401k non-spouse beneficiaries

Submitted by Bob Keller on Mon, 2015-11-30 15:21

A father (age early 60s) and son (early 20s) are non-spousal beneficiaries of 401k participant who passed away five years ago in her mid 50s before she began taking distributions. The money has remained in the 401k. The plan administrator has told them that the 401k accounts must be emptied very shortly and can still be transferred directly to inherited IRAs. My understanding had been that inherited 401k funds needed to be rolled into an IRA by December 31st of the year following the participant’s death, in this case 12-31-2011.

The administrator’s representative has also stated that the non-spouse beneficiaries are not required to take rmds until the deceased would have been 70 1/2. Aren’t they required to take annual distributions throughout their lifetimes? And do they take the first rmd before rolling the remainder to each IRA? Lastly, if rmds are required now, how is each calculated?

Any other thoughts or recommendations for handling this situation will be most appreciated.



Submitted by Alan - IRA critic on Mon, 2015-11-30 19:45

  • The rep may be confused about the plan provisions with respect to life expectancy RMDs or the 5 year rule. If the plan calls for the 5 year rule to apply, the deadline for the beneficiaries to do direct rollovers and restore a life expectancy stretch would have been as you expected – 12/31/2011.  Since this was not done, Notice 2007-7 makes it clear that in the 5th year, none of the plan balance is eligible for direct rollover and must be distributed under the 5 year rule.
  • Now suppose that LE is the default rule in the plan. In that case, the plan may owe excise taxes for failing to distribute annual RMDs. In this case, if the LE RMDs up through 2015 are distributed (all taxable in 2015), the remaining balance could be directly rolled to an inherited IRA and the LE RMDs could continue next year.
  • Another frequent plan option requires the beneficiary to make an election by 12/31/2011 to elect either the 5 year rule or LE. If beneficiaries elected LE, then the result is similar to the above point if the plan failed to start LE RMDs in 2011.
  • Administrator is clearly incorrect regarding age 70.5. That is limited to sole spousal beneficiaries only and I take it that father was not married to the employee at the time of her death. Nor is father a sole beneficiary even if he was a surviving spouse unless he requested separate accounts to be created by the end of 2011. Since the administrator is incorrect about this, it is likely that he may not understand the actual terms of the plan with respect to non spouse beneficiary RMDs. At this time you need to determine exactly what the plan provisions specify with regard to the default method or elections. If forced to guess, I would say that the 5 year rule probably applies here and as such there is no reason to do an IRA rollover. Time is running out to request a copy of the plan provisions and then act accordingly before year end.


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