Disclaiming a 401K

Submitted by Alice Severson on Wed, 2019-10-30 10:05

My dad passed away nearly 8.5 months ago at age 78. Dad had a 401(k) managed by Vanguard with my mom (his spouse) as the sole primary beneficiary and me (his daughter) as the sole contingent beneficiary. Mom turned 83 this year and I turned 47. We live in California.

Mom is in a fortunate position of not needing the funds in dad’s 401(k), so we’ve been discussing the option of disclaiming so we can extend the period of tax free growth. When we broached this with Vanguard, they appeared to be discouraging us from doing so, stating that it’s up to employer to decide whether they approve my mom disclaiming the 401(k) and that the employer will need to determine who they think is the next in line beneficiary.

Questions:

Can the employer associated with the 401(k) refuse to allow a spouse to disclaim the 401(k)?

If my dad previously specified that my mom is the sole primary beneficiary and I am the sole contingent beneficiary, can the employer associated with the 401(k) decide that someone else will become the beneficiary after my mom disclaims?

Does anyone know of a template for the document that my mom can fill in and have notarized to disclaim the 401(k)?

Once the 401(k) is disclaimed and I inherit it, do I use the Single Life Expectancy table in IRS publication 590B and my age next year (48) to determine that my life expectancy is 36.0 years, and so the 2020 RMD will need to be 1/36 of the 401(k) value on December 31, 2019?

If the above is accurate, then in 2021, do I subtract 1.0 from 36.0 to calculate the RMD as 1/35, and then continue subtracting 1.0 each year?

Thanks in advance for any pointers.
~Alice~



Submitted by Alan - IRA critic on Wed, 2019-10-30 15:03

  1. Probably, since there are conflicts between the tax code (which allows it) and a couple court decisions (most recent 2005) that find there are conflicts with ERISA. Unfortuneately, the answer is then “maybe”, and subject to possible large legal costs. 
  2.  No, but the plan may be able to decline a disclaimer in the first place, which is what Vanguard indicated.
  3.  There is no set template, however the requires of Sec 2518 are a minimum. The plan may or may not provide their own form. Since the deadline for submission is 9 months after the DOD with only 2 weeks left, there is little time to explore these options. At this point your Mom would either have to submit a generic letter or better yet hire a qualified estate attorney to draft the disclaimer and submit it to the plan in a manner that makes it harder for them to decline accepting it. This alone could be costly.
  4.  “IF” the plan accepted the disclaimer, you are correct that your single life expectancy for age 48 would determine your 2020 RMD. Divisor is 36, then reduced by 1.0 each year thereafter. Note that your Mom is responsible for completing Dad’s 2019 RMD (I assume he was retired) if he did not complete it before passing. Note that if your Mom rolled the 401k over to her own IRA, she would still have about a 16 year stretch period. If you then inherited the IRA from her in 7 years for example, you could then use your own life expectancy (age 55) from there. Your divisor then would start at 29.6. Mom is currently responsible for completing Dad’s 2019 RMD if he was retired from this plan and did not complete it. SInce it is not clear that RR 2005-36 that allows an IRA beneficiary to complete this RMD without invalidating any disclaimer can be applied to qualified plans, Mom should probably defer taking the year of death RMD or any other distributions until the disclaimer issue is resolved.
  5.  Since the acceptance of the disclaimer is problematic with time almost running out, this effort obviously should have been begun several months ago.  The account would probably have to be quite large in order to justify large legal expenses to pursue this.

Submitted by Bruce Steiner on Wed, 2019-10-30 17:49

  • Mom’s lawyer, or the lawyer handling Dad’s estate, would prepare the disclaimer to comply with both Federal and applicable state law.  Different states have different requirements as to filing and service of disclaimers.
  • As Alan pointed out, you should give this your immediate attention.  
  • Mom should consider whether the rollover would be better, since it would allow her to name new beneficiaries (such as a trust for the child, or to or in trust for the grandchildren), and it would allow her to do Roth conversions.
  • Bruce Steiner

Submitted by Alice Severson on Wed, 2019-10-30 20:44

Thank you so, so much for all this information, Alan and Bruce. This is super helpful. And you’re absolutely correct that we should have started this effort long ago.

  • Yes, dad was retired prior to his death and was taking his annual RMDs.
  • We considered a Roth conversion, but then realized mom would have a huge tax hit since the 401(k) is ~$1M, so we put this option aside.

We’ve reached out to my dad’s prior employer to inquire whether their retirement plan allows my mom to disclaim. Their retirement team is working with their legal team and Vanguard to look into this option.

  • Can you help me understand why there would be large legal costs involved with disclaiming? 
  • Assuming the retirement plan allows disclaiming and my mom submits a notarized document disclaiming the 401(k), will we need legal assistance in any other aspect of this?  We live in California, in case that makes a difference.

Assuming disclaiming is NOT an option, then my understanding is that my mom will have 3 options:

  1. “Assumed IRA” – roll dad’s 401(k) into mom’s existing Traditional IRA; note that dad had a Traditional IRA at Vanguard in addition to his 401(k), and mom already assumed his IRA into her existing IRA 
  2. “Inherited IRA” – roll the 401(k) into a new Inherited IRA
  3. “Keep in Employer Plan” – keep the assets under the company’s retirement plan, but in mom’s name instead of dad’s name; I believe Vanguard refers to this option as “deferring”

 I’m trying to figure out (a) which Life Expectancy Table in IRS Publication 590B and (b) whose age would be used to compute RMDs moving forward for each of these 3 options.  Is my understanding below correct?

  1. For an Assumed IRA, the RMD would be calculated by looking up mom’s age each year in the Uniform Lifetime Table III.
  2. For an Inherited IRA, the RMD would be calculated by looking up dad’s age in the Single Life Expectancy Table I and reducing by 1.0 each year thereafter OR by looking up mom’s age in the Single Life Expectancy Table I each year.  (I assume mom would need to inform Vanguard whose age to use in advance.)
  3. Note sure how future RMDs would be calculated in the Keep in Employer’s Plan option. I found the following the plan’s SPD: “In the event of your death, your designated Beneficiary may elect to leave their inherited death benefit under the Plan for up to five years after the close of the Plan Year in which you die.” 

 Ignoring the Disclaim and Keep in Employer Plan options:

  • It seems that the Assumed IRA is a better option than the Inherited IRA, since the Assumed IRA would use the Uniform Lifetime table whereas the Inherited IRA would use the Single Life Expectancy table.  Is my understanding correct? 
  • And finally, are there any options that calculate future RMDs using the Uniform Lifetime table based on dad’s age instead of mom’s age, since he was younger?

 Thanks in advance for helping me with this.

Submitted by Bruce Steiner on Wed, 2019-10-30 21:27

The legal fees to draft the disclaimer won’t be very much, except that the short time frame may increase the cost somewhat.  Disclaimers are common in estate administrations so any good trusts and estates lawyer will have done many of them.  However, there will also be some time involved in responding to all of your questions.  Presumably there was some time involved in the decision making process to this point.

Submitted by Alan - IRA critic on Wed, 2019-10-30 23:18

  • Should the disclaimer option not be possible or practical, Mom has 3 options:
  • 1) Do a direct rollover to an IRA, a new one or her current one. Assuming an IRA is a procedure limited to inheriting an IRA in the first place. In her case, this would be called a “spousal rollover”.
  • 2) “inherited IRA”  – this is not advisable given her age. It would have negative consequences. Mom should do the spousal rollover above.
  • 3) Maintain as inherited 401k – RMDs would be much higher and if you inherited as inherited 401k, your beneficiary RMDs would have to continue Mom’s higher RMDs. Although she might initially delay the spousal rollover a month in order to determine if the 401k includes low basis employer shares eligible for NUA treatment.
  • With respect to the RMD calculation in the above 3 scenarios – Your #1 is correct; #2 would be Dad’s age in single life table because he was younger, but the divisor would be subject to the 1.0 reduction each year. Again, this is a bad choice. #3 – keeping in the 401k, the divisor would be the same as #2, so this option is also a poor one. The spousal rollover is by far the best option to take. There is no deadline to do this by the way.
  • There are no options to use Dad’s age with the Uniform Table. The Uniform table is limited to 401k or IRA owners. Mom cannot own a 401k, just an IRA.
  • With respect to “high legal fees”, I had in mind any effort to contest the decision of the plan to not accept a disclaimer if that was a gray area in the plan document. If the plan document states that a disclaimer by a surviving spouse is not allowed, that should not be contested.
  • Mom is 83. Do not overlook that if you are named by her as beneficiary on an already inherited account, your beneficiary RMDs will have to use the same divisors Mom would have. You would never be able to use your own younger age to stretch the inherited account because you would be a “successor beneficiary” instead of her “designated beneficiary” on the IRA she owned.

 

Submitted by Alice Severson on Thu, 2019-10-31 08:34

Thank you so much for the follow-up information.  This is helping me tremendously.   

  • Regarding low basis employee shares: Long ago, dad’s 401k was invested in company stock that was not publicly traded. In the mid-2000s the stock became publicly traded. And about 5 years ago, after the company split into two, dad received notice that the company stock fund was being liquidated from the retirement plan, so we traded his company stock for a Vanguard mutual fund within the 401k. I’m assuming this means his 401k no longer includes low basis employee shares.
  • I was unable to find any mention of disclaimer in the summary plan description.  In fact, I’m surprised about how little is mentioned about options available to the beneficiary.  So I guess disclaiming is a gray area, as you suspected.
  • With dad’s passing, I am now my mom’s sole primary beneficiary, and her contingent beneficiary is a family friend. I previously did not consider your point about not being able to stretch an inherited account as a successor beneficiary.

Since neither mom nor I need the money from dad’s 401k any time soon, it seems like our best two options are:

  1. Mom disclaims and I inherit – future RMDs will be calculated based on the Single Life Expectancy table using my age, reduced by 1.0 each year thereafter.
  2. Mom does a spousal rollover and transfers the assets into her existing Traditional IRA – all her retirement funds will be in one account, and future RMDs will be calculated based on the Uniform Lifetime table using mom’s age each year. In this option, after mom passes away, I will be the designated (not successor) beneficiary on her Traditional IRA (which will be an aggregate of her original Traditional IRA prior to dad’s passing, dad’s Traditional IRA, and dad’s 401k).

Am I understanding this correctly?  Thank you for educating me on all this. I am grateful for your help.

Submitted by Alan - IRA critic on Thu, 2019-10-31 15:36

  • Yes, you are correct in the above post.
  • If she does the spousal rollover, it might be wise to roll it into a new rollover IRA due to likely better creditor protection as explained in the following link.
  • https://sdirahandbook.com/self-directed-ira-news/california-rollover-iras-can-receive-erisa-style-creditor-protection/
  • Some of her other IRAs might be commingled with both rollovers from employer plans and regular contributions that have been made. As the article explains, this is a gray area with respect to whether the courts would allow a portion of such accounts to be creditor protected or not. As such, if any other recent employer plan rollover amounts are better off moved to pure employer plan rollover accounts or not is a question. I understand that she probably has good insurance and perhaps is not prone to ever having creditor issues, but one never knows for sure. Many people in CA keep their 401k or other employer plans intact as long as possible due to the superior creditor protection, but that also has it’s tradeoffs, some of which were explained earlier.

Submitted by Alice Severson on Fri, 2019-11-01 08:19

Thank you for pointing me to that link.

  • I was unaware of the credit protection available to rollover IRAs.  
  • I had originally considered the inherited 401k to maintain the ERISA protections, but this option no longer made sense after you explained the higher RMDs.
  • Mom lives with me (so does not own property) and stopped driving last year (so we sold her car), and therefore no longer has home, car, or umbrella insurance; she only has health insurance.
  • Completely agreed that even though she does not have creditor issues, no one can predict what will happen in the future, so maintaining the ERISA protections with a new rollover IRA makes sense.

Regarding the disclaim option:

  • Assuming dad’s prior employer permits mom to disclaim, safe to assume that the 9 month deadline is just for submitting the disclaiming document to Vanguard (which will forward it to dad’s prior employer)? 
  • Or does the employer also need to complete their approval process (after receiving mom’s disclaim document) within 9 months of dad’s passing?

Thank you so much for all your help.

Submitted by Alan - IRA critic on Fri, 2019-11-01 16:39

Disclaimers are addressed in Tax code Sec 2518. It states that the disclaimer must be received by the holder of title (ie the plan administrator)  no later than 9 months following the date of death. Their decision does not have to be made within the 9 months, they just need to have received the disclaimer letter. Given the current time frame, it should be sent with a return receipt requested. If they prefer not to accept it, missing the 9 month deadline would make it too easy for them.

Submitted by Alice Severson on Sat, 2019-11-02 10:01

That makes sense, thank you for this explanation. Dad’s prior employer responded back that they will allow mom to disclaim:

It appears to me that the form provided by the employer meets the California requirements:

  • It lists the creator of the interest: my dad, the plan participant
  • It lists the interest to be disclaimed: the benefits under the employer’s retirement plan
  • It states the disclaimer and extent of the disclaimer: all rights and interests to any and all benefits due under the plan are being disclaimed
  • California also has a 9-month deadline
  • California states that the disclaimer can be filed with the person responsible for distributing the interest to the beneficiary, which would be Vanguard

So we’re moving forward with the disclaimer:

  • Mom filled in the disclaimer form.
  • We got the disclaimer form notarized; California notaries use a separate notary acknowledgment form instead of stamping the actual document. 
  • Tomorrow we’ll mail it to Vanguard overnight along with dad’s death certificate.
  • Good point on requesting a return receipt.

Am I missing any steps?  Super grateful for all your guidance, education, and time.

Submitted by Alan - IRA critic on Sat, 2019-11-02 20:59

I think you have it covered. You indicated that Dad was taking his RMDs, but since he passed so early this year, are you totally sure he completed his 2019 RMD before passing? 2018 and prior RMDs do not need to be checked.  If you find that he did not complete the 2019 RMD, please advise because that raises RMD and disclaimer issues. If this was an IRA, it would be best to have Mom not complete the RMD and have you take it after the account was retitled with you as beneficiary. However, with a 401k the participant or beneficiary does not have full control over if and when an RMD is distributed, so it might not be possible to just postpone it. Hopefully, his 2019 RMD had been fully distributed by the DOD.

Submitted by Alice Severson on Sun, 2019-11-03 02:08

I (as dad’s agent / power of attorney, since he had Alzheimer’s) did NOT yet take out dad’s RMD from his 401K for 2019:

  • Dad’s RMD option was set up so that if he did not take the RMD by December each year, then Vanguard would automatically do so. 
  • Up through 2018, I always made sure to take the RMD before December, when his selected mutual fund was doing well.
  • So I’m hoping that Vanguard can process the transfer by end of November. 
  • I’ll check with our contact at Vanguard on Monday to obtain the forms I need to fill out to complete the transfer (since previously, they sent the spousal beneficiary forms only) and inquire about transfer time.
  • I’ll also ask Vanguard about RMD timing given mom’s disclaiming and my inherting.
  • To make sure I’m using the correct terms, once I’m the beneficiary, dad’s 401k will be transferred to me as an Inherited IRA, and not rolled over into a Traditional IRA, correct?

Thank you so much for bringing this up, Alan.

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