Failure to meet September 30th deadline, year after passing

Submitted by Christopher Lamb on Tue, 2021-11-02 19:14

The situation…. The estate is the beneficiary under the decedent’s 401K plan and an individual is the beneficiary of the decedent’s probate estate. The beneficiary of the estate failed to notify the plan administrator by the September 30th deadline the year following death.

Can someone explain the distribution options under the law?

Can the individual open a beneficiary IRA for the benefit of a.) the estate, or b.) themselves as beneficiary of the estate? Or, does the failure to meet the September 30th deadline then cause the entire share of the 401K account to be payable to the estate in the year following death?

I do not believe that the beneficiary would have a 10-year option for distribution purposes. I’m thinking that it’s either a 5-year requirement or a full year distribution rule that may apply.

Any clarification on this matter would be appreciated.

Chris

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Permalink Submitted by Alan - IRA critic on Tue, 2021-11-02 21:14

Most plans with an estate beneficiary are going to eventually push out a lump sum distribution to the estate, and an estate is not eligible for a direct rollover from the inherited 401k plan to an inherited IRA. Therefore, there is no work around or recourse to the plan’s procedures. This is why leaving a 401k plan to the estate will result in worse outcomes than leaving an IRA to the estate. The estate executor cannot assign an inherited 401k out of the estate to an estate beneficiary, but they can with an inherited IRA. And there is no way to move these funds to an inherited IRA under IRS rules.
The 9/30 date is known as the beneficiary determination date. That date does not apply in this situation because the estate must continue to be treated as the beneficiary barring complicated disclaimer procedures.
To clarify, the plan could use the 5 year rule for deaths prior to RBD or the remaining LE of the decedent for deaths after the RBD, but plans normally do not want to delay distribution so will push for the lump sum distribution to the estate. The estate can then pass that distribution through to the estate beneficiary on a K 1, which will result in that beneficiary having to report the entire distribution (less possibly some deductions) as taxable in the year distributed.