2013 ESOP Required Minimum Distributions (RMDs)

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Fri, Dec 27, 2013
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ESOP Required Minimum DistributionsIn addition to the 2013 End of Year ESOP Legal Considerations discussed earlier this month, you should also make sure you have paid out all of your 2013 ESOP required minimum distributions (RMDs) by the end of the calendar year. 

What are Required Minimum Distributions?

IRC Section 401(a)(9)  provides statutory guidance on RMDs. An IRS Required Minimum Distribution Information Page defines RMDs and answers some frequently asked questions:

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner's benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner's death, or (2) over the life of the beneficiary starting no later than one year following the owner's death. See Publication 590 for complete details on when beneficiaries must start receiving RMDs.

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Required Beginning Date

Generally, all participants must receive their first RMD by the April 1 of the year following the year they meet both of the following requirements: attain age 70½ and terminate employment. This date is referred to as the participant's required beginning date.

Each subsequent RMD is due on December 31.  Another way to look at it is that the initial RMD is given an additional 3-month grace period.

Let's look at an example of a participant that attained age 70 ½ and terminated service with the company in 2012:

  • Required Beginning Date – Since the participant met both requirements in 2012, the required beginning date is April 1, 2013.

  • RMD #1 - The participant must receive their first RMD by April 1, 2013. This RMD is the participant's 2012 RMD and is calculated using the participant’s 2011 account balance.

  • RMD #2 - The participant must receive their second RMD by December 31, 2013. This RMD is the participant's 2013 RMD and is calculated using the participant’s 2012 account balance.

  • Each subsequent RMD - Each subsequent RMD will be due on each subsequent December 31 (calculated using the prior year's balance).

Some plans provide eligible participants with the option to take their first RMD in the year they satisfy both requirements. Using the example, the participant would take their first RMD in 2012.

Another option is for the participant to take both their first and second RMDs before April 1 of the year the RMDs are due. Using the example, the first two RMDs would be taken in 2013 by April 1, 2013.

What about the RMD Waiver?

You may remember the 2009 RMD waiver.  There is no waiver for RMDs for calendar years after 2009.  A plan amendment was required to be adopted by the last day of 2011 plan year to document how the 2009 RMDs were processed.

RMD Worksheets

The IRS has two RMD worksheets that you may find useful:

RMD Calculators

Here are two online RMD calculators you may find useful.

  1. RMD Planner - Annual Distribution Calculator – This calculator requires you to enter the date of birth, status of the designated beneficiary, the designated beneficiary's date of birth (if applicable), and the prior year-end balance.

  2. Calculate Your Minimum Required Distribution calculator – This is a basic calculator that only requires your age at the end of this year and the balance.

In previous years I have tested some of the calculators using the Uniform Lifetime Table and my calculation agreed with the online calculators. The IRS has provided links to the Joint Life and and Last Survivor TableUniform Lifetime Table, and Single Life Expectancy Table.

Do you have enough cash in the ESOP to pay RMDs? 

Another factor to consider for RMDs is that the plan may not have enough cash to pay to the participant(s) to satisfy the RMD requirements.  Should this situation arise the plan will most likely have three options:

  • Stock will be repurchased (recycled) in the plan to other participants - cash will need to be contributed to the plan.

  • Stock will be sold and the proceeds used to pay the participants – a stock appraisal on the date of the sale will need to be obtained.

  • Stock will be distributed and put back to the company (or the ESOP). It is important to note that as it gets closer to December 31, it becomes more likely that the stock value may be "stale" (see above discussion) and not an accurate reflection of the actual stock value.

In recent posts we have been focusing on the importance of establishing and updating a written ESOP Distribution Policy to document the TimingMethod, and Form of how the company processes ESOP distributions.  A written distribution policy can be modified as needed to ensure the policy continues to meet the objectives of the company, to manage cash flow, and to control the employee benefit level.  A proper ESOP distribution policy can help avoid or manage a situation where the ESOP doesn’t have enough cash available to pay its required minimum distributions.

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Topics: Compliance, ESOP distributions, Employee Stock Ownership Plan (ESOP)

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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