IRS steps back on non-spouse beneficiary concession!

Posted by Michael Kitces on Friday, January 4th, 10:23 pm, 2008 in Taxes

In its list of required plan amendments for 2008, the IRS has failed to include any mandatory requirement that plans provide for non-spouse beneficiary rollovers to IRAs. This implies a change in position from their Interim and Discretionary Amendments release issued in the fall of 2007, which suggested that the IRS intended to acquiesce in advance of a Congressional Technical Corrections bill that non-spouse beneficiary rollovers from employer retirement plans to inherited IRAs would be mandatory, as covered earlier in this blog.

What happened during the past several months? Well, the apparent complication is the fact that the actual Tax Technical Corrections Act of 2007, H.R. 4839, signed on December 29, 2007, did not actually include the provision requiring non-spouse beneficiary rollovers to be mandatory. Instead, this provision ended out on the cutting room floor sometime between the draft phase earlier in 2007, and the final bill submitted to the president for signature. Consequently, the IRS appears to have reverted to their original viewpoint in , that non-spouse beneficiary rollovers are an optional amendment for employer retirement plans, not a mandatory one.

So what should you do? For now, we appear to be back in the same boat we were at the beginning of 2007 when was first released - that you need to review an employer retirement plan to determine whether it will allow non-spouse beneficiaries to complete a rollover to an inherited IRA after the death of the participant. If the plan does NOT allow it, you have two choices: 1) rollover the plan to an IRA administrator that will allow the post-death stretch; or 2) keep the plan where it is. The latter option may still be desirable for many, either because they expect the plan will change before it's an issue (i.e., before the plan participant dies), and may be necessary for others who simply aren't yet allowed to rollover the plan (i.e., because they are still employed
and the plan doesn't allow in-service non-hardship distributions).

Nonetheless, for some group of employees who cannot do a rollover but wish to, this represents a rather undesirable planning setback. But the Service appears adamant in its belief that this provision should not be mandatory, and are taking the fact that Congress didn't not make it explicitly mandatory in the original Pension Protection Act or the 2007 Tax Technical Corrections legislation as support that their position is proper until proven otherwise.

The Service's official 2007 Cumulative List of Changes in Plan Qualification Requirements can be viewed here.

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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