The Tricky Still-Working Exception - After Death
For people with 401(k)s and other employer-sponsored retirement plans, the required beginning date (RBD) determines when required minimum distributions (RMDs) must begin. Generally, the RBD for someone who reaches age 73 is April 1 of the year after the year they turn 73. The same basic RBD applies to IRAs.
However, a special rule can delay RMDs from an employer retirement plan. If a person is still working for the company that sponsors the 401(k) and does not own more than 5% of that company, the plan may allow them to delay RMDs until April 1 of the year after they retire. This is commonly called the still-working exception.
But what happens if someone is using the still-working exception and dies before they retire?
What Is the Still-Working Exception?
The still-working exception allows certain employees to delay RMDs from their current employer's retirement plan beyond the age when RMDs would normally begin.
A few important rules apply:
- The exception applies to employer-sponsored retirement plans such as 401(k)s and 403(b)s. It does not apply to IRAs or IRA-based plans such as SEP IRAs and SIMPLE IRAs.
- It generally applies only to the retirement plan of the company where the person is currently working. It does not apply to plans from previous employers.
- The exception is optional. An employer's retirement plan does not have to offer the still-working exception, although many plans do.
- The employee generally must remain employed through the entire calendar year for the exception to apply for that year.
That last point often causes confusion.
What Happens If You Retire in December?
Suppose a 75-year-old employee retires in late December.
Because the employee separated from service during that calendar year, the still-working exception does not apply for that year. As a result, an RMD is required for that year.
The RMD can generally be delayed until April 1 of the following year if the person has not already reached the applicable RBD. However, completing a rollover before the RBD can create additional complications.
The same basic issue applies if the employee is laid off or otherwise separates from service during the year.
If someone wants to use the still-working exception to avoid an RMD for a particular year, the safest approach is generally to schedule the official retirement or separation date for January 1 or later of the following year. The person should also actually remain employed through that date.
But death creates a different and somewhat surprising result.
What Happens to the Still-Working Exception After Death?
Consider this example.
Still-Working Exception Example
Roger is 75 and still working for ABC, Inc. He participates in the company's 401(k) plan and has been using the still-working exception to delay RMDs. Roger plans to continue working until age 80.
Unfortunately, Roger has a heart attack and dies at age 75.
His death ends his employment with ABC, Inc. He is no longer working for the company.
So, does Roger's death trigger an RMD from the ABC, Inc. 401(k) for the year he died?
No.
This is the tricky part.
Although Roger is no longer employed because of his death, he had not yet reached the RBD that applied to his 401(k) under the still-working exception. The delayed RBD would have been April 1 of the year after the year in which Roger retired.
Roger never reached that date because he died first.
Therefore, there is no year-of-death RMD from the ABC, Inc. 401(k) for Roger's beneficiaries to worry about.
This distinction is important. Simply separating from service does not automatically create an RMD for the year of death when the participant dies before reaching the RBD that applies under the still-working exception.
Still-Working Exception and Death: Frequently Asked Questions
Does the still-working exception apply after death?
Yes, in the sense that death does not retroactively create an RMD for the year of death when the participant had not yet reached the RBD applicable under the still-working exception. If the participant dies before that RBD, there is no year-of-death RMD from the plan.
Does death count as separation from service for RMD purposes?
Death ends a person's employment, but that does not necessarily mean an RMD becomes due for the year of death. The key question is whether the participant had reached the applicable RBD before death.
If I die while using the still-working exception, is an RMD required for my year of death?
Not necessarily. If you die before reaching the RBD that applies under the still-working exception, there is no year-of-death RMD from that employer plan.
What is the required beginning date under the still-working exception?
For an employee who qualifies for the still-working exception, the RMD starting date can generally be delayed until April 1 of the year after the year the employee retires.
Does the still-working exception apply to IRAs?
No. The still-working exception applies to certain employer-sponsored retirement plans, such as 401(k) and 403(b) plans. It does not apply to IRAs, SEP IRAs or SIMPLE IRAs.
Does every 401(k) plan offer the still-working exception?
No. The still-working exception is an optional plan provision. Check the specific plan's rules or contact the plan administrator to determine whether the exception is available.
What happens if I retire in December?
If you separate from service during the year, the still-working exception generally does not apply for that year. An RMD may therefore be required for that year, even if you retire late in December.
What happens if I die before my delayed RBD?
If you die before reaching the RBD that applies under the still-working exception, there is no year-of-death RMD from the plan. Your beneficiaries will instead be subject to the applicable inherited retirement account distribution rules.
The Bottom Line
The still-working exception can allow employees to delay RMDs from a current employer's retirement plan well beyond age 73. But the rules surrounding separation from service can be complicated.
Retiring late in the year can trigger an RMD for that year. Death, however, is different. If a participant dies before reaching the RBD that applies under the still-working exception, the death does not create a year-of-death RMD from the plan.
For anyone using the still-working exception, understanding the timing of retirement, separation from service, death and the RBD can help avoid costly RMD mistakes.
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.