family members discover they are beneficiaries of qual plan late

Submitted by Donald Reutemann on Mon, 2014-12-08 22:08

Hello

A group of 3 children found out last month that their father had listed them as beneficiaries (listed as “all my children equally”) on his NYS deferred comp 457 plan. He died on 12/11/2010 without having taken his first RMD that was due (b. 11/19/1939). His wife was also named as 1/4 beneficiary.

Separately, he had an IRA with the same beneficiary designation that was properly handled. All children opened their own IRA-BDAs and have been taking the RMDs as needed.

The question: What should these children do now about this new found inheritance? Are they too late to roll these funds into their existing IRA-BDAs (and pay whatever penalties are owed for missed RMDs)? Are they subject to the 5 year rule? Please help!

Thanks



Submitted by Alan - IRA critic on Mon, 2014-12-08 23:49

He passed after his RBD, so the 5 year rule does not apply. Since separate inherited IRAs were not established by the deadline, RMDs using life expectancies (if life expectancy is the default RMD provision under the plan) would be based on the oldest beneficiary, most likely his wife. Inherited IRAs could still be established now by each beneficiary, but the delinquent RMDs for 2010 (decedents) and 2011 – 2014 (oldest beneficiary) need to be distributed ASAP. Form 5329 can be filed for each year requesting that the penalty be waived for reasonable cause, that being not knowing about the account. Again, the 457 provisions might contain more restrictive requirements, possibly even requiring a lump sum distribution. The wife can still roll her portion over to her own IRA except for the late RMDs.



Submitted by David Mertz on Tue, 2014-12-09 00:05

Wouldn’t the RBD have been April 1, 2011, meaning that he passed before his RBD, bringing the 5-year rule into play?  That would allow the plan to be distributed by December 31, 2015 and still avoid excess-accumulation penalties.



Submitted by Alan - IRA critic on Tue, 2014-12-09 00:58

  • Yes, you are right. Bad math. If the 5 year rule applies either per plan provisions or by election, the penalty could be unconditionally avoided by a full distribution by 12/2015. However, it may be desirable for one or more to restore the stretch if life expectancy is the default rule, and delayed knowledge of the plan would almost surely result in the penalty waiver for the beneficiaries. (Plan may have their own RMD penalty issues if they did not seek out the beneficiaries for RMDs). Note that since he passed prior to RBD, there is no RMD required for 2010 by anyone. If the 5 year rule happens to be the plan default rule instead of LE, it is too late for any of the beneficiaries to restore the life expectancy stretch per Notice 2007-7.
  • If there is any doubt about restoring LE RMDs for the 457 proceeds, any inherited IRA should be kept separate and not combined with the IRA separate accounts where LE applies. Further, if LE can be used for the beneficiaries, it would be that of the oldest beneficiary due to missing the separate accounts deadline, thus another reason any inherited IRAs could not be combined with the inherited IRAs from the decedent’s IRA.
  • The possibilities are complex. Start with determining what the default RMD provision in the 457 plan is with respect to RMDs when death is prior to RBD. If the amount is modest, due to the plan amount or the 1/3 split, it is probably not worth considering PLRs designed to restore life expectancy due to the late notice. Different goals for each beneficiary increases complexity.


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