Plan does not allow rollover – IRS Yes?
Client is non spouse beneficiary of deceased’s 401k plan, and would like to rollover to her IRA. Plan says no, and plan document does not allow it. I believe there is documentation that the IRS’ intent was to allow rollovers even if a plan does not. Is there a way to legally do the rollover, at least with the non withheld funds?
Permalink Submitted by Jose Morales on Wed, 2012-02-15 22:23
*read through too fast and provided wrong information*
Permalink Submitted by Mark T Ealy, CFP, CPA on Wed, 2012-02-15 22:25
It is a non spouse, if that matters. Is there any IRS or other documentation that we can place reliance on, for your answer?
Permalink Submitted by Jose Morales on Wed, 2012-02-15 22:26
I’m sorry, I read through that too fast and overlooked that it was a non-spouse. Please disregard what I posted!
Permalink Submitted by Alan Spross on Wed, 2012-02-15 23:18
The plan MUST allow it. Under the tax bill signed in 12/2008 (WRERA), the direct rollover that was formerly optional under the PPA became mandatory as of 1/1/2010. It is subject to the same provisions as other direct rollovers mandated by Sec 401(a)(31). This is copy from the Technical Analysis of WRERA of this provision:
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Allow rollovers by nonspouse beneficiaries of certain retirement plan distributions (Act sec.
829 and Code sec. 402(c)(11), (f)(2)(A))
The Act permits rollovers of benefits of nonspouse beneficiaries from qualified plans and
similar arrangements. The provision clarifies that the current law treatment with respect to a
trustee-to-trustee transfer from an inherited IRA to another inherited IRA continues to apply.
Under the provision, effective for plan years beginning after December 31, 2009, rollovers by
nonspouse beneficiaries are generally subject to the same rules as other eligible rollovers.
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Permalink Submitted by Mark T Ealy, CFP, CPA on Thu, 2012-02-16 15:55
Thank you very much! If the plan will not comply what options do we take: legal or should we/can we do an indirect rollover?
Permalink Submitted by Alan Spross on Thu, 2012-02-16 16:53
The problem is that a non spouse beneficiary cannot do an indirect rollover. Any distribution to the beneficiary would be irrevocably taxable.
I think if you present the citation to the plan, they can check with their legal people and they will agree that they are in violation of current law effective 2 years ago.
Upon re reading your original post, it refers to “her IRA”. Perhaps this is the actual issue with the plan. The transfer the plan must do is to an INHERITED IRA for her, not to her own IRA. There is no mandatory withholding on such a direct rollover.
Permalink Submitted by Steven Finkelstein on Thu, 2012-02-16 18:43
The rules are pretty straight forward on this issue. The plan custodian must allow and should facilitate a rollover of the 401k to an Inherited IRA FBO non-spouse beneficiary. Once set up as an Inherited IRA, the beneficiary of that IRA can move it where he/she wants to maintaining same registration, but cannot consolidate it or merge it into any other Inherited IRA’s or IRA’s or retirement plans of any kind. That is, it stands alone always.
Steve F
Permalink Submitted by Mobey on Thu, 2012-02-16 19:03
Can’t roll it to “her IRA” since she’s not the spouse.
They must allow a rollover to an inherited IRA for her benefit.
[quote=”[email protected]“]Client is non spouse beneficiary of deceased’s 401k plan, and would like to rollover to her IRA. Plan says no, and plan document does not allow it. I believe there is documentation that the IRS’ intent was to allow rollovers even if a plan does not. Is there a way to legally do the rollover, at least with the non withheld funds?[/quote]