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Non Spouse Beneficiary Rollovers

“My client, who is a nonspouse beneficiary of a deceased 401(k) plan participant, requested and received a distribution of the inherited account balance.  Can she complete a 60-day rollover?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • No, the IRS does not allow nonspouse beneficiaries to complete indirect or 60-day rollovers of amounts received from a 401(k) plan.
  • If a nonspouse beneficiary wants to complete a rollover of inherited plan assets, he or she must do so through a “direct rollover” to an inherited IRA.  (See IRS Notice 2007-7  Q&A 15). The Pension Protection Act of 2006 introduced this option for nonspouse beneficiaries, effective for 2007 and later years. The direct rollover option for nonspouse beneficiaries applies to IRC §401(a) qualified retirement plans, as well as IRC §§403(b) and governmental 457(b) plans.
  • A direct rollover is a transfer of plan assets from the trustee of the plan to the trustee of the inherited IRA (i.e., a trustee-to-trustee transfer), without receipt by the beneficiary of the assets.
  • A qualified plan can (but is not required to) offer a direct rollover of a distribution to a nonspouse beneficiary, provided the distributed amount satisfies all the requirements to be an eligible rollover distribution.
  • The direct rollover must be made to an IRA established on behalf of the designated beneficiary that will be treated as an inherited IRA. If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of the distribution.
  • The receiving IRA must be established in a manner that identifies it as an IRA with respect to the deceased plan participant and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.”
  • If a nonspouse beneficiary receives an amount distributed from a plan, the distribution is not eligible for rollover, and is includible in income in the year of the distribution.

Conclusion

The plan-to-IRA rollover rules for nonspouse beneficiaries are different than those that apply to spouse beneficiaries. If a nonspouse beneficiary wants to complete a rollover of inherited plan assets, he or she must do so through a direct rollover to an inherited IRA.

 

 

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