401k Estate Beneficiary
401k owner dies without naming a beneficiary and non-spouse heir. Is there any way the 401k assets can go to an inherited IRA fbo the beneficiary? Assuming not from previous posts, can the beneficiary take distributions over 5yrs and are distributions taxed to the estate (i.e. compressed tax rates) or to the heir?
Permalink Submitted by Alan - IRA critic on Fri, 2023-06-09 15:37
There is no way since a direct rollover to an inherited IRA can only be made to a designated beneficiary or a trust qualified for look through. While the IRS rules allow 5 years (death prior to RBD) or the remaining LE of the participant (death post RBD), the plan administrator will rarely allow this. Most plans will require a lump sum distribution to the estate. The estate can either pay the taxes or pass through the distribution to the estate beneficiaries on a K 1 and the beneficiaries will report the income and pay taxes using their personal tax rates. Unfortunately, while those rates are lower than estate rates, there is still a large taxable distribution in a single year and loss of any stretch. Note that the 401k provisions should be checked to verify that there is not a default beneficiary provision (eg children of participant) other than the estate.
Permalink Submitted by jane Abell on Mon, 2023-07-17 20:41
I am an executor of an estate, individual died w/o beneficiaries on his 401k. The Plan does not specifically state that the distribution is a lump sum but the administrators still insist it must be taken as one. The Plan states: If the participant has no designated Beneficiary distribution of the Participant’s vested Account must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death. Shouldn’t they allow the heirs to distribute the money over 5 years?
Permalink Submitted by Alan - IRA critic on Mon, 2023-07-17 21:55
This is a normal restriction of the IRS RMD rules for an estate beneficiary of a qualified plan. In this case it is apparently an operating procedure that is not stated in the plan document. Most executors do not want to keep an estate open for longer than necessary, filing a 1041 for each year, etc. If you receive the lump sum, you can pass it through the estate to the estate beneficiaries on a K 1, and tax due will be at the lower individual tax rates rather than the higher rates of an estate.
Permalink Submitted by Dawn Chastain on Sun, 2023-10-01 01:02
Unmarried participant with only one heir, her daughter, dies on 12/26/21 with no designated beneficiary on her 401K. To save money, daughter takes on personal representative duties for the estate and ignores/loses much of the mail being sent to her from Fidelity and ultimately discovers in late March 2023 that Fidelity has cashed out the entire balance of the 401K ($52K gross, 10% withholding) and mailed her a check dated 12/26/22 with a 1099R for 2022. Check was never deposited. SPD says the same as jabell3 above, “if your beneficiary is someone other than your spouse, payment cannot be deferred beyond December 31 of the fifth year following your death.” No mention of any mandatory distribution within one year of death. So since the tax preparer finds out about this in April 2023, there is no way for this income to be distributed out of the estate on a K-1. I don’t see how either the Plan sponsor or Fidelity can legally force this distribution to be a 2022 distribution. Nothing in the SPD legally required it and the withdrawal was not requested nor expected. In fact, SPD reads that we would have grounds to force them to pay it out over 5 years if we chose to. On what grounds could they refuse? The plan sponsor has requested that Fidelity prepare a corrected 2022 and report the distribution as a 2023 distribution since the beneficiary is unemployed and has no income. Still waiting for them to accomplish this.
Permalink Submitted by Alan - IRA critic on Sun, 2023-10-01 19:19
As indicated earlier in this thread, an estate beneficiary is almost always going to result in a lump sum distribution for a 401k. The SPD is restating the IRS RMD rules, but the plan operating procedures can be used to override the IRS rules if the procedures are more restrictive than the IRS RMD options. While nothing good can come from losing or ignoring plan correspondence, I doubt that the lost mail would have offered any option for avoiding the LSD. It’s rare that the plan sponsor would request a revision from the administrator (Fidelity) but they might comply with the request depending on their agreement with the sponsor. If they do there will probably be new 2023 withholding and the taxpayer may have to file for 2022 to get a refund of the 2022 WH.
Permalink Submitted by Dawn Chastain on Sun, 2023-10-01 22:23
I totally get that the plan can choose to override the IRS rules for RMDs if they are more restrictive, but my issue is that these more restrictive operating procedures should have been disclosed in the SPD and they were not. I would think that they are obligated to do so. Agreed on the withholding part, although I am confident that for a payer as big as Fidelity, issuing corrected 1099Rs is commonplace and that adjustments to withholding are frequently made on corrected forms 945. I think the biggest issue is their will to do it.
Permalink Submitted by David Mertz on Mon, 2023-07-17 22:13
Presumably the individual was not married, otherwise the surviving spouse would be the default beneficiary. Because the inherited 401(k) cannot be rolled over to an inherited IRA under these circumstances, to obtain distributions over the period ending on December 31 of the fifth year following the year of death, the 401(k) account would have to remain in place and the *estate* would have to obtain distributions from the 401(k) over the period and pass the income through to the estate beneficiaries, but the estate would have to remain open to do so, which might be undesirable. Since the plan document does not require a lump-sum distribution, it should be possible to convince the plan to maintain the account for distributions over the period.