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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
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CCH® PENSION AND BENEFITS — 3/17/08

IRS issues guidance on rollovers to Roth IRAs, optional survivor annuity rules

The IRS has issued guidance, in question-and-answer format, on the provisions of the Pension Protection Act of 2006 (PPA, P.L. 109-280) which relate to distributions after December 31, 2007. The PPA provisions discussed in the guidance include requirements relating to rollovers from qualified retirement plans to Roth IRAs and the qualified optional survivor annuity rules.

Rollovers from retirement plans to Roth IRAs

According to the IRS, post-PPA, eligible rollover distributions from qualified plans can be rolled over to Roth IRAs via a direct plan-to-Roth IRA rollover, or via a distribution from the plan followed by a rollover to the Roth IRA within 60 days. The new definition of qualified rollover contribution in Code Sec. 408A(e) includes distributions from tax-sheltered annuity plans ( Code Sec. 403(b) plans) and governmental plans ( Code Sec. 457(b) plans).

The IRS notes that, for taxable years beginning before January 1, 2010, an individual cannot make a qualified rollover contribution from an eligible retirement plan other than a Roth IRA if, for the year the eligible rollover distribution is made, he has a modified adjusted gross income (MAGI) above $100,000, or is married and files a separate return. If a taxable amount rolled into a Roth IRA from an eligible retirement plan other than a Roth IRA is distributed within 5 years, the additional tax under Code Sec. 72(t) applies as if the distribution were includible in gross income.

Plan administrators are required to permit the distributee of an eligible rollover distribution to elect a direct rollover to a Roth IRA, the IRS states, but they are not responsible for assuring that the distributee is eligible to make such a rollover. Withholding is required for rollover distributions paid to the employee, but is not required for direct trustee-to-trustee rollovers, including rollovers to Roth IRAs, even if the distribution is includible in gross income.

For beneficiaries, the MAGI and filing status of the beneficiary are used to determine whether a beneficiary is eligible to make a qualified rollover contribution to a Roth IRA. A surviving spouse who makes a rollover to a Roth IRA may elect either to treat the Roth IRA as her own or to establish the Roth IRA in the name of the decedent with the surviving spouse as the beneficiary.

Plans may, but are not required to, permit roll-overs by nonspouse beneficiaries, which must be made by direct trustee-to-trustee transfer. As per Notice 2007-7 (see CCH Pension Plan Guide 17,135R ) a nonspouse beneficiary cannot elect to treat the Roth IRA as his or her own. As with other types of direct trustee-to-trustee transfers, distributions directly rolled over to Roth IRAs by nonspouse beneficiaries are not subject to withholding.

Qualified optional survivor annuity requirements

Plans that are subject to Code Sec. 401(a)(11) must provide that accrued benefits are payable, in the case of a vested participant who does not die before the annuity starting date, in the form of a qualified joint and survivor annuity (QJSA), which can be waived by the participant with spousal consent. A QJSA is defined, for married participants, as an annuity for the life of a participant with a survivor annuity for the life of the participant’s spouse which is not less than 50% and not more than 100% of the amount of the annuity payable during the joint lives of the participant and the spouse.

Under the PPA, the IRS states, such plans are required to offer those who waive QJSAs the alternative of a qualified optional survivor annuity (QOSA). A QOSA is defined as an annuity for the life of a participant with a survivor annuity for the life of the participant’s spouse that is equal to a specified applicable percentage of the amount of the annuity that is payable during the joint lives of the participant and the spouse, and that is the actuarial equivalent of a single life annuity for the life of the participant.

The level of a spouse survivor annuity that must be provided under a QOSA depends upon the level of the spouse survivor annuity provided under a plan’s QJSA. The IRS clarifies that, as long as a plan provides an optional joint and spouse survivor annuity that (a) is at least actuarially equivalent to the plan’s single life annuity form of benefit payable at the same time as the optional joint and spouse survivor annuity, and (b) provides a spouse survivor annuity percentage that is equal to the spouse survivor annuity percentage required to be provided under a QOSA, the plan need not be amended so that the optional joint and spouse survivor annuity is designated as a QOSA, and its administrative procedures need not be revised to designate the optional form of benefit as a QOSA.

The IRS further states that, while plans are required to provide a QOSA which is at least actuarially equivalent to the plan’s form of benefit that is a single life annuity for the life of the participant payable at the same time as the QOSA, the QOSA need not be actuarially equivalent to the plan’s QJSA.

The IRS notes that, while spousal consent is required for a participant to waive a plan’s QJSA form of distribution and elect an alternative distribution form, a participant may elect out of the QJSA, in favor of an actuarially equivalent alternative joint and survivor annuity that satisfies the conditions to be a QJSA, without spousal consent. If the QOSA is not actuarially equivalent to the QJSA, spousal consent is required for the participant to waive the QJSA and elect the QOSA.