This QOTW has been updated to reflect changes made by the SECURE Act, which was signed into law on December 20, 2019.
Participants who were born on or before July 1, 1949, are required to start taking their RMDs in the year they turn 70 ½. Those born after that date are subject to RMDs on reaching age 72.
We have a non-owner participant in our 401(k) plan who is age 74 and retired in 2014. That means that he has already been taking required minimum distributions for the last few years. We just recently rehired him in October 2018. Now that he is re-employed he has inquired as to whether he can suspend his RMDs this year.
Can he suspend his RMDs beginning this year or must he continue taking the distributions even after his reemployment?
Don’t feel bad for not knowing the answer, because really there is no answer. I know; go figure, right?
Currently the law does not offer a clear position on this situation. Even though there is no guidance directly on this point, we can look at what we do know about RMDs to draw some reasonable conclusions.
As an example, the date RMDs are supposed to begin for an individual who owns more than 5% of the company is potentially different than it is for non-owners. That means we must identify those who are 5% owners. With respect to that identification, the existing rules tell us to look at the ownership status during the year the individual reaches age 70 ½ (for participants born after July 1, 1949, the new RMD age requirement is 72). If the person is a 5% owner at that time, he or she is always considered a 5% owner for RMD purposes even if his or her ownership subsequently drops below 5%.
That suggests that once things are set in motion, they continue that way even if circumstances change in the future. To lend additional support for that interpretation, an IRS agent weighed in on this question during a Q&A session at an industry conference. The agent suggested that RMDs should continue once started. We should add the important caveat that opinions expressed by IRS representatives are conferences are just that - their opinions - and are not considered binding guidance.
All this being said, when there is no clear guidance on how to handle a situation, it is important to consider all relevant facts and circumstances (including your risk tolerance) before making the call. Based on the information we do have available to us, our interpretation (conservative though it may sound) is that this participant should continue taking RMDs after rehire.
For more information on required minimum distributions and plan distributions in general, please visit our Knowledge Center here, here and here.