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“How did beneficiary distribution options change under the SECURE Act?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to beneficiary distribution options.

Highlights of the Discussion

The Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions that Congress added to the Further Consolidated Appropriations Act, 2020, affected the distribution options for retirement plan beneficiaries in 2020 and beyond. The changes are summarized in the charts below.

Beneficiary Changes under the SECURE Act

Applies to distributions with respect to individuals who die after December 31, 2019

Refer to the terms of the plan or IRA agreement for specify options.

Type of Beneficiary Definition Distribution Options
Eligible Designated Beneficiary (EDB)
  • Spouse
  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the employee (or IRA owner), or
  • Children of the employee (or IRA owner) who have not reached the age of majority
Terms of the plan or IRA agreement will specify, but  generally:

Death before required beginning date (RBD)

•     Five-year rule

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse beneficiary only)

•     Rollover

  • Spouse EDB may roll over his or her share from an IRA or qualified plan into his/her own IRA or eligible plan
  • Non-spouse EDB may roll over his or her share of an employer plan to a beneficiary IRA

Death on or after RBD

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse EDB only)

•     Rollover (see above)

Noneligible Designated Beneficiary (Non-EDB) Nonspouse beneficiaries who do not qualify as an EDB as listed above (e.g., child who has reached the age of majority) Terms of the plan or IRA agreement will specify, but generally:

•     Timing of death does not matter (i.e., no before or after RBD differentiation)

•     10-year rule—account depleted within 10 years of death

•     Lump sum

•     Rollover−nonEDB may roll over his or her share of an employer plan to a beneficiary IRA, but payout remains subject to 10-year rule

 

Estate or nonqualified trust as beneficiary Nonperson beneficiaries Death before RBD

•   Lump sum

•   Five-year rule

Death on or after RBD

•   Lump sum

•   Single life expectancy payments

 

Qualified trust as beneficiary with underlying EBD A qualified trust is one that meets the following requirements of Treas. Reg. 1.401(a)(9)-4, Q&A 5(b).

1.   The trust is valid under state law,

2.   The trust is irrevocable (either during the IRA owner or plan participant’s

life or becomes so at his or her death),

3.   The trust has identifiable beneficiaries, and

4.   The trustee of the trust provides the IRA or plan administrator with a copy of the trust instrument (or qualifying trust documentation) by October 31 of the year following the year of the IRA owner or plan participant’s death.

EDB—See above

Death before RBD

·    Lump sum

·    Five-year rule

·    Single life expectancy payments

Death on or after RBD

·     Lump sum

·     Single life expectancy payments

·      Rollovers-

  • Spouse EDB rollover only allowed with private letter ruling
  • Nonspouse EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary
Qualified trust as beneficiary with underlying Non-EDB Qualified trust—See above

Non-EDB—See above

Timing of death does not matter (i.e., no before or after RBD differentiation

•   10-year rule

•   Lump sum

•   Rollover−Non-EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary, but payout remains subject to 10-year rule

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