He Kept Working at 74 and Skipped the RMD on His 401(k), Which the Law Allows. He Also Owned 6% of the Company, Which the Law Doesn’t

Something many people may not know is that the current tax code lets certain workers leave their current employer’s 401(k) untouched past the required beginning date. There is no required minimum distribution, no forced income, and no April 1 deadline. People who want to keep contributing and compounding widely rely on the provision. What’s far less publicized is the single disqualifier: owning more than a specified share of the business.

Ownership Test Follows a Mechanical Formula

The still-working exception under Internal Revenue Code section 401(a)(9)(C) is unavailable to any participant who is a 5% owner of the employer sponsoring the plan. A 5% owner is anyone who owns more than 5% of the outstanding stock, or more than 5% of the total combined voting power of the employer. Importantly, ownership at exactly 5% does not disqualify.

The determination is made for the plan year ending in the calendar year in which the participant attains the applicable age, currently 73 under SECURE 2.0. Once classified as a 5% owner for RMD purposes, distributions must begin. Later reductions in ownership do not reverse the classification. The test is a count of shares and voting rights, adjusted by attribution.

Attribution Rules Reach Family Members Directly

The 5% owner test incorporates constructive ownership rules of section 318. An individual is treated as owning stock owned directly or indirectly by spouse, children, grandchildren, and parents. A participant who owns 3% directly, whose spouse owns 3%, and whose adult child owns 2% is treated as owning 8% and fails the test. Siblings are not attributed to one another under section 318, and for the 5% owner determination, brother-and-sister shareholdings stand alone.

Section 318 also attributes ownership held through entities. Stock owned by a partnership, estate, or trust is attributed proportionately to partners or beneficiaries. Stock owned by a corporation is attributed to a shareholder who owns 50% or more of that corporation’s value. Interests held indirectly through a family holding company or trust count toward the participant’s total.

Family Businesses Are the Recognizable Case

Shares in a closely held company get distributed among spouse, children, and grandchildren for estate planning or succession. The founder or senior employee keeps a modest direct stake and continues working past 73, expecting the still-working exception to defer distributions. The mechanical combination of direct shares, spousal shares, and shares held by lineal descendants routinely pushes the total above 5%. A participant in a closely held business should assume he fails the ownership test until a professional confirms otherwise.

Correction Path When the Exception Was Not Available

If distributions should have been taken and were not, the missed amount is subject to an excise tax under section 4974. SECURE 2.0 reduced the rate from 50% to 25% of the shortfall, and further to 10% when the taxpayer corrects within a two-year correction window by taking the missed distribution and filing Form 5329.

A waiver of the excise tax is available for a shortfall due to reasonable error where reasonable steps are being taken to remedy it. The taxpayer takes the missed distribution, files Form 5329 with the excise tax lines completed, attaches a statement explaining the error and corrective action, and requests the waiver. Reliance on a plan administrator’s incorrect determination of non-owner status supports waiver requests.

The multi-year problem makes an ownership misclassification worse than a single missed distribution. The belief that the exception applies persists until someone runs the attribution analysis, which may be years later. Each missed year is a separate failure with its own Form 5329 and excise calculation. Discovering the error in year two differs materially from discovering it in year six (this is one of several quiet RMD rules that can drain six figures from a retirement account, and we mapped the rest in a free tax trap guide).

Scope Limits Worth Naming

The exception never applies to IRAs, regardless of employment status or ownership. It applies only to the plan of the current employer, not to plans left at former employers, though rolling an old balance into the current plan is a separate strategy with its own considerations. The exception is also permissive at the plan level: the plan document must have adopted it, and some have not. Retirement for purposes of ending the deferral generally means separation from service; a reduction in hours without separation does not trigger the required beginning date on its own, though plan terms vary.

Written Determination Before Relying on the Exception

Participants working past 73 at a company where they or any family member hold an ownership interest often obtain a written 5% owner determination from the plan administrator and have a tax professional run the Section 318 attribution analysis independently. The administrator’s letter documents the plan’s position; the independent analysis is what a waiver request may later need to reference. The exception is useful, and the disqualifier is easy to overlook.

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