Q&A: A gray area in required distributions

Dear Liz: I’ve reached that “certain age” when I should be taking required minimum distributions from my retirement accounts. I retired from full-time work at age 65 but continued doing small jobs at an hourly rate for that same employer. I set my own hours and earn just a couple thousand bucks a year. The company that holds my retirement funds says I don’t have to take the required minimum distribution because I never retired. I don’t want to be penalized for failing to take the RMD, and I can’t believe I get to delay taking the funds. Have I found a little-known loophole?

Answer: You’ve found a definite gray area.

People who are still working for the employer who provides their 401(k) may be exempted from the required minimum withdrawals that are otherwise supposed to start at age 72. The exemption does not apply to IRAs or retirement plans from previous employers. The exemption also doesn’t apply if you own more than 5% of the company, and not all 401(k) plans offer a “still working” exemption.

The IRS hasn’t offered a lot of guidance about the still-working exemption. For example, there doesn’t seem to be a clear minimum number of hours that an individual must work, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Luscombe says the exemption may depend in part on the minimum number of hours required to participate in the plan. Even then, though, it’s not clear that an employee could reduce the number of hours working from a full-time level to a part-time level and still qualify for the still-working exception, he said.

“This could be a discrimination issue if higher-paid employees were allowed to reduce their hours and lower-paid employees were not,” Luscombe notes.

The company might need a written rule that all employees are allowed to reduce their hours at a certain age, Luscombe said.

If a particular plan permits part-time employees working at least 500 hours per year to qualify for its 401(k) plan, for example, then perhaps working at least 500 hours per year meets the still-working standard for that plan.

You’ll want to get some clarity about this, because the penalty for not taking required minimum distributions on time is high — it’s 50% of the amount you should have taken but didn’t. If the plan doesn’t have clear rules, ask your company to create some to guide you and others in your situation.