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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.


IRS clarifies recent guidance on nonspouse beneficiary rollovers

In response to criticism that recently-issued Notice 2007-7 (CCH Pension Plan Guide 17,135R) regarding nonspouse beneficiary rollovers was unclear, the IRS has issued further clarification explaining how the rules in the notice apply in determining minimum distributions by a nonspouse beneficiary.

The Pension Protection Act of 2006 (PPA; P.L. 109-280) amended the rules for nonspouse beneficiary rollovers of retirement plan benefits. A designated nonspouse beneficiary may be able to roll over the inherited funds into an IRA. The rollover must be a direct trustee-to-trustee transfer and the retirement plan must provide for this type of rollover. The IRS also explained that the distribution must otherwise be eligible for rollover.

Clarification requested

Soon after Notice 2007-7 was issued, the IRS reported hearing concerns about the interaction of Question 19 and Question 17; specifically, whether the general rule in Question 19 overrode the special rule in Question 17.

Question 19 asks: After a direct rollover by a nonspouse designated beneficiary, how is the required minimum distribution determined with respect to the IRA to which the rollover contribution is made? The IRS explained that Question 19 provides that the rules for determining required minimum distributions under a plan with respect to a nonspouse designated beneficiary also apply to an IRA. If a participant dies before his or her required beginning date, the required minimum distributions for purposes of determining the amount eligible for rollover with respect to a nonspouse designated beneficiary are determined under the five-year rule in Code Sec. 401(a)(9)(B)(ii) or the life expectancy rule in Code Sec. 401(a)(9)(B)(iii).

Question 17, the IRS explained, describes a special rule that is an exception to the general rule in Question 19. Despite a plan provision for the five-year rule, the nonspouse designated beneficiary is permitted to treat the plan as using the life expectancy rule both for determining the rollover amount and the required minimum distributions under the IRA, the IRS explained. However, this applies only if the rollover is made before the end of the year following the year of the participant's death.

Example provided

The IRS included an example in its clarification: A participant in a 401(k) plan dies in 2007 before her required beginning date; under the plan, the five-year rule applies for determining required minimum distributions; the participant's nonspouse designated beneficiary is permitted to roll over the deceased participant's entire account balance into an IRA in 2007 and take required minimum distributions from the IRA under the life expectancy rule. If the account balance is rolled over in 2008, the amount eligible for rollover must be reduced by the amount of the reported required minimum distribution for 2008, determined using the life expectancy rule. After 2008, the IRS explained, the nonspouse designated beneficiary may still roll over the funds from the 401(k) plan but would have to take required minimum distributions from the IRA under the five-year rule. No amount can be rolled over after 2011, the IRS observed.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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