Required Beginning Date for a Still-Working Owner
Ravi is a 76-year-old 30% owner of a small manufacturing company and still works full time. He participates in the company's profit sharing plan, which has a calendar plan year. The plan uses the uniform lifetime table for distributions and does not permit a lump sum after annuity starting date. Ravi turned 73 two years ago and has not taken any distributions. The plan administrator assumed that because Ravi is still employed and is not a 5% owner, no distribution is required until he retires. In fact, Ravi's ownership has been 30% for over a decade. His account balance is $1.4 million, of which $300,000 is a rollover from a prior employer's 401(k). The plan has no designated Roth accounts. The administrator asks what should have happened, what the required beginning date was, and how to correct the missed distributions.
1. Was Ravi's assumption correct? Determine his required beginning date and the first distribution year.
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No. The still-working exception applies only to employees who are not 5% owners. Ravi is a 30% owner, so the exception does not apply. His required beginning date is April 1 of the calendar year following the calendar year in which he attains the applicable age. Under SECURE 2.0, the applicable age is 73 for individuals who attain age 72 after December 31, 2022 and age 73 before January 1, 2033. Ravi turned 73 two years ago, so his first distribution calendar year was the year he turned 73, and his RBD was April 1 of the following year. He has missed at least one, probably two, required annual distributions. The rollover dollars are part of his account balance for RMD purposes because they are held in the plan; the source of the funds does not matter once in the plan.
2. What is the correction path, and what penalty exposure exists?
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The missed RMDs must be distributed immediately, with the shortfall calculated for each missed year using the uniform lifetime table and the prior-year-end balance. The excise tax under §4974 is 25% of the shortfall, reduced to 10% if corrected within the correction window (generally within two years). Because the plan administrator's error caused the failure, the employer should consider whether to pay the excise tax or reimburse Ravi. The plan should also use the IRS Form 5329 or, for plan-level correction, consider EPCRS. Going forward, the plan must establish an RMD distribution process that flags 5% owners regardless of employment status. Also confirm whether Ravi wants to defer the first year's distribution to the RBD; if the first distribution year was missed entirely, the RBD has passed and both years are now due.