PSP Spousal Beneficiary and RMDs

Submitted by Jonathan Sard on Sat, 2007-10-27 14:13

A participant in a profit sharing plan passed away 3 years and his spouse was the beneficiary, but never rolled over the account to her own IRA. The money is still in the profit sharing plan in the deceased husband’s name and the surviving spouse is currently 67 years old. The husband would have turned 70 1/2 this year. What are the spouses options? Does she have to take an RMD this year by 12/31 and if so, whose life expectancy is used? Can she still avoid having to take the RMD by 12/31 if she completes an IRA rollover by year end? Any help would be appreciated!

Thank you.



Submitted by Alan Spross on Sat, 2007-10-27 20:56

Yes, if she completes the rollover prior to year end, she avoids the RMD she would otherwise be obligated to take as a beneficiary for 2007. She should specifically request the transfer be done in full, and that NO RMD be held back by the plan. The plan may be under the wrong impression that there is an RMD due here.

Submitted by Jonathan Sard on Tue, 2007-10-30 18:14

Thank you! Would you be able to reference the code or document that states the RMD does not have to be taken the year the account owner would have reached 70 1/2?

Submitted by Alan Spross on Wed, 2007-10-31 03:00

Glad you asked because I went to sleep on this one. The RMD IS due this year, per following paste from the Regs:
>>>>>>>>>>>>>
Q–3. When are distributions required to commence in order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)?

A–3. (a) Nonspouse beneficiary. In order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii), if the designated beneficiary is not the employee’s surviving spouse, distributions must commence on or before the end of the calendar year immediately following the calendar year in which the employee died. This rule also applies to the distribution of the entire remaining benefit if another individual is a designated beneficiary in addition to the employee’s surviving spouse. See A–2 and A–3 of §1.401(a)(9)–8, however, if the employee’s benefit is divided into separate accounts.

(b) Spousal beneficiary. In order to satisfy the rule in section 401(a)(9)(B)(iii) and (iv), if the sole designated beneficiary is the employee’s surviving spouse, distributions must commence on or before the later of—

(1) The end of the calendar year immediately following the calendar year in which the employee died; and

(2) The end of the calendar year in which the employee would have attained age 70 1/2.
>>>>>>>>
With respect to the rest of your original question, the RMD that must be withheld from the rollover is based on the spouse’s attained age in 2007 and Table I.

Submitted by Denise Appleby on Wed, 2007-10-31 12:07

Hi Alan,

I thought you were right the first time. This is a tricky one. I reviewed the regs several times, and could find nothing that provided any definitive guidance.

Here’s what I came up with…

The spouse beneficiary, who is subject to the life-expectancy payments, has two options:
1. Start distributions under the life-expectancy method, in which case she would need to begin distributions by December 31 of this year ( the year he would have reached age 70 ½ ), or
2. Rollover the amount to her own traditional IRA or other eligible retirement plan.

Regarding the question of life-expectancy, we agree, and the regs are clear, that…under option 1, she is required to calculate the distribution amounts using her life expectancy. Her life expectancy would be recalculated; therefore, the single life expectancy table should be consulted each year to determine her life expectancy.

Under option 2- the tricky one… if she rolls-over the amount before the end of this year, it seems she need not take any required minimum distribution (RMD) amount. Instead, she would begin RMD payments from the IRA to which the rollover is made, beginning (for) the year she reaches age 70 ½.

Here’s how I came to that conclusion…

§1.401(a)(9)-3-Q&A-3(b) provides that distributions under the life expectancy option does not commence until the later of:
1. The end of the calendar year immediately following the calendar year in which the employee died; and
2. The end of the calendar year in which the employee would have attained age 70½.

The latter applies in this case

§1.401(a)(9)-3-Q&A A-6, goes on to say that “Distributions are considered to have begun to the surviving spouse …on the date …on which distributions are required to commence to the surviving spouse, even though payments have actually been made before that date.” This is going as far as to say that even if she made distributions before December 31 of this year, she is still not subject to the life-expectancy distributions before December 31, unless she does not rollover the balance by December 31.

Submitted by Alan Spross on Thu, 2007-11-01 01:31

Denise, glad you checked into this one. The exact age 70 RMDs are among the most confusing issues. Since the QRP here needs to determine what amount is not eligible for rollover, do you see the following copy of Reg 402(c), Q&A 7 as material to this discussion, even though it is addressed to owners?
>>>>>> >>>>>>>>>>

Q–7: When is a distribution from a plan a required minimum distribution under section 401(a)(9)?

A–7: (a) General rule. Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. For example, if an employee is required under section 401(a)(9) to receive a required minimum distribution for a calendar year of $5,000 and the employee receives a total of $7,200 in that year, the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies. If the total section 401(a)(9) required minimum distribution for a calendar year is not distributed in that calendar year (e.g., when the distribution for the calendar year in which the employee reaches age 70 1/2 is made on the following April 1), the amount that was required but not distributed is added to the amount required to be distributed for the next calendar year in determining the portion of any distribution in the next calendar year that is a required minimum distribution.

>>>>>>> >>>>>>>>>

Submitted by Denise Appleby on Thu, 2007-11-01 04:47

Thanks Alan,
I looked at that too.
Q&A-7(b) of § 1.402(c)-2 seems to support that position. It states as follows [quote](b) Distribution before age 70 1⁄2 . Any amount that is paid before January 1 of the year in which the employee attains (or would have attained) age 70 1⁄2 will not be treated as required under section 401(a)(9) and, thus, is an eligible rollover distribution if it otherwise qualifies.[/quote]

This suggests that any amount outside of this is not rollover eligible; and the phrase [b]or would have attained[/b] appears to apply to a ‘spouse beneficiary’; but §1.401(a)(9)-3-Q&A A-6 seems to create some uncertainty

[b]JSard[/b]…if the amount is determined to be rollover-eligible, she can rollover the amount in 60-days after receiving the distribution. If the plan is saying that an RMD is due for this year, then any amount they pay as the RMD will not be subject to the 20% mandatory withholding . Therefore, she does have the option of rolling over the balance ( after what is determined to be the RMD amount by the plan), and if it is determined that she did not need to take an RMD, that amount can be rolled over within 60-days.

If we find anything definitive , we will post.

Submitted by Jonathan Sard on Thu, 2007-11-01 12:17

So does this mean the surviving spouse does have to take an RMD by 12/31 this year since her deceased husband would have turned 70 1/2 this year? The QRP is saying she does have to take an RMD, which was in contradiction to what you both were saying, but now I am confused by the new responses above. Can you clarify? Thank you!

Submitted by Denise Appleby on Thu, 2007-11-01 13:07

We have come to different conclusions as to whether she needs to take an RMD for this year.
However, if the plan insists, all is not lost-yet. For now, if she so chooses, she can go along with the plan’s position and not rollover the amount they deem to be the RMD amount. She can keep that amount in a regular account, and if we find something that definitively says she can rollover the amount (that the plan deems to be an RMD), she has 60-days to do so. If she chooses this option, it may be a good idea to defer taking the distribution as long as possible, so that the 60-day period ends later than sooner.

We understand that you need a definitive response, and we will keep looking.

Submitted by Denise Appleby on Fri, 2007-11-02 07:15

[quote=”denise@applebyconsultingi“]Hi Alan,

I thought you were right the first time. This is a tricky one. I reviewed the regs several times, and could find nothing that provided any definitive guidance.

Here’s what I came up with…

The spouse beneficiary, who is subject to the life-expectancy payments, has two options:
1. Start distributions under the life-expectancy method, in which case she would need to begin distributions by December 31 of this year ( the year he would have reached age 70 ½ ), or
2. Rollover the amount to her own traditional IRA or other eligible retirement plan.

Regarding the question of life-expectancy, we agree, and the regs are clear, that…under option 1, she is required to calculate the distribution amounts using her life expectancy. Her life expectancy would be recalculated; therefore, the single life expectancy table should be consulted each year to determine her life expectancy.

Under option 2- the tricky one… if she rolls-over the amount before the end of this year, it seems she need not take any required minimum distribution (RMD) amount. Instead, she would begin RMD payments from the IRA to which the rollover is made, beginning (for) the year she reaches age 70 ½.

Here’s how I came to that conclusion…

§1.401(a)(9)-3-Q&A-3(b) provides that distributions under the life expectancy option does not commence until the later of:
1. The end of the calendar year immediately following the calendar year in which the employee died; and
2. The end of the calendar year in which the employee would have attained age 70½.

The latter applies in this case

§1.401(a)(9)-3-Q&A A-6, goes on to say that “Distributions are considered to have begun to the surviving spouse …on the date …on which distributions are required to commence to the surviving spouse, even though payments have actually been made before that date.” This is going as far as to say that even if she made distributions before December 31 of this year, she is still not subject to the life-expectancy distributions before December 31, unless she does not rollover the balance by December 31.[/quote]

OK. After reviewing this over and over again, I am certain that she is not required to take an RMD before rolling over the balance, providing she completes the rollover before December 31 of this year.
I still believe that the answer is in §1.401(a)(9)-3-Q&A A-6 . Here’s why…in addition to the reasoning quoted here/above, further expanding on §1.401(a)(9)-3-Q&A A-6, the complete details which are as follows:

Q-6. For purposes of section 401(a)(9)(B)(iv)(II), when are distributions
considered to have begun to the surviving spouse?
A-6. Distributions are considered to have begun to the surviving spouse of an employee, for purposes of section 401(a)(9)(B)(iv)(II), on the date, determined in accordance with A-3 of this section, on which distributions are required to commence to the surviving spouse, even though payments have actually been made before that date.

Now, we must go to A-3 (b), which states as follows:

Q-3. When are distributions required to commence in order to satisfy the life expectancy rule in section 401(a)(9)(B)(iii) and (iv)?

(b) [b]Spousal beneficiary.[/b] In order to satisfy the rule in section 401(a)(9)(B)(iii) and (iv), if the sole designated beneficiary is the employee’s surviving spouse, distributions must commence on or before the later of- –
(1) The end of the calendar year immediately following the calendar year in which the employee died; and
(2) [b]The end [/b]of the calendar year in which the employee would have attained age 70½.

It is “the end” phrase that is key here. Now, let’s go to 401(a)(9)(B)(iv)which states as follows:

(iv) Special rule for surviving spouse of employee. – If the designated beneficiary referred to in clause (iii)(I) is the surviving spouse of the employee –
(I) the date on which the distributions are required to begin under clause (iii)(III) shall not be earlier than the date on which the employee would have attained age 70 1/2 …

This is very roundabout, but I wanted to show how I came to the conclusion. Which is, as long as she completes the rollover before December 31, no amount of that rollover is treated as an RMD. And the entire balance is therefore, rollover eligible.

Submitted by Robert Wright on Fri, 2007-11-02 15:08

I am going to weigh in on this with quotes from Natalie Choate’s 6th edition 2006:

page 150; 2.6.04 [b]Rollover in a year in which a distribution is required[/b]

A minimum required distribution (MRD) cannot be rolled over. 402(c)(4)(B), 408(d)(3)(E). The “trap” is that [i]the first distribution received in any year[/i] for which a distribution is required (Distribution Year) is considered part of the MRD for that year and thus cannot be rolled over. Reg 1.402(c)-2, A-7(a).

I think the pertinent clauses in the above are

[b] “in a [u]year[/u]” [/b]
[b] “in any [u]year[/u]” [/b]

Also p 167; 3.2.03 from Choate:

The tests for determining whether a distribution is an “eligible rollover distribution,” and other rollover rules, are the same for the surviving spouse as they would have been for the deceased participant.

December 31 therefore is merely the deadline for the distribution required in [i]the first distribution year.[/i]

Finally p 45; 1.4.01 Choate:

A year for which an MRD is required is called a “distribution calendar year” in the regulations, [b]Distribution Year[/b] in this book. Reg 1.401(a)(9)-5, A-1(b). For plans subject to the lifetime MRD rules, the “first Distribution Year” is the year the participant reaches age 701/2.

From this I would surmise that the sposue must take the MRD. It cannot be rolled over.

Submitted by Robert Wright on Fri, 2007-11-02 15:20

Here is another quote from Natalie Choate 6th Edition 2006.

page 79; 1.6.04 [b] Required Commencement Date: Distributions to spouse[/b]

If the participant dies [u]prior to his RBD[/u], and the spouse is the [i]sole[/i] Designated Beneficiary, annual distributions to the spouse over her life expectancy do not have to begin until the later of: the year following the year in which the participant dies, or the year in which the participant would have reached age 70 1/2. 401(a)(9)(B)(iv)(I); Reg. 1.401(a)(9)-3,A-3(b)

Again, the language used is [b][i]the year[/i][/b].

Submitted by Denise Appleby on Fri, 2007-11-02 15:49

[quote=”robert@completefinancial.”]Here is another quote from Natalie Choate 6th Edition 2006.

page 79; 1.6.04 [b] Required Commencement Date: Distributions to spouse[/b]

If the participant dies [u]prior to his RBD[/u], and the spouse is the [i]sole[/i] Designated Beneficiary, annual distributions to the spouse over her life expectancy do not have to begin until the later of: the year following the year in which the participant dies, or the year in which the participant would have reached age 70 1/2. 401(a)(9)(B)(iv)(I); Reg. 1.401(a)(9)-3,A-3(b)

Again, the language used is [b][i]the year[/i][/b].[/quote]

Good point…
but the [u][b]regs [/b][/u]say “The end of the calendar year”. not in the year

Submitted by Denise Appleby on Fri, 2007-11-02 18:13

Take a look at PLR [url=http://www.irs.gov/pub/irs-wd/0222033.pdf%5D200222033%5B/url%5D

Summary
Participant died at age 58
Participant would have reached age 70 ½ in 1997 ( see page 2)
Spouse beneficiary rolled over the entire balance in 1997 ( same year he would have reached age 70 ½) [ second paragraph from bottom of page 2]
Requested ruling # 1, that the entire balance was rollover eligible, and none of the balance constitutes an RMD
IRS ruling… the entire balance was rollover eligible, because it was rolled over before December 31 ( page 5)

I know PLRs are not citable, but…

Submitted by Robert Wright on Fri, 2007-11-02 18:35

Denise,

What then do you think Choate means by:

page 150; 2.6.04 Rollover in a year in which a distribution is required

A minimum required distribution (MRD) cannot be rolled over. 402(c)(4)(B), 408(d)(3)(E). The “trap” is that the first distribution received in any year for which a distribution is required (Distribution Year) is considered part of the MRD for that year and thus cannot be rolled over. Reg 1.402(c)-2, A-7(a).

Submitted by Denise Appleby on Fri, 2007-11-02 21:04

Based on the excerpt you provided, it seems she means what you think she means. I have not checked the book though. I really need to get a more recent version, as my copy is old.

Submitted by Robert Wright on Fri, 2007-11-02 21:12

Denise,

I guess my question really is: What do [i]you[/i] make of it? Or, how do [i]you[/i] apply this to the question at hand?

She references Reg Sec. 1.402(c)-2, Q&A 7, which alan-oniras referenced above. Specifically interesting is the example given in A-7.

Submitted by Denise Appleby on Sun, 2007-11-04 19:47

I think we all agree that an RMD for a year applies to the year as of January 1 of that year, as is indicated in the Cite Alan provided. But the IRS is saying that this general rule does not apply to the spouse beneficiary for the first RMD year. I agree with the IRS, as that is what I understood it to mean, before I found the PLR, and even after looking more closely, I still understand it to mean such. [b]But, the IRS have changed their position on other issues before [/b], even in documents that are citable. And if Natalie and Alan has a different POV, then[b]…[/b]
I spoke with two large consulting firms yesterday, and one thinks an RMD is required, the other does not. Go figure!
For a plan administrator, this seems a sticky place to be in. A plus here is that it is still within the five-year period for this beneficiary , and I think they should use this to their advantage if they are at a stalemate.
[b]What I would do[/b]…if I was not certain that the entire amount was rollover eligible under the life-expectancy method…
[b]If I was the plan administrator[/b], I would have her make an election to use the five-year rule. This would leave no doubt that the entire balance is rollover eligible
[b]If I was the beneficiary[/b], I would tell the plan administrator that I am electing the five year rule, and the entire amount is therefore rollover eligible.

Submitted by Alan Spross on Tue, 2007-11-06 05:09

And on we go:
After further “research”, we have 1.408-8 of the Regs, which has not been referenced by any of us previously. First Q&A 7 and then Q&A 5 which appears in 7. These directly link a QRP rollover to the RMD requirement when surviving spouse assumes the IRA:

>>>>>>>>>>>>
And A-5:

A–5. (a) The surviving spouse of an individual may elect, in the manner described in paragraph (b) of this A–5, to treat the spouse’s entire interest as a beneficiary in an individual’s IRA (or the remaining part of such interest if distribution thereof has commenced to the spouse) as the spouse’s own IRA. This election is permitted to be made at any time after the individual’s date of death. In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust. If the surviving spouse makes the election, the required minimum distribution for the calendar year of the election and each subsequent calendar year is determined under section 401(a)(9)(A) with the spouse as IRA owner and not section 401(a)(9)(B) with the surviving spouse as the deceased IRA owner’s beneficiary. However, if the election is made in the calendar year containing the IRA owner’s death, the spouse is not required to take a required minimum distribution as the IRA owner for that calendar year. Instead, the spouse is required to take a required minimum distribution for that year, determined with respect to the deceased IRA owner under the rules of A–4(a) of §1.401(a)(9)–5, to the extent such a distribution was not made to the IRA owner before death.

(b) The election described in paragraph (a) of this A–5 is made by the surviving spouse redesignating the account as an account in the name of the surviving spouse as IRA owner rather than as beneficiary. Alternatively, a surviving spouse eligible to make the election is deemed to have made the election if, at any time, either of the following occurs —

(1) Any amount in the IRA that would be required to be distributed to the surviving spouse as beneficiary under section 401(a)(9)(B) is not distributed within the time period required under section 401(a)(9)(B); or

(2) Any additional amount is contributed to the IRA which is subject, or deemed to be subject, to the lifetime distribution requirements of section 401(a)(9)(A).

(c) The result of an election described in paragraph (b) of this A–5 is that the surviving spouse shall then be considered the IRA owner for whose benefit the trust is maintained for all purposes under the Internal Revenue Code (e.g., section 72(t)).

>>>>>> >>>>>>
Conclusion: If plan insists on holding back the alleged RMD, the surviving spouse can have it distributed and roll it over after the rest has been transferred in a direct rollover. That should avoid debates with the plan administrator. Should be no withholding since the QRP does not consider it an ERD.
Denise, I had my doubts for awhile, but finally agree with you. Hope OP is still around to digest all this.

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