403b in beneficial form
Client has the 403b of his deceased wife that was registered in beneficial form in 2004, the year following her death. He has never taken a distribution. What advice should I offer the client?
A. Forget about it and start distributions?
B. Start Distributions and keep them up?
C. Calculate the missed distributions and distribute them. Seek IRS forgiveness for missed distributions
D. Other suggestions?
Help is appreciated!
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Permalink Submitted by Alan Spross on Thu, 2009-10-08 20:43
What was each spouse’s age as of 12/31/2003, the year of employee’s death?
Permalink Submitted by Roger Kruse on Tue, 2009-10-13 20:05
The client was 55 at the time of her death
Permalink Submitted by Alan Spross on Tue, 2009-10-13 20:39
Also need the age of deceased wife in 2003. Thanks.
Permalink Submitted by Roger Kruse on Tue, 2009-10-13 21:12
The surviving client was 57 at the time of death in 2003. The wife died at age 55 in 2003.
Permalink Submitted by Alan Spross on Tue, 2009-10-13 21:52
OK. Since he was evidently the sole plan beneficiary, and his wife passed at 55, there is no need for him to take an RMD until the year his wife would have reached 70.5. That’s still another 9 years away. There has been no RMD violation of any type. Further, as long as he rolls it over prior to the year RMDs must begin, his successor beneficiary would get the full lifetime stretch, because he would be treated as the account owner for RMD purposes as applied to his beneficiary.
Since he is now over 59.5, he can roll this over to his own IRA, and that might be advisable even though his own RMDs would start two years earlier than if he kept this in beneficiary form. He could also roll this over to an inherited IRA if he wanted to delay RMDs for the extra two years, but wanted IRA options for the investments.
The main point is that there is no RMD infraction to date. He should be sure that a successor beneficiary is named on the account no matter what he decides to do with it.
Permalink Submitted by Roger Kruse on Wed, 2009-10-14 14:35
Thank you for your assistance. I have since learned from the IRS that the plan document could require distributions. According to the administrator, beneficiaries are required to fully distribute the funds five years after the death of the employee which has since passed. The administrator was surprised he did not take the balance out and recommended that the beneficiary distribute the full amount ASAP. He was not notified of a requirement to distribute prior to our call to the administrator. Are there any consequences to the client for not taking the required distribution before the end of the fifth year and for taking it this year?
Permalink Submitted by Alan Spross on Wed, 2009-10-14 23:06
Then this plan must never have adopted the IRS 2002 RMD provisions, which are NOT mandatory for 403b plans. Therefore, the plan can legally specify the 5 year rule for deaths before the RBD. But the plan should also be notifying the beneficiary of their options and/or eventually distributing the full amount if there was no action by the end of the 5 year period (12/31/2008).
Moreover, there are now two problems:
1) The 50% excess accumulation penalty for failing to distribute the entire balance by the deadline. A waiver of this penalty can probably be secured from the IRS by using the procedure on p 6 of the Inst for Form 5329. Their “reasonable cause” for failure to distribute would be that the plan failed to notify them of the requirement. The chances of waiver are excellent.
2) But the larger problem is getting the IRS to allow a rollover of the balance after the balance became an RMD not eligible for rollover. There is probably some history of letter rulings for this problem, but I do not have a citation for you. Depending on the amount of the balance, the client may want to pursue a PLR allowing him to rollover the plan to his own IRA. Receiving no notification from the plan would be the justification for the request. I am not aware of any liability on the part of the plan for damages resulting in the failure to notify the beneficiary of his options.