In Retirement News for Employers (Winter 2012), the Internal Revenue Service posited the following question: When does a 401(k) plan have to pay the first required minimum distribution to a 72-year-old employee who will stop working for the employer on February 29, 2012, but is going to work for another company?
The answer: A retirement plan must pay required minimum distributions (“RMDs”) to participants over the age of 70½ who have stopped working for the employer maintaining the plan. The 401(k) plan at issue must pay the first RMD to the 72-year-old plan participant no later than April 1, 2013.
Retirement plans must start paying RMDs to a plan participant by April 1 following the year:
• the individual turns age 70½, or,
• if later, the year in which the individual retires. However, this later date does not apply if the participant is a 5% owner of the company sponsoring the retirement plan. Also, some plans may require all participants, including non-5% owners, to start RMDs by April 1 following the year in which the participant turns 70½.
The first RMD – the payment required for the year the participant turns 70½ or retires, if applicable – can be paid as late as April 1 following the year the participant turns 70½ (or retires). For each subsequent year (including the year containing this April 1), the plan must pay the RMD by December 31 of the year. For example, if the retiring employee receives her first RMD in 2013 (no later than April 1), he or she must be paid her second RMD in the same year, by December 31, 2013.
A plan must pay RMDs to a participant over the age of 70½ who no longer works for the company sponsoring the plan, even if he or she continues to work elsewhere. If a plan fails to pay RMDs on time, it may be able to correct the error using the Employee Plans Compliance Resolution System.