The Pension consultants at Planmark regularly receive calls on a broad array of technical topics related to qualified retirement plans. A recent call with a plan sponsor in Alpharetta is a commonly asked question about Plan Audits. The plan sponsor asked:
In a previous PlanINSIGHT that I saw on your website you explained about required minimum distributions (RMDs) in 401(k)plans. It said if you were still working at the plan sponsor business you didn’t have to take an RMD as long as you are not a 5% owner. How is a 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:
- With an employer that is a corporation, any person who owns 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,
- 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.
The Resource Desk is staffed by the pension experts at Planmark Financial Group, Inc., a third-party plan administration firm. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Planmark does not provide tax or legal advice.