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

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 to worry about. Workers who want to keep contributing and compounding rely on this provision heavily. What gets far less attention is the single disqualifier hiding inside the ownership rules: hold too large a stake in the business, and the exception disappears entirely.

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 qualifies as a 5% owner of the employer sponsoring the plan. That label applies to anyone who owns more than 5% of the outstanding stock or more than 5% of the total combined voting power. Owning exactly 5% does not disqualify; the threshold is crossed only above that level.

The determination is made for the plan year ending in the calendar year in which the participant reaches the applicable age. Under SECURE 2.0, that age is 73 for those born between 1951 and 1959, and 75 for those born in 1960 or later. Once someone is classified as a 5% owner for RMD purposes, distributions must begin. A later reduction in ownership stake does not undo the classification. The test counts shares and voting rights, then adjusts for attribution.

Attribution Rules Reach Family Members Directly

The 5% owner test pulls in the constructive ownership rules of section 318. Under those rules, an individual is treated as owning stock held directly or indirectly by a spouse, children, grandchildren, and parents. A participant who directly owns 3%, whose spouse owns another 3%, and whose adult child holds 2% is treated as owning 8% in total and fails the test cleanly. Siblings, by contrast, are not attributed to one another under section 318, so a brother-and-sister shareholding structure does not automatically collapse the exception.

Section 318 also reaches ownership held through entities. Stock owned by a partnership, estate, or trust is attributed proportionately to the partners or beneficiaries. Stock owned by a corporation flows to any shareholder who holds 50% or more of that corporation’s value. Interests held indirectly through a family holding company or a trust therefore count toward the participant’s attributed total, often in ways the participant never anticipated.

Family Businesses Are the Recognizable Case

Shares in a closely held company frequently get distributed among a spouse, children, and grandchildren for estate planning or succession purposes. The founder or a senior employee keeps a modest direct stake, continues working past the applicable age, and expects the still-working exception to defer distributions. What that person often overlooks is that direct shares, spousal shares, and lineal-descendant shares all combine under the attribution rules. That mechanical addition routinely pushes the total above 5% without anyone running the numbers. Anyone participating in a closely held business plan should treat the ownership test as failed until a professional confirms otherwise.

Correction Path When the Exception Was Not Available

When distributions should have been taken and were not, the missed amount becomes subject to an excise tax under section 4974. SECURE 2.0 reduced that rate from 50% to 25% of the shortfall. The rate drops further to 10% when the taxpayer corrects within the statutory correction window by taking the missed distribution and filing Form 5329. That window closes on the earliest of three dates: the date the IRS mails a deficiency notice, the date the tax is assessed, or the last day of the second tax year after the year the missed RMD was due.

A full waiver of the excise tax is available when the shortfall arose from reasonable error and the taxpayer is taking reasonable steps to fix it. The path forward requires taking the missed distribution, completing the excise tax lines on Form 5329, and attaching a written statement that explains the error and the corrective action taken. A taxpayer who relied on a plan administrator’s incorrect determination of non-owner status has a straightforward basis for that statement.

The multi-year dimension makes an ownership misclassification considerably more damaging than a single missed distribution. The mistaken belief that the exception applies tends to persist until someone finally runs the attribution analysis, which can easily be several years after the required beginning date passed. Each missed year is a separate failure, carrying its own Form 5329 filing and its own excise calculation. An error discovered after two years looks very different from one discovered after six, and the compounding cost of the oversight is one reason this particular trap can quietly drain six figures from a retirement account.

Scope Limits Worth Naming

The still-working exception never applies to IRAs, regardless of employment status or ownership percentage in any company. It covers only the plan of the current employer, not balances left behind at former employers, though rolling an old balance into the current plan is a separate strategy that carries its own set of considerations. The exception is also permissive at the plan level: the plan document must have adopted it, and some have not. Separation from service is what generally ends the deferral. A reduction in hours alone, without an actual separation, does not trigger the required beginning date on its own, though plan terms vary and should be reviewed.

Written Determination Before Relying on the Exception

Workers past the applicable age at a company where they or any family member hold an ownership interest should get two things before treating the exception as available: a written 5% owner determination from the plan administrator, and an independent Section 318 attribution analysis run by a tax professional. The administrator’s letter documents the plan’s official position. The independent analysis is the foundation any waiver request may later need. The exception is genuinely valuable for those who qualify. The disqualifier is easy to miss and expensive to discover late.

Editor’s note: This revision adds the SECURE 2.0 distinction between the age-73 RMD trigger for those born 1951 through 1959 and the age-75 trigger for those born in 1960 or later, and clarifies the three-date statutory deadline that closes the correction window for reduced excise tax treatment under section 4974.

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