Are RMDs Required for a Retiree Turned Independent Contractor?

DWC | 11/27/18

QOTW - 11.27.2018 - Are RMDs Required for a Retiree Turned Independent Contractor - Plan Distributions

Facts

We have an employee who attained age 70 ½ earlier in 2018 and will retire by the end of 2018. However, she has agreed to enter into a contract to provide services to our firm and will be reclassified as an independent contractor on December 1, 2018.

Question

Given the change in her work relationship with us, will she be considered retired and, therefore, required to begin RMDs by April 1, 2019?

Answer

This good news is that the answer here is straight-forward. The bad news is that the answer is dependent on a question that isn’t as straight forward.

Let’s start with the easy part of the answer.  For non-owners, RMDs must begin no later than the April 1st of the year following the later of:

  • the calendar year in which she reaches age 70 ½, or
  • the calendar year in which she is no longer your employee, i.e. the year she retires.

Based on her age and the fact that you mention she will no longer be an employee as of the end of 2018, her first RMD will be due no later than April 1, 2019.

That brings us to the more complicated part of the question…whether or not she truly ceases to be an employee when her new work arrangement starts on December 1, 2018.  Unfortunately, the answer is not as clear cut as simply looking at the agreement you made with her or the fact that she now receives a 1099 rather than a W2 to report her pay.  Instead, the IRS says that the employment/contractor status is based on who controls the arrangement.

So, what does it mean to control the work arrangement?  There isn’t really a bright line.  Instead, the IRS provides a number of factors to consider.  Here are some of the most common ones.

  • Schedule: Will you allow the worker to come and goes as she pleases while doing her work, or will you set a work schedule?
  • Payment: Will you pay her by the job, or will you require her to submit time sheets for her work?
  • Equipment: Will she need to have her own equipment (computer, tools, etc.), or will she use equipment that you provide?
  • Exclusivity: Will she provide similar services to other companies, or will she only be performing services for you?

Setting her work schedule, requiring time sheets, providing equipment and establishing an exclusive agreement all suggest that you control the work arrangement.  That means she is still your employee (even though you are calling her a contractor) and, therefore, is not required to begin RMDs on April 1, 2019.  On the flip side, if she sets her own schedule, uses her own equipment, gets paid by the job and/or provides services for other unrelated companies, it is more likely she is legally an independent contractor, which means she is no longer an employee and would be required to begin RMDs.

Proper classifications of workers is an issue the IRS has on its radar, not only in the context of retirement plans but also with respect to tax and employment matters in general.  Getting this determination wrong can be a big headache for you and your plan participants.  Given the complexity and the consequences for missing the mark, we suggest working with knowledgeable experts who can assist with the accurate classification of workers. This will ensure you know who your employees are and allow you to make the determination as to whether an RMD will need to be processed for an individual.

For more information on proper classification of employees, required minimum distributions and plan distributions in general, please visit our Knowledge Center here, here, and here.

The Results are In!

All of us at DWC hope you had a wonderful Thanksgiving holiday with family and friends. The results of last week's Holiday Film Favorite poll are in! And the winner is...drum roll please...National Lampoon's Christmas Vacation! 

We'd breakdown the rest of the results but oh, woo. Look at the time. I gotta get to bed. I still gotta brush my teeth, feed the hog, still got some homework to do, still got those bills to pay, wash the car...

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Topics: Question of the Week, DWC, Plan Distributions, Required Minimum Distributions, Independent Contractor

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.