The Pension Protection Act of 2006 included a provision (section 829 of the Act) that permits company-sponsored retirement plans to make a transfer from the plan to an IRA for a non-spouse plan beneficiary (in other words, a "direct rollover"), which allows the individual to take stretch distributions over his lifetime instead of being subject to the harsh payout rules of most company retirement plans (which includes tax-qualified retirement plans under section 401 of the Internal Revenue Code, annuity plans under section 403(a) or 403(b) of the Code, and governmental retirement plans under section 457(b) of the Code). This provision became effective in 2007.
The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetimes as if they had inherited an IRA. That was the plan. But the provision lost its steam when the IRS released Notice 2007-7 in January 2007 stating that the provision was not mandatory for company plans.
So What's the Rule Now?
Do company plans have to allow non-spouse direct rollovers or not? It now appears that non-spouse transfers will remain voluntary and not be mandatory for 2008. This is the conclusion we must come to until either IRS or Congress issues official guidance otherwise.
The rules of IRS Notice 2007-7, making this provision optional, are the only rules we have to rely on since the provision making this mandatory for 2008 was never made part of the Tax Technical Corrections Act of 2007 signed into law by the President on December 29, 2007.
You should tell your clients that the direct rollover provision for non-spouse beneficiaries is still optional for company-sponsored plans.
But, In General, Tell Your Clients to Do an IRA Rollover If They Can!
As you can see, these provisions can change and it is clear that the plans have a better lobby in Congress than the people. The plans obviously do not want this provision being mandatory. This tells you that beneficiaries will not do well if company plan funds are left in the plan.
The best move is still generally to do the rollover into an IRA when you can (unless one of the lump-sum distribution tax breaks like net unrealized appreciation or 10-year averaging might work out better for your client).
Timeline of the Rules for Non-Spouse Direct Rollovers
| August 17, 2006 |
The Pension Protection Act of 2006 is enacted. It appears that the problem is solved since it is clearly the intent of Congress that this be mandatory for all plans |
| January 10, 2007 |
IRS issues Notice 2007-7 stating this provision is optional, NOT mandatory |
| February 13, 2007 |
IRS issues a clarification once again stating this provision is optional |
| August 2007 |
IRS posts an announcement on its website stating that this provision will be mandatory in 2008, referencing a technical correction to be put into the law requiring plans to allow this provision in 2008 |
| December 29, 2007 |
President Bush signs The Tax Technical Corrections Act of 2007 into law (H.R. 4839) but it mysteriously does not include the provision making the non-spouse rollover mandatory for 2008 |
| January 2008 |
IRS released Publication 590 on IRAs and Publication 575 for company plans mentioning that the provision is effective but no mention in either of these key publications of whether it is mandatory or optional |
We must assume that the non-spouse rollover provision remains optional for company plans, since there is no official guidance stating that this provision is mandatory, even though it is clear that this was the intent of Congress.
What was originally intended to be expanded protection for those who need it most -- the children of plan participants -- has now been taken away -- AGAIN!
Copyright 2008 Ed Slott, CPA - www.irahelp.com
[BenefitsLink editor's note: a discussion of this topic appears on the BenefitsLink message boards at http://benefitslink.com/boards/index.php?showtopic=37513 (click).]
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