Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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does not meet the requirements of a qualified rollover under § 402(c)(11) ); followed by a regular contribution (almost always an excess contribution) to the beneficiary’s own IRA (or Roth IRA). See ¶ 5.3.02 , ¶ 5.4.06 , ¶ 2.1.08 . This mistake cannot be fixed by “recharacterization”; see ¶ 5.6.01 . F. Applies to post-2006 post-death distributions. The nonspouse beneficiary rollover is available for any otherwise-qualifying post-2006 distribution even if the date of death was before 2007. See PLRs 2007-17022 and 2007-17023, permitting beneficiaries to use § 402(c)(11) in 2007 to cause a direct rollover of plan benefits of a participant who had died in 2005. A distribution made prior to 2007 cannot be rolled over by the nonspouse beneficiary. Also, the beneficiary rollover provision applies only to post-death distributions; for post-death rollovers of pre-death distributions, see ¶ 4.1.04 . If not certain whether the distribution occurred before or after the participant’s death, see ¶ 2.1.03 . G. Cannot use rollover to “fix” the estate plan. The nonspouse beneficiary rollover can NOT be used to “create” a Designated Beneficiary when there is no Designated Beneficiary. For example, suppose widowed Father dies without having named any beneficiary for his 401(k) plan. Under the plan terms, the benefits are payable to Father’s estate (see ¶ 1.7.02 ). Father’s three children are the sole beneficiaries of his estate. An estate cannot be a Designated Beneficiary. ¶ 1.7.04 . Even if § 402(c)(11) permitted the estate to transfer the inherited 401(k) plan to an “inherited” IRA (which it does not do; see “C”), that would not permit the family to change the beneficiary of the plan from “the estate” to “the children.” Similarly, if the benefits are payable outright to a minor beneficiary, the beneficiary’s guardian cannot use § 402(c)(11) to change the beneficiary to a trust for the minor; all the guardian can do is direct the benefits to be sent via direct rollover to an inherited IRA that is payable outright to the minor. (Once that direct rollover is completed, see ¶ 4.6.03 (C) regarding the possibility of transferring the inherited IRA to a trust on the minor’s behalf.) H. Limits on the plan’s obligations. See ¶ 2.6.01 (C) regarding choices the plan must offer to a recipient of retirement benefits regarding where the plan will “send” a distribution. It is not clear, when there are multiple Designated Beneficiaries, whether the plan is required to give each beneficiary the entire menu of choices or whether the plan can require all beneficiaries to agree on one of the distribution methods on the permitted “menu.” If the plan is restrictive on this, and there are multiple Designated Beneficiaries who want different outcomes (for example, some want immediate outright distribution of their shares, others want to establish separate inherited IRAs for their shares), the beneficiaries would have to proceed by having the plan transfer the entire benefit to a single inherited IRA payable to all of them collectively, then divide up the inherited IRA using IRA-to-IRA transfers (see ¶ 4.2.02 ), thus allowing each beneficiary to preserve or cash out his newly-created separate “inherited IRA.” I. Plan must distribute RMD before the transfer. Since a required minimum distribution RMD) is not an eligible rollover distribution (see ¶ 2.6.03 ), the plan must distribute the RMD for the year in which the rollover occurs before the plan transfers the (rest of the) inherited plan account to the “inherited” IRA.