“However, we have a 74 year old current employee whom our 403(b) vendor is insisting must receive a required minimum distribution (RMD) at age 75, regardless of her employment status at that time. Is the vendor correct?”  

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

Does the employee in question have an account balance with the plan that existed prior to 1987? This 12/31/86 account balance may be the source of the confusion, since it is subject to a special grandfathering provision from the RMD rules. Under this provision, an employee may defer the RMD with respect to this 12/31/86 balance only until age 75, regardless of employment status.  

In a private letter ruling issued prior to the changes to the RMD regulations under 401(a)(9), the IRS indicated that even active employees would be required to initiate minimum required distributions at age 75. However, this PLR was issued prior to the changes to the RMD regulations that permitted active employees to defer distribution of post-86 account balances until employment termination, regardless of age. Since active employees over age 70 1/2 are no longer required to take distributions of post-86 account balances, it seems unlikely that such employees would be required to receive distributions from pre-86 account balances were a PLR to be issued today.   

It should be noted that, in order to take advantage of the grandfathering provision, the 12/31/86 account balance must be segregated from the remainder of the particpant’s account balance; vendors often commingle the balances with no separate recordkeeping, which eliminates the grandfathering.  

It is also possible that a vendor contract would mandate a distribution commencing at age 75, but the vendor would likely have a dilemma here, since the contract would conflict with the plan document.  Sometimes the vendor will take the position that the contract language takes precedence over the plan language.  

Finally, it should be noted that active employees over age 70 1/2, in addition to being able to defer distributions, may continue to contribute to their 403(b) plan as well. This is a key advantage of a 403(b) account over a traditional IRA, which prohibits contributions after the attainment of age 70 1/2.  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.