Spouse Bene Rules

Submitted by Kevin O'Hearn on Fri, 2023-03-24 22:41

Hello,

A husband had a 401k and died 5 ½ years ago at age 60. He left the assets to his wife who was 57. An inherited 401k was opened in the spouse’s name.

This year the company is telling the wife that she has to deplete the full assets of the plan under the pre-RBD 6-year depletion method (1-year COVID extension). This is incorrect as she should be able to defer RMDs until the husband would have turned RMD age had he not died (he would only be 66). They will not allow her to roll the assets to her own IRA as a spouse because they are saying the account must be depleted.

1. It is incorrect that they are requiring her to deplete the account, correct?

2. Can an employer or a 401k provider supersede these the spousal RMD rules and require a spouse bene to deplete the assets quicker?

Thank you.



Submitted by Alan - IRA critic on Sat, 2023-03-25 01:29

  1. Some plans use the 5 year rule as the default beneficiary method, and others provide for an election by the end of the year after the year of death. Or the spouse can do an IRA rollover before the end of that same year to escape the 5 year rule. Whether these rules were never communicated to the spouse or not is a question. As things stand 2023 is the final year of the 5 year rule (6 years due to 2020 not counting), and as such the entire plan balance is the RMD for 2023. It’s too late to do the spousal rollover now. 
  2. If the balance is significant, this will be a tax disaster. It might be worth looking into whether the plan provisions actually conform to what the plan is saying, and if they do, whether the spouse was ever given proper notice of her options.
  3. Deferral of RMDs until the year deceased spouse would have reached RMD age only applies when the RMDs are based on life expectancy. This rule does not apply when the 5 year rule applies.


Submitted by Kevin O'Hearn on Mon, 2023-03-27 15:53

Thanks Alan! Seeing as this seems to be a plan specific rule, not an IRS rule, if the plan were to allow a spousal rollover now, do you think the IRS would have an issue with the rollover and the spouse keeping an IRA balance in her name and starting her own RMDs at 73? Especially since she had the rollover option at the time of death and if this were an IRA that she inherited as the spouse. The account is $1 million so it does present a tax issue.



Submitted by Alan - IRA critic on Mon, 2023-03-27 16:56

  • Unfortunately, because the entire balance of the plan becomes an RMD in the final year of the 5 year rule, none of it is rollover eligible. See  QA #4 in the following link regarding beneficiary provisions when death is pre RBD. There is either a mandatory 5 year rule, LE, or an election the beneficiary must have made by 12/31/2018 between the two. The election is irrevocable, and if the 5 year rule applies to the plan, it must apply to all successor plans. Up to the end of 2022 she could have a done a direct rollover to an IRA even under the 5 year rule because she was not yet in the final year, but the 5 year rule would stlll have applied to the IRA as well, although it is not clear how this is enforced. Certainly, the plan is acting as if the 5 year rule is in full effect, but it’s not clear whether she could have made an election in 2018 and it is also not clear what formal requirement was in place to properly notify her of her options. Did she receive any notifications from the plan, and did she do with them?
  • With 1mm in play, she may want to consider filing for a PLR to allow a rollover if there is an extenuating circumstance to justify the cost and delay that comes with a PLR application.
  • 26 CFR § 1.401(a)(9)-3 – Death before required beginning date. | Electronic Code of Federal Regulations (e-CFR) | US Law | LII / Legal Information Institute (cornell.edu)


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