Category Archives: Nonspouse Beneficiary

Rollovers to Nonspouse Beneficiaries

Rollovers to NonSpouse Beneficiaries Are Back With Passage of H.R. 3361 But For 2009 Instead of 2008

A little over a year ago, I started this blog to keep track of my notes about the Pension Protection Act. One of my first posts was about rollovers to nonspouse beneficiaries. One year and 126,210 visitors later, rollovers to nonspouse beneficiaries remain a hot topic.

Last week, the House of Representatives finally passed H.R. 3361, the Pension Protection Technical Corrections Act of 2008 (PPTCA). Since the Senate passed their version of the PPTCA, S. 1974, late last year, the Senate should make quick work of reconciling the differences between their bill and H.R. 3361, and have a version of PPTCA ready for the President to sign as early as mid-April.

For rollovers to nonspouse beneficiaries, the passage of H.R. 3361 has significant impact because of the IRS’ position on rollovers to nonspouse beneficiaries. In the 2007 List of Interim and Discretionary Amendments, the IRS included this statement:

    § 402(c)(11) [Discretionary]: PPA ’06 § 829(a)(1) added § 402(c)(11) to allow nonspouse beneficiaries to roll over distributions from a qualified plan to an individual retirement plan. Nonspouse beneficiary rollovers are an optional plan provision for 2007. See, Notice 2007-7. Pursuant to an impending technical correction, nonspouse beneficiary rollovers will be required for plan years beginning on or after January 1, 2008. See, section 9(e) of S. 1974, the Pension Protection Technical Corrections Act of 2007, as introduced in the Senate on August 2, 2007 and section 9(e) of H.R. 3361, the Pension Protection Technical Corrections Act of 2007, as introduced in the House of Representatives on August 3, 2007.

The version of PPTCA that this paragraph of the 2007 List of Interim and Discretionary Amendments referenced was the Introduced version in the House. Section 9(e) of that version of H.R. 3361 stated:

    (e) Amendments Related to Section 829-
      (1) Section 402(c)(11) of the 1986 Code is amended–
        (A) by inserting `described in paragraph (8)(B)(iii)’ after `eligible retirement plan’ in subparagraph (A), and
        (B) by striking `trust’ before `designated beneficiary’ in subparagraph (B).
      (2)(A) Section 401(a)(31)(D) of the 1986 Code is amended by adding at the end the following new sentence: `Such term shall include any distribution which is treated as an eligible rollover distribution by reason of section 402(c)(11), 403(a)(4)(B), 403(b)(8)(B), or 457(e)(16)(B).’
      (B) The amendment made by subparagraph (A) shall apply with respect to plan years beginning after December 31, 2007.

In the Engrossed version of PPTCA, which passed the House last week, the applicability date changed from December 31, 2007, to December 31, 2008. Section 9(f) of H.R. 3361 now states:

    (f) AMENDMENTS RELATED TO SECTION 829.—
      (1) Section 402(c)(11) of the 1986 Code is amended—

        (A) by inserting ‘‘described in paragraph (8)(B)(iii)’’ after ‘‘eligible retirement plan’’ in subparagraph (A), and

        (B) by striking ‘‘trust’’ before ‘‘designated beneficiary’’ in subparagraph (B).

      (2)(A) Section 402(f)(2)(A) of the 1986 Code is amended by adding at the end the following new sentence: ‘‘Such term shall include any distribution to a designated beneficiary which would be treated as an eligible rollover distribution by reason of subsection (c)(11), or section 403(a)(4)(B), 403(b)(8)(B), or 457(e)(16)(B), if the requirements of subsection (c)(11) were satisfied.’’

        (B) Clause (i) of section 402(c)(11)(A) of the 1986 Code is amended by striking ‘‘for purposes of this subsection’’.

        (C) The amendments made by this paragraph shall apply with respect to plan years beginning after December 31, 2008.

Reconciling Section 9(f) of H.R. 3361 with Section 9(e) of the Engrossed version of S. 1974 should go smoothly, as Section 9(e) of S. 1974 states:

    (e) AMENDMENTS RELATED TO SECTION 829.—
      (1) Section 402(c)(11) of the 1986 Code is amended—
        (A) by inserting ‘‘described in paragraph (8)(B)(iii)’’ after ‘‘eligible retirement plan’’ in subparagraph (A), and
        (B) by striking ‘‘trust’’ before ‘‘designated beneficiary’’ in subparagraph (B).
      (2)(A) Section 402(f)(2)(A) of the 1986 Code is amended by adding at the end the following new sentence: ‘‘Such term shall include any distribution which is treated as an eligible rollover distribution by reason of section 403(a)(4)(B), 403(b)(8)(B), or 457(e)(16)(B).’’
        (B) Clause (i) of section 402(c)(11) of the 1986 Code is amended by striking ‘‘for purposes of this subsection’’.
        (C) The amendments made by this paragraph shall apply with respect to plan years beginning after December 31, 2008.

[tags]Pension Protection Act, PPA, IRS, HR 3361, S 1974, Pension Protection Technical Corrections Act, rollovers, nonspouse beneficiaries, ERISA[/tags]

Revisiting Rollovers to NonSpouse Beneficiaries Before 2008

When the House of Representatives failed to act on the Pension Protection Technical Corrections Act of 2007 last week, it created a terrific end-of-the-year PPA question.

The question: Are plans required to provide rollovers to nonspouse beneficiaries?

The answer: Yes No Yes

The reason behind changing the answer from “Yes” to “No” to “Yes” is the revised interpretation the IRS, with a little help from Congress, has provided regarding the plan document impact of new Internal Revenue Code section 402(c)(11).

Effective December 31, 2006, Section 829 of the Pension Protection Act added new Internal Revenue Code section 402(c)(11), which states:

    ‘‘(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT PLAN OF NONSPOUSE BENEFICIARY.—
      ‘‘(A) IN GENERAL.—If, with respect to any portion of a distribution from an eligible retirement plan of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee—
        ‘‘(i) the transfer shall be treated as an eligible rollover distribution for purposes of this subsection,
        ‘‘(ii) the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and
        ‘‘(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan.
      ‘‘(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES.—For purposes of this paragraph, to the extent provided in rules prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a trust designated beneficiary.’’.

The IRS provided guidance in Notice 2007-7, including how to accomplish a rollover to a nonspouse beneficiary. Q&A 14 of Notice 2007-7 stated that a plan was not required to offer a direct rollover of a distribution to a nonspouse beneficiary. Thus, Q&A 14 of Notice 2007-7 provides the “No” answer to the question on whether a plan is required to provide rollovers to nonspouse beneficiaries.

On February 13, 2007, the IRS released a special edition of Employee Plan News devoted to clarifying the provisions of Notice 2007-7 relating to rollovers to nonspouse beneficiaries. It states that:

There has also been a question whether a plan is required to offer a direct rollover of a distribution to a nonspouse designated beneficiary. Pursuant to section 402(c)(11) of the Code and Notice 207-7 Q&A-14, a plan may, but is not required to, offer a direct rollover of a distribution to a nonspouse designated beneficiary.

Congress answered this interpretation of IRC section 402(c)(11) in August of 2007 with the Pension Protection Technical Corrections Act of 2007. Specifically, section 9(e) of both S. 1974 and H.R. 3361, which prompted the IRS to reverse their “No” position back to “Yes” on rollovers to nonspouse beneficiaries.

The IRS then released the 2007 List of Interim and Discretionary Amendments, which included this statement:

§ 402(c)(11) [Discretionary]: PPA ’06 § 829(a)(1) added § 402(c)(11) to allow nonspouse beneficiaries to roll over distributions from a qualified plan to an individual retirement plan. Nonspouse beneficiary rollovers are an optional plan provision for 2007. See, Notice 2007-7. Pursuant to an impending technical correction, nonspouse beneficiary rollovers will be required for plan years beginning on or after January 1, 2008. See, section 9(e) of S. 1974, the Pension Protection Technical Corrections Act of 2007, as introduced in the Senate on August 2, 2007 and section 9(e) of H.R. 3361, the Pension Protection Technical Corrections Act of 2007, as introduced in the House of Representatives on August 3, 2007.

Even though the Pension Protection Technical Corrections Act of 2007 did not become law before the end of 2007, the IRS has not announced a new interpretation of the plan document requirement for rollovers to nonspouse beneficiaries. It remains as last stated by the IRS in the 2007 List of Interim and Discretionary Amendments – rollovers to nonspouse beneficiaries are required for plan years beginning on or after January 1, 2008.

Section 1107 of PPA permits plans to adopt amendments for PPA as late as the last day of the first plan year which begins on or after January 1, 2009, as long as the plan timely operates according to PPA. For rollovers to nonspouse beneficiaries, until the IRS or Congress states differently, plans are required to permit rollovers to nonspouse beneficiaries for plan years beginning on or after January 1, 2008, and can adopt an amendment to include this provision as part of the plan document no later than the last day of the first plan year which begins on or after January 1, 2009.

[tags]Pension Protection Act, ppa, rollovers, nonspouse beneficiary, non-spouse beneficiaries, 402(c)(11), ERISA[/tags]

Amending for the Pension Protection Act

The Pension Protection Act contains a variety of deadlines for applying different provisions. For example, for plan years beginning after December 31, 2006, the faster vesting schedule in Section 904 for employer non-elective contributions must be used.

Even though the plan will apply the different provisions of the Pension Protection Act according to the deadlines contained in the Act, the deadline for amending the plan to incude these provisions is stated in Section 1107 as the last day of the plan year beginning on or after January 1, 2009. For calendar year plans, this means that they will need to amend for the Pension Protection Act no later than December 31, 2009, and the amendment will apply retroactively back to the date the PPA required the provision to be applied. Continuing with the example, for the faster vesting schedule applied to employer non-elective contributions, the amendment must be adopted no later than the last day of the plan year beginning on or after January 1, 2009, but will be effective for plan years beginning after December 31, 2006.

This deadline applies to both the mandatory and optional provisions made by PPA.

Because the plan can wait to amend until 2009 does not mean that the plan should wait until 2009 to amend. For example, Section 829 of PPA permits the plan to make rollovers to non-spouse beneficiaries. The IRS says this provision is optional, and applies to distributions made after December 31, 2006. For small plans who only make one or two distributions a year, the plan sponsor may want to consider amending before the deadline in 2009. Especially if the plan sponsor changes TPA firms every 2 to 3 years.

Assume the plan sponsor decides to apply Section 829 of PPA and permits a rollover to a nonspouse beneficiary in 2007. The plan sponsor decides not to amend in 2007 to memorialize that they have decided to apply this optional provision of PPA, but instead decides to wait until the deadline to amend in 2009. The plan sponsor becomes busy with their business, and doesn’t think much about how their plan is administered. Eighteen months go by, and the plan sponsor decides to change TPA firms. In 2009, the new TPA firm prepares the PPA amendment for the plan, and does not include the provision permitting rollovers to nonspouse beneficiaries in the amendment. The new TPA firm is unaware that, in 2007, the plan sponsor applied this provision to the plan and made a rollover distribution to a nonspouse beneficiary.

The plan sponsor has now failed to operate the plan according to the terms of the plan document. This type of failure is completely avoidable, unintentional, and is the result of poor communication. In 2009, the plan sponsor will possibly remember that they had an employee terminate in 2007. The odds are pretty good that the plan sponsor will not remember the type of distribution made to the participant when the participant cashed out of the plan. The new TPA firm is probably aware that the plan made a distribution in 2007, but the plan sponsor and the former TPA firm probably did not provide them sufficient details about the distribution for the new TPA firm to determine that it was a rollover to a nonspouse beneficiary.

If the plan sponsor amended the plan in 2007, before permitting the rollover to a nonspouse beneficiary, the plan documents would have been clear to the new TPA firm. They would have known in 2009 when they are creating the PPA amendment for the plan that, in 2007, the plan sponsor decided to apply this optional provision of PPA.

[tags]rollover, nonspouse beneficiary, distribution, amendment, deadline, participant, plan sponsor, plan document, pension, retirement, ERISA[/tags]

WSJ Article on Nonspouse Beneficiary

The Wall Street Journal published a short article on the nonspouse beneficiary provisions in Section 829 of the Pension Protection Act. I missed the article on February 27th, but I was lucky that a friend of mine emailed me a copy. In the Personal Finance column, the article provides a short summary of this part of PPA – it is not an in-depth discussion. It does contain a reminder that the plan language must be amended for this provision to take effect. The IRS in Notice 2007-7 stated that this not mandatory, and then clarified two of the Q&As in a press release on February 13th.[tags]Pension Protection Act, nonspouse, rollover, beneficiary, Notice 2007-7, pension, retirement, tax, PPA[/tags]