Concerning employee benefits, April 1 carries another meaning

While April 1 is traditionally known as “April Fools Day,” it also is known in employee benefits circles as “required minimum distribution (“RMD”) day” as to a participant’s initial distribution of benefits from a retirement plan or individual retirement account. Specifically, Section 401(a)(9) of the Code requires that an individual must generally receive a distribution from a qualified plan, individual retirement account, 403(b) plan or 457 plan no later than the April 1 of the calendar year following the calendar year in which the individual attains age 701⁄2.

The only exception to this rule is for employees (other than a 5 percent or more owner) who continue to work for their employer, in which instance they can delay the distribution of their retirement benefits from such qualified plan, 403(b) plan or 457 plan until the April 1 following their retirement.

The April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. Hence, an individual who turns 701⁄2 in 2014 and receives the first RMD on April 1, 2015, must still receive the second RMD by Dec. 31, 2015. Failure to observe the RMD rules potentially can result in the imposition of a 50 percent excise tax by the Internal Revenue Service equal to the difference between the applicable RMD amount and the amount of the actual distribution. Therefore, for those 701⁄2 or above, it is important to observe your initial RMD on or before April 1 so you in turn are not the “fool” on April 1!

David Graf is a Partner in the Friday, Eldredge & Clark, LLP law firm in Little Rock. To submit a question, please contact Janet Borders at [email protected].

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