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A recent call with a financial advisor in Virginia is representative of a common question on 5% owners and required minimum distributions (RMDs).
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“Is a required minimum distribution (RMD) due for a more-than-5% owner who is still working if their level of ownership was reduced during the year?”
If a qualified plan allows it, working participants who own 5% or less of the plan sponsor may delay starting their RMDs until after they retire, rather than when they reach age 73. Workers who are more-than-5% owners cannot delay starting their RMDs. The question often arises as to what happens if an individual starts the year as a more-than-5% owner and during the year their ownership drops to 5% or less. Are they still required to take an RMD if they are still working for the company?
A participant is a more-than-5% owner for RMD purposes if, at any time during the applicable plan year, the participant owns, directly or through the applicable attribution rules, more than 5% of the employer (see IRC §416(i)(1)). The relevant test is whether the participant owned more than 5% at any time during the plan year ending in the calendar year in which the participant attains the applicable RMD age (see Treas. Reg. §1.401(a)(9)-2(b)(3)(ii)).
Assume the following:
Plan year: January 1 through December 31.
Owner/Participant: Maria turns 73 on October 15, 2026.
Ownership: Maria owns 6% on January 1, 2026, reduces ownership to 4% on July 1, 2026, and sells her ownership on December 31, 2026.
Employment: Maria continues working in 2026 and beyond.
Plan provisions: The plan permits the still-working exception for participants who are not more-than-5% owners.
Maria turns 73 in 2026, and the applicable ownership-testing period is January 1, 2026 – December 31, 2026.
RMD or no? A 2026 RMD is required because Maria was a more-than-5% owner during the applicable plan year. She may take her first RMD in 2026 or delay it until April 1, 2027. Her 2027 RMD must be taken by December 31, 2027. RMDs must continue in subsequent years even though she no longer owns the company.
Assume the following:
Plan year: July 1- June 30
Owner/Participant: Tony turns 73 on June 7, 2026.
Ownership: Tony owns 6% initially, but reduces ownership from 6% to 4% on June 30, 2025, and maintains 4% throughout July 1, 2025–June 30, 2026.
Employment: Tony continues working in 2026 and beyond.
Plan provisions: The plan permits the still-working exception for participants who are not more-than-5% owners.
Tony’s applicable ownership-testing period is July 1, 2025 – June 30, 2026. RMD or No? No RMD is required for the 2026 distribution calendar year. Tony's 6% ownership before July 1, 2025, does not disqualify him from the still-working exception in 2026. His reduction to 4% on June 30, 2025, occurred in time to avoid being classified as a more-than-5% owner for his required beginning date.
The ownership percentage during the plan year ending in the calendar year in which the participant reaches the applicable RMD age determines whether the still-working exception applies. If the participant owns more than 5% of the employer at any time during that testing year, the participant must begin RMDs regardless of continued employment. A subsequent reduction in ownership does not restore the still-working exception. Participants who are not more-than-5% owners during the applicable testing year may delay RMDs until retirement if the plan permits.