401(k) RMD Still-Working Exception: 5% Rule, Plan Terms, Penalties

If you’re still working past 73, you can delay required minimum distributions from your current employer’s 401(k) under what’s commonly called the 401(k) RMD still working exception. Two conditions decide whether it’s available to you: you cannot own more than 5% of the company sponsoring the plan, and the plan document itself has to permit the deferral. Meet both, and the money inside that plan keeps growing tax-deferred until the year you actually retire, no matter how old you are.

The exception is narrower than most people assume. It covers one account — the plan at the employer you still work for — and nothing else.

The 5% Ownership Test Is the First Hurdle

The statute disqualifies anyone who is a “5-percent owner” of the sponsoring business. That means owning more than 5% of the company’s outstanding stock, or more than 5% of its capital or profits interest if the business isn’t a corporation.¹ Cross the threshold and RMDs begin by April 1 of the year after you turn 73, whether you’re still working or not.²

Ownership is tested during the plan year ending with or within the calendar year you reach the RMD age. A small business owner holding exactly 4% at 73 qualifies for the exception, but picking up an extra 2% the following year can retroactively disqualify them for that plan year.

The real trap is family attribution. The statute borrows the rules from IRC Section 318, so shares owned by your spouse, children, grandchildren, and parents count as yours for the 5% test.¹ A founder who personally holds 3% but whose spouse holds another 4% is treated as owning 7%. If any family member has a stake in the business, add it all up before assuming you qualify.

Your Plan Document Has to Allow It

The Internal Revenue Code delays your required beginning date until April 1 of the year after you retire.³ There is no minimum-hours requirement. Part-time employees qualify just as full-time employees do. The statute’s trigger is retirement, not reduced hours; someone who drops from five days a week to two still counts as working.

What the IRC permits, however, your plan sponsor is not required to offer. Most plans include the still working provision, but some don’t.⁴ Check your Summary Plan Description or ask the plan administrator directly. If the deferral isn’t written into the plan, you owe RMDs starting at 73 even while actively employed.

Some administrators ask employees to confirm non-owner status through a written certification. After that, the administrator tracks your employment and flags when distributions must begin once you leave.⁵

What the Exception Does Not Cover

This is where people get into trouble. The exception shelters only the balance inside your current employer’s qualified plan. Every other tax-deferred retirement account follows the standard RMD schedule.

Traditional, SEP, and SIMPLE IRAs: RMDs must start by April 1 of the year after you turn 73. Your employment status is irrelevant.⁴
Old 401(k) plans at former employers: Balances left behind don’t benefit from your current job. RMDs from those legacy plans generally must begin at 73.²
Money already rolled into an IRA: Once it lands in an IRA, it follows IRA rules permanently, regardless of where it started.

You also can’t aggregate 401(k) RMDs. If you owe a distribution from an old employer’s plan, you take it from that specific plan. Each employer plan’s RMD must be satisfied individually, unlike IRA RMDs where you can draw the full combined amount from any single IRA.⁶

Rolling Old Balances Into Your Current Plan

There is one way to pull old 401(k) money under the still working umbrella: roll it into your current employer’s plan. Once those assets sit inside the active plan, they join the balance protected by the exception. The condition is that your current plan has to accept incoming rollovers, and not all plans do. Confirm with the administrator before moving anything.

The same approach can work for old 403(b) balances and other qualified plan funds, but the receiving plan’s rules decide what it will take. If yours only accepts rollovers from other 401(k) plans, a 403(b) transfer may be off the table. Money already sitting in a traditional IRA is harder to move; the code allows IRA-to-401(k) rollovers of pre-tax amounts, but many plan documents don’t permit them.

What Happens the Moment You Retire

Retirement starts the clock. Your first RMD covers the year of retirement and is due by April 1 of the following year.³ Your second RMD, covering that following year, is due by December 31 of the same year.²

The exact date you walk out the door matters more than people expect. Retire on December 31, 2026 and there’s a legitimate question whether the plan treats that as a 2026 or 2027 retirement. That one-day distinction decides whether your first RMD year is 2026 (due April 1, 2027) or 2027 (due April 1, 2028). Plans handle this differently, so if you’re planning a year-end departure, ask how the administrator classifies the retirement date.

The Double-RMD Tax Problem

Deferring the first distribution to April 1 and then owing the second by December 31 of the same year drops two full RMDs on one tax return. For anyone with a sizable balance, that income spike can push you into a higher bracket and trigger several downstream costs.

Medicare’s Income-Related Monthly Adjustment Amount is the most common one. IRMAA surcharges raise Part B and Part D premiums based on modified adjusted gross income from two years earlier. For 2026, a single filer above $109,000 (or married couple filing jointly above $218,000) starts paying surcharges that can more than triple the standard Part B premium of $202.90 per month.⁷ Two large RMDs stacked in one year can clear those thresholds easily, and you won’t feel the premium hike until two years later.

The same spike can make more of your Social Security benefit taxable. Up to 85% of Social Security income is subject to federal tax once combined income passes certain levels, and a two-RMD year is often the year that tips it.

Taking your first RMD in the retirement year itself, rather than waiting until April 1, spreads the income across two tax years. You give up a few months of tax-deferred growth, but the tax savings often beat the deferral.

Roth 401(k)s and the Rising RMD Age

Starting in 2024, SECURE 2.0 eliminated RMDs entirely for designated Roth accounts inside employer plans. If your contributions went into a Roth 401(k), you no longer need the still working exception to shelter that portion of your balance; the exemption applies regardless of age or employment.

SECURE 2.0 also raises the applicable RMD age to 75 for anyone who turns 74 after December 31, 2032.³ If you were born in 1960 or later, your starting age will be 75 rather than 73. The still working exception works the same way, just on a later timeline.

Penalties If You Get the Exception Wrong

Missing a required distribution triggers a 25% excise tax on the shortfall between what you should have withdrawn and what you actually took.² A missed $20,000 RMD costs $5,000 in penalty alone, on top of the regular income tax owed when the distribution eventually comes out.

The penalty drops to 10% if you fix it inside a defined correction window. That window runs until the earlier of 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 penalty was imposed.⁸ To get the reduced rate, take the missed distribution and file Form 5329 reporting the additional tax within that period.

You can also ask for a full waiver if the shortfall was due to reasonable error rather than neglect. Attach a letter to Form 5329 explaining what happened and what you’ve done to correct it.⁹ The IRS grants these regularly when the explanation is credible and the distribution has already been taken. Most trouble comes from people assuming the still working exception applies when it doesn’t, especially when family attribution pushes them past 5% ownership or old plan balances have been forgotten.

1
Legal Information Institute. 26 USC 416(i)(1) – Definition: 5-Percent Owner
2
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
3
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
4
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
5
Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Timely Start Minimum Distributions
6
Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans)
7
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
8
Internal Revenue Service. Instructions for Form 5329 (2025) – Section: Part IX Additional Tax on Excess Accumulation in Qualified Retirement Plans
9
Internal Revenue Service. Instructions for Form 5329 (2025) – Section: Waiver of Tax for Reasonable Cause