I have seen quite a few posts here on what happens when someone rolls over their entire account balance in a year when they should have first received a RMD (excess IRA contribution, etc.) Most of these examples seem to relate to correcting something that has already happened. So I want to get some thoughts on the following current situation:

We have a participant who has elected a Direct Rollover of his account balance, but also needs to take his initial RMD for 2007. We informed him of the fact that he needs to take the RMD and that the remainder of his account balance may be rolled over. However, the participant (who also happens to be one of the Plan's Trustees) is insisting (quite strongly) that 100% of the account balance be rolled over to his IRA and that he will take the RMD from there. The IRA custodian has indicated that they "do this all of the time" and it's not a problem.

Naturally, my concern is from the standpoint of the Plan and our administration of it. It seems to me that the RMD is not an eligible rollover and to go ahead and process it as a rollover may be putting the Plan unnecessarily at risk. Upon an audit of the Plan, I doubt the reviewer is going to look at whether the participant eventually received his RMD out of his IRA, but rather the fact that the Plan improperly rolled over a RMD.

Any thoughts on what should be done here and what the Plan/TPA's responsibility is with respect to this situation? Thanks.

BTH

Well, I'll never understand why some people insist on doing things that make no sense - why not just take the RMD and then roll over the rest? Sheesh.

Anyway, from a tax standpoint, I honestly don't think what they want to do is a problem; if too much is rolled over it is an ineligible rollover and the correction is to remove it.

From a plan standpoint, they're not following the terms of the document, which is a potential DQ issue. I'm not sure that on audit the IRS would do anything about it. It would probably go worse for them if there's a lot of documentation that you told them to pay the RMD first.