Spousal 401(k) distribution at death

Submitted by Dennis Love on Thu, 2019-12-19 18:18

When employee died in 2006, his 401(k) account changed to 401(k) account in his spouse’s name. She just passed away and the 401(k) administrator says the company is telling them that her beneficiaries cannot roll their share to inherited IRAs, and must take an immediate payout, because they are “secondary beneficiaries”. Is this correct? Previously, the primary beneficiary had been told he would be able to do a trustee to trustee rollover to an inherited IRA. The tax consequences of an immediate payout will be very significant.



Submitted by Alan - IRA critic on Fri, 2019-12-20 02:50

  • Yes, the plan is correct, but they might have warned the surviving spouse about this beforehand to prevent this problem. Per Notice 2007-7, a qualified plan can only offer (must offer) a direct rollover to an inherited IRA for a designated beneficiary or a qualified trust, but cannot do so for a successor beneficiary or an estate. The surviving spouse would have been able to execute the direct rollover to an inherited IRA, the elect to assume ownership of that inherited IRA while naming his own designated beneficiaries for that IRA. They would then have been able to stretch the inherited IRA over their respective life expectancies. Perhaps the multiple beneficiaries on this plan reduce the amount to any individual such that they will not be driven into a much higher bracket. It probably will not work, but they might ask the plan to distribute half the death benefit right away in 2019 and the other half in January. 
  • This pitfall is not often publicized and plan beneficiaries are probably not warned by many plans, but they should be. 

Submitted by Dennis Love on Fri, 2019-12-20 19:54

Thank you for your response and the Notice reference. I cannot find specifically in the Notice the paragraph where this is covered. Can you be more specific? Also, I wonder if I have legal recourse because the plan administrator told me three times that beneficiaries would be able to roll their distributins to inherited IRAs. I may consult an attorney about that, as the tax consequences are very significant.

Submitted by Alan - IRA critic on Fri, 2019-12-20 21:34

  • The notice I referenced above was entered in the tax code as Sec 402(c)(11)(A) which is copied to the bullet point below. Notice that the distribution must be made to a designated beneficiary, which is defined as the beneficiary named by the participant on the plan. The designated beneficiary inherits and names a successor beneficiary, but the successor beneficiary cannot do a direct rollover. As for litigation, you would probably need clear documentation to show that the plan rep was referring to successor beneficiaries when they indicated a rollover could be done, and not for designated beneficiaries.
  • (11) Distributions to inherited individual retirement plan of nonspouse beneficiary(A) In generalIf, with respect to any portion of a distribution from an eligible retirement plan described in paragraph (8)(B)(iii) of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee—(i)the transfer shall be treated as an eligible rollover distribution,   

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