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RMD Calculations and Distributions

Q. I have a client that has turned 70 ½ and we were working on her required minimum distribution (RMD) calculations. She retired and then placed her name on the district’s substitute teacher list. We completed the paperwork for the RMD distribution and the third party administrator for the district declined the paperwork stating that the district still has her coded as an employee listed on their substitute teacher list. I called the client and asked if she has worked in the district this year and she said she has not because they had not called her to come in. I am concerned that if she does not take the RMD and is audited she may be subject to the 50% penalty. How do we handle this situation?

A. The IRS has specific views on the meaning of “severance of employment.” The IRS states that this is a “facts and circumstances” issue; thus, the answer is not as definitive as you needed.

An IRS representative with whom I consulted also said: “I don’t believe putting your name on a substitute list or even performing substitute work would continue the performance of service associated with the original relationship. If the former employee is eligible for retirement benefits, no longer is covered for health insurance, and is eligible to access 403(b) accounts, that would support a severance under 1.403(b)-6 & 1.401(k)-1 and trigger the RMD for those 70.5.”

It appears to be best if your client takes an RMD for each year since the IRS, upon audit, might find that RMDs should have been taken. As you know the penalty for failure to take a required distribution is far too high to take the risk.