RMD's from an ESOP

Investing Strategies Retirement Investing
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I am looking at my first RMD in 2023 and have understood for a long time the RMD amount would be based on my total TIRA balance as of 12-31-22.

Today, I read something in our RSOP Plan Admin Report that indicates my vested balance in my employers ESOP will also be subject to RMD’s. The ESOP is a qualified retirement plan and distributions to terminated employees can be rolled over to another qualified plan or taken as a taxable distribution. So if I roll that balance into my TIRA at some future date, the RMD’s apply for sure and that makes sense. But it seems Uncle Sugar wants a cut even while the balance remains in the ESOP. Our ESOP plan does not allow in service distributions so requiring an RMD on funds I cannot access seems like something is amiss…

Anybody have any insights or experience with this?

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Today, I read something in our RSOP Plan Admin Report that indicates my vested balance in my employers ESOP will also be subject to RMD’s. The ESOP is a qualified retirement plan and distributions to terminated employees can be rolled over to another qualified plan or taken as a taxable distribution. So if I roll that balance into my TIRA at some future date, the RMD’s apply for sure and that makes sense. But it seems Uncle Sugar wants a cut even while the balance remains in the ESOP. Our ESOP plan does not allow in service distributions so requiring an RMD on funds I cannot access seems like something is amiss…

Qualified plans sponsored by employers, including Traditional 401(k)s, ESOPs and even Roth 401(k)s, all require RMDs to be taken out once you reach age 72. (That’s why rolling Roth 401(k)s over into an IRA by Dec 31 of the year before you will turn 72 is highly recommended.) The plan rules for employer plans can make exceptions to RMD requirements for those who are still employed by the company. So if you are still employed, as indicated by the ‘in-service distribution’ comment, then you should check to see if your ESOP has that exception. If it doesn’t, so that you are required to take an RMD, but you are prohibited from taking an in-service distribution, you need to check with the plan administrator on how they plan to distribute your RMD without triggering issues because of the prohibition on in-service distributions. If that’s the case, it sounds like plan rules may need to be updated.

I would also point out that, at least for 401(k)s, you are supposed to be allowed to take in-service distributions once you reach age 59 1/2, even if in-service distributions are prohibited for other employees. I’m not sure if that’s the case for ESOPs, though.

If you’re no longer employed by the company that sponsors the ESOP, then you will need to take an RMD, and it wouldn’t be considered an in-service distribution, because in-service distributions, by definition, mean that you’re still working for the company.

Also - please note - If you try to roll over your ESOP into an IRA after the account valuation that the RMD was based on has been determined but before your take the RMD for the year, your administrator will likely require you to take the RMD before it does the rollover.

AJ

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Thank you AJ. That was a wealth of information… I will check with the plan admin about in service distributions driven by RMD requirements. It has never come up before and the plan document says distributions are made for terminations, disability, or death of the plan participant and goes on to say, the plan sponsor has the option of delaying the first payment for up to five years and then paring our over the sunsequent five years. Not very compatible with an RMD.

Hypothetically, would you happen to know if I could satisfy the entire RMD from my TIRA and lease the ESOP alone?

Lastly an observation. I know my TIRA custodian, Vanguard, reports my TIRA balance to Uncle Sugar. AFAIK, my ESOP does not. So how would Uncle know how much, if any, he is due from my ESOP?

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Sorry typos galore…

plan sponsor has the option of delaying the first payment for up to five years and then paring our over the sunsequent five years. Not very compatible with an RMD.

Hypothetically, would you happen to know if I could satisfy the entire RMD from my TIRA and lease the ESOP alone?

plan sponsor has the option of delaying the first payment for up to five years and then paying out over the subsequent five years. Not very compatible with an RMD.

Hypothetically, would you happen to know if I could satisfy the entire RMD from my TIRA and leave the ESOP alone?

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Qualified plans sponsored by employers, including Traditional 401(k)s, ESOPs and even Roth 401(k)s, all require RMDs to be taken out once you reach age 72. (That’s why rolling Roth 401(k)s over into an IRA by Dec 31 of the year before you will turn 72 is highly recommended.) - AJ

I have been noodling around the internet and found some info that clarifies the situation. It appears there is an exception to “requiring” RMD’s from ESOPs based solely on age…

https://www.bkd.com/article/2020/01/understanding-rmds-your-…

Understanding RMDs for Your ESOP Account

When Are You Required to Take Your First RMD?

Benefits under an ESOP must begin to be distributed by the “required beginning date” (RBD). The RBD is April 1 of the calendar year following either: 1) the calendar year in which the participant attains age 70 1/2 or 2) the calendar year in which the participant severs employment, whichever is later. Effective January 1, 2020, the SECURE Act increases the age requirement in number 1 above from 70 1/2 to 72. Please note this increase is only for participants turning 70 1/2 in 2020 and after. All participants who attained age 70 1/2 in 2019 and before and have terminated employment must continue taking their RMDs. After the first distribution, the participant will have until December 31 of each year to take the RMD. The participant isn’t limited to that sole amount. A participant can withdraw more without a penalty, but the excess amount can’t be used to lessen the next year’s RMD.

When I terminate, I am eligible for a distribution from my ESOP but am not required to take it. I can leave the account with my now ex employer and let it grow tax deferred from ongoing investment gains. Starting the RMD upon termination ensures uncle sugar gets his slice even if I let it ride for a while post termination.

This clears up much of the confusion I initially had… That said, if I did let it ride, I don’t think my plan would allow me to take just a little distribution each year to cover the RMD. It would be either all at once or as 20% each year spread over five years.

I wouldn’t let it ride anyway. When I terminate, I will do a 100% rollover to my TIRA and then cover the RMD’s within the TIRA framework. My issue was erroneously thinking I somehow had to take RMD’s from the ESOP pre-termination.

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Hypothetically, would you happen to know if I could satisfy the entire RMD from my TIRA and lease the ESOP alone?

No. Each plan has a separate RMD requirement. Roth 401(k) different from Traditional 401(k) different from IRA, etc.

Lastly an observation. I know my TIRA custodian, Vanguard, reports my TIRA balance to Uncle Sugar. AFAIK, my ESOP does not. So how would Uncle know how much, if any, he is due from my ESOP?

All qualified plans have reporting requirements. You may not see the reporting, but I’m sure it’s reported.

AJ

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2) the calendar year in which the participant severs employment, whichever is later.

As I said in my first post: The plan rules for employer plans can make exceptions to RMD requirements for those who are still employed by the company. and suggested that you need to check with your administrator to see if they have that exception.

When I terminate, I am eligible for a distribution from my ESOP but am not required to take it. I can leave the account with my now ex employer and let it grow tax deferred from ongoing investment gains. Starting the RMD upon termination ensures uncle sugar gets his slice even if I let it ride for a while post termination.

Well, you will be required to take an RMD when you terminate, so let me correct that statement:

Once you terminate, you are allowed to take distributions, but are not required to do so unless you have reached the age where an RMD is required.

This clears up much of the confusion I initially had… That said, if I did let it ride, I don’t think my plan would allow me to take just a little distribution each year to cover the RMD. It would be either all at once or as 20% each year spread over five years.

Yes, that would depend on the plan rules. Plans can have different distribution rules.

I wouldn’t let it ride anyway. When I terminate, I will do a 100% rollover to my TIRA and then cover the RMD’s within the TIRA framework.

If you are over 72 when you terminate, you will likely have to take a distribution from the ESOP before it can be rolled over into your IRA. As I said in my first post: If you try to roll over your ESOP into an IRA after the account valuation that the RMD was based on has been determined but before your take the RMD for the year, your administrator will likely require you to take the RMD before it does the rollover.

My issue was erroneously thinking I somehow had to take RMD’s from the ESOP pre-termination.

You still need to confirm that your particular plan has that waiver. Just because the plan is allowed to have that waiver doesn’t mean that they necessarily do. And they may have specific work requirements, like you have to work for x number of hours/days for the year for the RMD to be waived. Again - I would suggest that you check your plan rules and/or check with the administrator.

AJ

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You still need to confirm that your particular plan has that waiver. Just because the plan is allowed to have that waiver doesn’t mean that they necessarily do. And they may have specific work requirements, like you have to work for x number of hours/days for the year for the RMD to be waived. Again - I would suggest that you check your plan rules and/or check with the administrator.

AJ

Good advice and will do. At least now when I discuss with plan admin I have a much better understanding of how the process works or could work. I will be able to ask better questions. Thanks again.

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