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Can NUA in employer stock count towards an RMD?

“Can the portion of a distribution from a 401(k) plan that takes advantage of NUA tax treatment be used to satisfy the receiving participant’s RMD for the year?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Colorado is representative of a common inquiry involving net unrealized appreciation (NUA) and required minimum distributions (RMDs).

Highlights of discussion

  • Yes— amounts excluded from income at the point of distribution, such as NUA on employer securities, are amounts a plan participant may count toward satisfying an RMD under Internal Revenue Code Section (IRC §) 401(a)(9). (NUA is eventually included in the participant’s income as taxable long-term capital gains when the employer securities are eventually sold.)
  • According to Treas. Reg. 1.401(a)(9)-5, Q&A 9, with a few, limited exceptions, all amounts distributed from a qualified plan are amounts that are taken into account in determining whether an RMD is satisfied for a participant, regardless of whether the amount is includible in income.
  • For example, amounts that are excluded from income as recovery of “investment in the contract under IRC§ 72” (i.e., after-tax contributions) are taken into account for purposes of determining whether an RMD is satisfied for a year. Similarly, amounts excluded from income as NUA on employer securities are counted towards satisfying an RMD of the participant.
  • The following amounts are not taken into account in determining whether a participant’s RMD is satisfied for the year:
  1. Amounts returned to a participant to correct plan excesses;
  2. Loans treated as deemed distributions;
  3. The cost of life insurance coverage (i.e., PS 58 costs);
  4. Dividends on employer securities; and
  5. Other similar amounts as deemed by the IRS and published in the Internal Revenue Bulletin from time to time.

Conclusion                                                   

The IRS is clear that NUA on employer securities is a distribution amount that a plan participant may count toward satisfying his or her RMD for the year.

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Aggregating RMDs

My client, who is retired, has a Roth IRA, multiple traditional IRAs and a 401(k) plan, and is over age 70 ½.  Can a distribution from his 401(k) plan satisfy all RMDs that he is obliged to take for the year?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

    • No, your client may not use the RMD due from his 401(k) plan to satisfy the RMDs due from his IRAs (and vice versa). He must satisfy them independently from one another.
    • Participants in retirement plans, such as 401(k) plans, are not allowed to aggregate their RMDs [Treasury Regulation 1.409(a)(9)-8, Q&A 1]. If an employee participates in more than one qualified retirement plan, he or she must satisfy the RMD from each plan separately.
    • However, there are special RMD “aggregation rules” that apply to individuals with multiple traditional IRAs, as explained next.
    • The IRA RMD rules allow IRA owners to independently calculate the RMDs that are due from each IRA they own directly (including savings incentive match plan for employees (SIMPLE IRAs, simplified employee pension (SEP) IRAs and traditional IRAs), total the amounts, and take the aggregate RMD amount from an IRA (or IRAs) of their choosing that they own directly (Treasury Regulation 1.408-8, Q&A 9).
    • RMDs from IRAs that an individual holds as a beneficiary of the same decedent may be distributed under these rules for aggregation, considering only those IRAs owned as a beneficiary of the same decedent.
    • Roth IRA owners are not subject to the RMD rules but, upon death, their beneficiaries would be required to commence RMDs.
    • 403(b) participants have RMD aggregation rules as well. A 403(b) plan participant must determine the RMD amount due from each 403(b) contract separately, but he or she may total the amounts and take the aggregate RMD amount from any one or more of the individual 403(b) contracts.  However, only amounts in 403(b) contracts that a individual holds as an employee may be aggregated. Amounts in 403(b) contracts that an individual holds as a beneficiary of the same decedent may be aggregated [Treasury Regulation 1.403(b)-6(e)(7)].

Conclusion

Individuals who are over age 70 ½, generally, are required to take RMDs from their tax-favored retirement accounts on an annual basis. There is some ability to pool certain accounts for RMD purposes, but the RMD aggregation rules are complex. Therefore, the guidance of a financial professional is suggested.

© Copyright 2017 Retirement Learning Center, all rights reserved
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RMDs and More than 5 Percent Owners

“My client’s 401(k) plan allows participants who are not five-percent owners of the company to delay taking their RMDs until after they retire. How is ‘five-percent owner’ defined for RMD purposes?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

•The IRS requires those who are considered “five-percent owners” of the employer to begin their RMD no later than April 1 of the calendar year following the year in which they attain age 70½. For example, if a five-percent owner turns age 70 ½ in 2016, he or she must begin RMDs by April 1, 2017.

•For RMD purposes, a five-percent owner is an employee who is a five-percent owner [as defined in Internal Revenue Section (IRC §416) with respect to the plan year ending in the calendar year in which the employee attains age 70 ½ [Treasury Regulation §1.401(a)(9)-2, Q&A-2(c)].

•Under IRC §416(i)(1)(B)(I), the term “five-percent owner” means the following:

•If the employer is a corporation, any person who owns (or is considered as owning within the meaning of IRC § 318) more than five-percent of the outstanding stock of the corporation or stock possessing more than five-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 five-percent of the capital or profits interest in the employer.

•A person might be a more than five-percent owner through “constructive ownership.” The IRS outlines its constructive ownership rules in IRC § 318. Generally, an individual shall be considered as owning the stock owned, directly or indirectly, by or for his spouse, and his children, grandchildren, and parents.

Conclusion

401(k) plan participants who are more than five-percent owners of the business sponsoring the plan must begin their RMDs no later than April 1 of the year following their age 70 ½ year. Constructive ownership rules could cause a plan participant to be considered a more than five-percent owner for RMD purposes.

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© Copyright 2017 Retirement Learning Center, all rights reserved