The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Louisiana is representative of a common inquiry regarding 401(k) plans and required minimum distributions (RMDs). The advisor asked:
“My client’s 401(k) plan allows participants who are not 5% owners of the company to delay taking their RMDs until after they retire. How is ‘5% owner’ defined for RMD purposes?”
- The IRS requires those who are considered “5% 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 5% owner turns age 70½ in 2016, he or she must begin RMDs by April 1, 2017.
- For RMD purposes, a 5% owner is an employee who is a 5% owner as defined in IRC Section 416 with respect to the plan year ending in the calendar year in which the employee attains age 70½ [Treasury Regulation §1.401(a)(9)-2, Q&A-2(c)].
- Under IRC §416(i)(1)(B)(I), the term “5% 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 5% of the outstanding stock of the corporation or stock possessing more than 5% 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% of the capital or profits interest in the employer.
- A person might be a more than 5% 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 5% owners of the business sponsoring the plan must begin their RMDs no later than April 1 of the year following their age 70½ year. Constructive ownership rules could cause a plan participant to be considered a more than 5% percent owner for RMD purposes.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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