Retirement Plan Services: Ownership and RMDs

Retirement Plan Services: Ownership and RMDs

By: Julie Reinhardt, Retirement Associate

It is critical to understand that the ownership of your firm, and other businesses that the firm’s owners might have ownership in, may very well affect your company’s retirement plan. It is important to have a detailed list of owners and any other companies that they own so that it may be analyzed for any conflicts. Also, when you are in discussions about starting a business, selling all or a portion of your business, or purchasing another business, it is important to consult with us or an attorney before entering into any agreements. Typically, you have more choices before the deal is complete than after.

Regarding owners that also work directly at the company, it is important to note they are considered employees, even if they are partners in a partnership. Employee owners can be considered Highly Compensated Employees or Key Employees and can have a direct impact on many tests required for your plan. Bringing on new owners and hiring family members that are related to owners can also have a direct impact on the plan. A consultation with us is important so that you are aware of any implications.

Retirement plans typically contain tax-deferred income allowing your employees to save money either from their own paycheck or money that you as their employer choose to give them for retirement. This allows them to pay the taxes on all deferred income and the earnings later and over time. The IRS only allows the tax-deferred status to continue for a period of time. Once a participant has reached 70 ½ years of age, they may have to begin withdrawing funds from the retirement plan. If the participant no longer works for the firm, they will need to begin withdrawals. For most employees that are still employed at that age, they can continue to defer the withdrawals. However, anyone who owns more than 5% of your organization will be required to start the withdrawals. The IRS has specific tables and formulas for determining the amount required to be withdrawn each year, along with specific deadlines for doing so. The penalty for missing a required minimum distribution falls to the participants, not the plan, and that penalty is steep. The IRS charges a 50% penalty on the missed amount. The participant can apply for relief from this penalty if they do not take a timely withdrawal.

ML&R Wealth Management serves both as an investment advisory fiduciary in the 3(21) or 3(38) capacity and as an administrative fiduciary in the 3(16) capacity for our clients. We will help you to navigate any late deferral situations that you may find.  Please contact us with any questions.

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