Plan distribution made 10 years after death
A client’s husband died in early 2012. His state pension agency is only now is distributing his defined contribution plan balance to his wife (to be clear: this is not his defined benefit pension). Initially, the state pension plan sent her a distribution election form to complete, and she requested a “direct transfer rollover” into her personal IRA. A month later, the state pension plan sent her a letter saying it should have distributed the balance of the account within five years of her husband’s death (12/31/17) per both state law and federal minimum distribution requirements. The state agency also apologized for sending the benefit distribution election “in error” and said the amount is now “not rollover eligible.” Instead, the state is now distributing it as a direct payment and has issued her a check for $82,348.87 after withholding 20% for federal taxes.
The state said she had until March 26th to appeal this determination, but she instead emailed specifically requesting the check.
My questions:
Should this go into an inherited IRA, her traditional IRA or simply treat it as a taxable distribution?
Who is responsible for any taxes or penalties, if any, for not distributing this within five years?
Thanks for any insight or guidance anyone can provide.
Brent Hunsberger
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-08 23:36
Did she fail to respond to an election request to opt out of the 5 year rule by 12/31/2013? It seems odd that the plan would mandate the 5 year rule for death prior to RBD. But if she did fail to make a mandatory election, then the plan needed to have been fully distributed by 12/31/2017, which the plan also failed to do. She needs to secure a clear explanation of why the 5 year rule was applied. Unless the plan erred in execution, the distribution will be taxable this year and she will have to file Form 5329 for 2017- 2021 to request the waiver of the penalty. The IRS will likely grant the waiver since the participant can generally rely on a qualified plan to properly follow the IRS RMD requirements.
Permalink Submitted by Brent Hunsberger on Tue, 2022-03-08 23:45
The plan cited a specific state statute regarding state pension “death benefits” that requires: “The entire amount of a deceased member’s vested accounts must be distributed by December 31 of the fifth calendar year after the year in which the member died. Notwithstanding any other provision of this chapter, distributions of death benefits under the individual account program must comply with the minimum distribution requirements of 26 U.S.C. 401(a)(9) and the regulations implementing that section, as in effect on April 1, 2021.”