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CCH® PENSION AND BENEFITS — 6/7/07

Rollover to IRA of nonspousal beneficiary allowed where plan promised to amend to comply with PPA

A direct trustee-to-trustee transfer of a deceased participant’s plan assets to the IRA of a nonspousal beneficiary subsequent to a plan amendment allowing such direct transfers to non-spouses may be accomplished as a tax-free rollover, the IRS has privately ruled.

The participant had originally designated the non-spouse as the beneficiary of his retirement plan. Because the plan was being terminated, he set up an IRA, with the non-spouse as beneficiary, intending to have the retirement plan funds transferred to it. He died in 2005 before the transfer was made, and the plan was terminated before the funds were transferred. The retirement plan has stated that it intends to amend the plan to comply with section 829 of the Pension Protection Act of 2006 (PPA; P.L. 109-280), which allows the plan to provide that benefits may be rolled over directly from a deceased participant’s account to the IRA of a non-spouse beneficiary. The IRA would be retitled in the non-spouse’s name, as beneficiary of the deceased taxpayer, and distributions would be made based on her remaining life expectancy.

Prior to the enactment of the PPA, tax-free roll-overs from a retirement plan to an IRA could only be made to the IRA of a participant’s surviving spouse. In addition, an IRA that is inherited from a deceased spouse is treated, for tax purposes, as the IRA of the surviving spouse, but no such provision applies to a non-spouse that inherits an IRA. For non-spouses, such an IRA is an “inherited IRA,” so that the non-spouse beneficiary cannot make contributions to the IRA or rollover amounts from the IRA. Distributions from an inherited IRA are subject to the rules that apply to distributions to any non-spouse beneficiaries.

The IRS has stated that, because the plan is being amended to comply with Section 829 of the PPA, the deceased participant’s employer may directly transfer the balance of his retirement plan, minus required distributions for 2006 and 2007, to the non-spouse’s IRA, but the IRA will be treated as an inherited IRA.

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

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