Take-Away: The still working exception to the required beginning date (RBD) for required minimum distributions (RMDs) is a great way to delay having to take taxable RMDs. A problem surfaces, though, if a rollover occurs early in the calendar year and the still working plan participant retires or is laid-off later in the same year, since first distributions out of a retirement account once the required beginning date has passed cannot be rolled over.

Background: The required beginning date (RBD) for a 401(k) owner is the same as for an IRA owner: April 1 of the year that follows the year in which the account owner turns age 72. However, if the qualified retirement plan allows, a still working exception applies to the basic RBD rule, and the RBD can be delayed if the employee-participant is still working for the plan sponsor and the participant does not own more than 5% of the employer in the year in which the plan participant attains the age 72. The Tax Code does not specify a minimum number of hours to be worked in order to qualify for the still working delay in the participant’s RBD. Arguably, an employee who works a minimum number of hours, e.g. 10 hours per week, would satisfy the still working RBD exception.

  • Formally Adopted as Part of the Qualified Plan: Note, however, that the still working exception to the normal RBD is an option that the qualified plan must formally adopt; a qualified plan sponsor is not required to allow the still working exception to its qualified plan, i.e.  it is not automatically available to all participants age 72.
  • Delayed RBD: If still working, the plan participant can delay their required beginning date (RBD) until April 1 of the year that follows his/her retirement.

Example: Bud continues to work for his employer at age 75. Bud’s employer sponsors a 401(k) plan which has adopted the still working exception to the normal RBD of age 72. Bud does not own any part of his employer who sponsors the 401(k) plan. Bud retires on December 31, 2022. Bud must take his first required minimum distribution (RMD) for 2022 no later than April 1, 2023, since Bud stopped working in 2022. Had Bud delayed his retirement date until January 3, 2023, Bud’s first required minimum distribution (RMD) would not have to be taken until December 31, 2023,  thus avoiding having to take two RMDs (April 1, 2022, and December 31, 2022) in the same calendar year.

  • Must Actually be Working: The still working exception to the RBD does not apply to an individual who is currently not working for the employer sponsor of the qualified plan. This seems to suggest that the participant must technically be formally employed and working on December 31 of the year in order to satisfy the still working RBD exception.
  • Inapplicable to IRAs: As noted, though, this exception to the normal RBD applies only to qualified plans that formally adopt the still working exception to the normal RBD, but not to the owner of an IRA, for which the RBD still applies.

Lay-offs: A problem arises, though, if the still working plan participant is later laid-off, and abruptly separates from service with his/her employer. Suddenly, he/she will have an RMD for that year in which the lay-off occurs. This becomes even more problematic when the participant has done a rollover earlier in the calendar year from the 401(k) plan to an IRA prior to their unexpected lay-off. The rollover was based on the assumption that he/she would still be working after the rollover. The then find themselves no longer still working. The complication arises due to the IRS’s first-dollar-out rule.

First-Dollar-Out Rule: We have covered this rule in the past. Recall that the first dollars out after the RBD has been reached cannot be rolled over into an IRA. While the RMD rule did not apply at the time of the still working participant’s rollover, because the participant was still working, their subsequent separation from service due to their lay-off within the same calendar year will have abruptly ended the still working exception. Thus, the RMD rules suddenly apply with the unexpected lay-off, creating problems for the earlier rollover.

Example: Karla, age 75, participates in her employer’s 401(k) plan, as she works part-time (500+ hours a year.) The 401(k) plan adopted the still working exception to the RBD. Karla thus uses the still working exception to delay taking RMDs from her 401(k) account. Karla intends to continue to work part-time a couple more years, thus delaying any RMDs until her retirement. In order to access a Bitcoin investment that was not offered in her employer’s 401(k) investment menu, Karla in February of 2022 rolled over $30,000 to her IRA where she invested the withdrawn funds in a Bitcoin fund. Karla has not taken any other distributions from her 401(k) during 2022. In September, 2022 Karla is suddenly laid-off by her employer. Abruptly, Karla is no longer still working. Accordingly, Karla’s has a 401(k) RMD obligation for 2022. But Karla rolled over the $30,000 back in February, 2022 to her IRA. Based on the first-dollars-out rule, in conjunction with Karla’s lay-off, the $30,000 distributed and rolled into Karla’s IRA retroactively included Karla’s 2022 RMD. That $30,000 contributed to Karla’s IRA is now an excess contribution to Karla’s IRA that must be rectified by year end, i.e. Karla must pull the $30,000 out of her IRA, along with an pro rata earnings on those contributed funds, prior to December 31, 2022.

Conclusion: The still working exception is a great way, if available in a qualified plan, to delay taking RMDs from a qualified plan. It has no bearing, however, if the plan participant also owns a traditional IRA outside of the qualified plan; RMDs must still be taken from the IRA even though there is no obligation to take any RMD from the qualified plan if it has adopted the still working exception. That said, the first-dollars-out rule can complicate life for a still working plan participant if he/she suddenly retires, e.g. for health reasons, or he/she is suddenly laid-off, if there was a rollover earlier in the same calendar year. For those participants still working and thus delaying their RBD, they need to be mindful of engaging in rollovers with their qualified plan account in the year that they ‘might’ decide to finally retire.