RMDs and 5%+ Owners
Learn when ownership is determined for the still-working exception to starting RMDs—plan permitting.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Virginia is representative of a common question about 5% owners and required minimum distributions (RMDs).
“Is a required minimum distribution (RMD) due for a more-than-5% owner who is still working if their level of ownership was reduced in the year the RMD is due?"
Highlights of the discussion
If a qualified plan allows it, working participants who own 5% or less of the plan sponsor may delay starting their RMDs until after they retire, rather than when they reach age 73. Workers who are more-than-5% owners cannot delay starting their RMDs. The question often arises as to what happens if an individual starts the year as a more-than-5% owner and during the year their ownership drops to 5% or less. Are they still required to take an RMD if they are still working for the company?
A participant is a more-than-5% owner for RMD purposes as defined in IRC §416(I)(1) for the plan year ending in the calendar year in which the participant attains his or her applicable age for beginning RMDs. Therefore, if a participant’s ownership was reduced in the same year as they turn 73 (the applicable age), and they are still working for the company, then no RMD would be required. Alternatively, if the participant’s ownership were not reduced until the plan year after they turned 73, an RMD would be required. RMDs must continue to a more-than-5% owner even if the participant sells their ownership in later years.
Example:
D-Lay, Inc. sponsors a 401(k) plan that permits the “still-working” exception for starting RMDs. Maria is an employee of D-Lay and continues to work full-time. She turns 73 in 2026. On January 1, 2026, Maria owns 6% of D-Lay, which would ordinarily make her a more-than-5% owner and, therefore, ineligible for the still-working exception for starting RMDs.
However, on July 1, 2026, Maria sells part of her ownership interest, reducing her ownership to 4%. As of December 31, 2026 (the last day of the plan year ending in the year she turns 73), Maria is not a more-than-5% owner and is still employed by D-Lay, Inc. Because Maria is not a more-than-5% owner as of the end of the applicable plan year and the plan permits the still-working exception, she is not required to take an RMD for 2026. Her RMDs will instead begin in the year following her retirement.
By contrast, if Maria had remained a more-than-5% owner through December 31, 2026, she would have been required to begin taking RMDs for 2026, and those RMDs would have continued in future years even if her ownership were later reduced below 5%.
Conclusion
The still-working exception to delaying RMDs until retirement only applies if it is specified in the plan document. If so, the ownership percentage at the end of the plan year ending in the calendar year in which the participant reaches RMD age determines whether the still-working exception to starting RMDs applies.
