calendar year in which the employee attains age 70½, or (II) the calendar year in which the employee retires from employment” with the employer maintaining the plan. § 401(a)(9)(C) ; Reg. § 1.401(a)(9)-2 , A-2(a). Emphasis added. See ¶ 1.4.03 for the meaning of “5-percent owner.” See ¶ 1.4.06 for the meaning of “retires.” Note the following:  A QRP participant who filed a “TEFRA 242(b) election” may have a later RBD than specified in § 401(a)(9)(C) ; see ¶ 1.4.08 .  A QRP is not required to recognize the “later of retirement or age 70½” RBD. A QRP may choose to require all employees to commence distributions by April 1 of the year following the year in which they reach age 70½, even non-5-percent owners who are not retired. Reg. § 1.401(a)(9)-2 , A-2(e). If the plan forces all employees to commence distributions by April 1 of the calendar year following the year they reach age 70½, things get complicated for the nonretired employee who is not a 5-percent owner: He has one RBD for certain purposes, but some of his “required” distributions from the plan are not considered “required” distributions for other purposes. Specifically, for purposes of determining RMDs from that plan, and determining whether the employee died before or after his RBD for that plan , the employee’s RBD is the RBD set by the plan, not the RBD described in the statute. Reg. § 1.401(a)(9)-2 , A-6(b).  If the “later of” year was 2008 or 2009, see ¶ 1.4.09 .