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CCH® PENSION — 01/05/10

IRS explains requirements for nonspousal distributions

In the Fall 2009 issue of Retirement News for Employers, the IRS explained the requirements for distributing a deceased participant's account balance to someone other than his or her surviving spouse.

Notice requirements

For plan years beginning after December 31, 2009, distributions to a nonspouse beneficiary are subject to many of the same rules that apply to other eligible rollover distributions. Plans are required to offer a nonspouse beneficiary the option to do a direct rollover (a trustee-to-trustee transfer) of an eligible rollover distribution to an inherited IRA. Plan administrators are required to give all nonspouse beneficiaries a written notice explaining the direct rollover rules and the mandatory 20% income tax withholding rules for distributions not directly rolled over. This explanation should be provided to the nonspouse beneficiary no earlier than 180 days and no later than 30 days before making the distribution. Notice 2009-68 contains two sample notices that plans may give to nonspouse beneficiaries.

Rollover must be to inherited IRA

The IRS makes clear that a nonspouse beneficiary can only roll over the distribution of an inherited amount into an inherited IRA. Under an inherited IRA, the designated nonspouse beneficiary:

• cannot make any contributions to the inherited IRA;
• cannot roll over any amounts into or out of the inherited IRA, but may do a trustee-to-trustee transfer into another inherited IRA in the original deceased account owner's name with the same beneficiary;
• has the same basis in the inherited traditional IRA assets as the original deceased account owner;
• may not combine the basis in this inherited IRA with the basis in his or her own traditional IRAs, or any of his or her other inherited IRAs;
• will not owe taxes on the inherited traditional IRA assets until he or she receives distributions from the IRA; and
• must begin receiving distributions under the beneficiary distribution rules.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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