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Jan 2010
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January 18, 2010

Non-Spouse Beneficiary Rollovers - Administrative Changes

For plan years beginning in or after 2010, retirement plans must offer non-spouse beneficiaries the opportunity to directly roll over eligible rollover distributions to an inherited IRA. In addition, for the first time, plans must notify non-spouse beneficiaries in writing of their rollover rights. For the last three years, non-spouse rollovers have been permissive and no notice was required; the direct rollover option and notice have been mandatory only for distributions to participants and spouse beneficiaries.

The written notice must explain the beneficiary's rollover rights and the now mandatory 20% income tax withholding on distributions not directly rolled over. Plan administrators may use the new model rollover notices included in IRS Notice 2009-68 and described in our September 10, 2009 Alert. Two model notices are available, one for payments from Roth accounts and one for payments from non-Roth accounts. Both new model notices include sections specifically addressed to spouse and non-spouse beneficiaries.

The plan must provide the explanation in the same time frame as it provides distribution notices to participants. This time frame is set forth in the plan document and cannot be earlier than 180 days or later than 30 days before making the distribution. The beneficiary may waive the 30-day minimum, but even with a waiver, a 7-day minimum applies for defined benefit plans.

Although rollovers by participants or spouse beneficiaries can be made to any eligible retirement plan, rollovers by non-spouse beneficiaries can only be made to inherited IRAs. Inherited IRAs can be either traditional or Roth IRAs. To be an inherited IRA, the IRA must be established in a manner that identifies it as an IRA with respect to the deceased participant and must identify the beneficiary. The IRA need not exist before the participant’s death, however. Payments from an inherited IRA are subject to the required minimum distribution rules applicable to post-death distributions with respect to the participant.

Under an inherited IRA, a non-spouse beneficiary:

  • cannot make any other contributions, including rollovers from other plans;
  • can make a trustee-to-trustee transfer to another inherited IRA in the participant’s name with the same beneficiary;
  • will not be taxed on the assets until receipt of distributions from the IRA, except that non-Roth assets rolled over to a Roth IRA are subject to income tax upon rollover;
  • has the same basis in the assets as the participant; and
  • may not combine the basis in the IRA with the basis in any of his or her other IRAs, whether individually owned or inherited.

If you have any questions about non-spouse beneficiary rollovers and notices or would like the new model rollover notices adapted to your particular plan, please contact any member of the Warner Norcross & Judd LLP employee benefits practice group.
 

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