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Guest lvegas

NonSpouse Rollovers

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Guest lvegas

I've seen at least one blog and other sources (including clients) suggesting that the PPA non-spouse rollover rules (optional in 2007 per Notice 2007-7) will be required in 2008 based on a statement in the IRS's 2007 List of Required and Interim Amendments. That statement indicates that pursuant to impending PPA technical correction legislation, nonspouse rollovers will be required in 2008. However, that legislation has not been passed. As such, it is my view that the IRS's conditional interpretation of what would happen should the legislation be passed should not hold the force of law. In otherwords, I believe those who are saying the nonspouse rollover rules to be required in '08 to be wrong.

Anyone want to quibble with this?

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I saw IRS speakers at two ASPPA conferences this year say that the IRS is treating rollovers to nonspouse beneficiaries as mandatory, not optional. They said it was Congressional intent that rollovers to nonspouse beneficiares are mandatory, not optional.

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Guest lvegas

When were the conferences? I have a hard time seeing how there could be Congressional intent when Congress failed to put the technical corrections into law. Anticipatory Congressional intent? Does a web posting on the IRS website carry the force of interpretive guidance? Why hasn't the IRS put something out to clarify their stance? What are all you benefits professionals out there advising?

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Guest mjb
I've seen at least one blog and other sources (including clients) suggesting that the PPA non-spouse rollover rules (optional in 2007 per Notice 2007-7) will be required in 2008 based on a statement in the IRS's 2007 List of Required and Interim Amendments. That statement indicates that pursuant to impending PPA technical correction legislation, nonspouse rollovers will be required in 2008. However, that legislation has not been passed. As such, it is my view that the IRS's conditional interpretation of what would happen should the legislation be passed should not hold the force of law. In otherwords, I believe those who are saying the nonspouse rollover rules to be required in '08 to be wrong.

Anyone want to quibble with this?

The IRS issued its notice implimenting non spousal rollovers for all plans as of 1/1/08 because it knows the tech corrections act which includes the mandatory rollover provision effective as of 1/1/08 will becomes law in sometime in 2008, since Congress always passes tech corrections legislation. There is no doubt the rollover provision can be made retroative to 1/1/08 regardless of when it is enacted into law.

As for your view that the IRS notice stating that mandatory rollovers are required on 1/1/08 for all plans does not have the force of law heres 2 questions for you:

1. Why do you care if it is applied as of 1/1/08 since the plans can be amended at a later date?

2. do you feel lucky today?

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Guest lvegas

In reverse order: I feel so lucky it hurts. I care because if a plan does not offer a nonspouse the rollover distribution on, say, Jan. 10, but was supposed to, a retroactive amendment in 2009 is not going to fix the operational problem.

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Guest mjb
In reverse order: I feel so lucky it hurts. I care because if a plan does not offer a nonspouse the rollover distribution on, say, Jan. 10, but was supposed to, a retroactive amendment in 2009 is not going to fix the operational problem.

1. So if you feel lucky why are you asking the Question in the first place?

2. Why can't you apply the mandatory rollover to any distributions payable to non spouses on or after 1/1/08?

I don't know why any plan admin can't comply with a rollover for non spouses since all plans are required to rollover distributions for spouses. Please explain.

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Guest lvegas

I feel lucky, but luck is a dangerous and fleeting thing. To rely on it would be foolish, which is why I posed the question.

A plan can certainly change its processes to permit rollovers. But if it doesn't want to go through the administative hassle of changing its established practice and doesn't have to, why should it?

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Guest mjb
I feel lucky, but luck is a dangerous and fleeting thing. To rely on it would be foolish, which is why I posed the question.

A plan can certainly change its processes to permit rollovers. But if it doesn't want to go through the administative hassle of changing its established practice and doesn't have to, why should it?

Because the IRS says so.

Why do you think it wont have to???

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Guest lvegas

I stated why in my initial post. Again, I'm having a problem with the idea that the IRS can say it is going to interpret a law in a certain way because of another law that has not yet been passed based on the notion that it goes without saying that the other law will be passed expeditiously. If that is the case, and given that we're on the edge of 1/1/08, why hasn't the IRS come out with more formal guidance to state explicitly that such rollovers are mandatory. Why didn't it make more noise? I have to believe that there are a number of plans that will not be in compliance come mid-next week.

The IRS statement on this (issued on its website) is ambiguous: "Pursuant to an impending technical correction, nonspouse beneficiary rollovers will be required for plan years beginning on or after January 1, 2008." Yes, I agree that it could be read to mean that no matter what the circumstances, the IRS thinks it's a foregone conclusion that the corrections bill will be passed as drafted in August (or whenever it was), and therefore it is going to reverse course from N 2007-7. However, I think it can also be interpreted to mean that the passage of the legislation in a reasonably short timeframe is a condition precedent to the IRS's interpretation. Now that we're in the twilight zone of the law not having been passed in a particularly "impending" manner (one would think it would have at least have to have been passed by the date stated by the IRS for compliance to be impending), it puts some plans in a quandry of having to comply with a law that has not yet been passed. I see a breakdown in the logic there and therefore think it is at least justifiable to view the IRS's interpretation as moot. I'm not saying that's necessarily right, but I'm saying that's what I'm arguing.

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I think you might be putting too much weight on a flawed IRS interpretation of a law which the IRS has even publicly announced is flawed.

In the Pension Protection Act, Congress said rollovers to nonspouse beneficiaries are permitted.

IRS interprets that law as stating that rollovers to nonspouse beneficiares are optional, and releases Notice 2007-7.

Congress comes back, smacks the IRS in the head, and says that the Pension Protection Act did not say that rollovers to nonspouse beneficiaries are optional.

IRS announces that they concede the point, and that rollovers to nonspouse beneficiaries are required, not optional.

At the Cincinnati Benefits Conference last summer, the IRS was already conceding that rollovers to nonspouse beneficiaries are not optional, and this was months before the announcement on their website.

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I'd agree that the IRS missed the boat in the first place. While a technical correction might make it even clearer as to Congressional intent, I believe it's already there in the law...

  • 401(a)(31) requires direct trustee-to-trustee transfers of rollover eligible distributions.
  • 401(a)(31)(D) points to 402(f)(2)(A) for the definition of rollover eligible distributions.
  • 402(f)(2)(A) says the term has same meaning as in 402(c ).
  • PPA Sec 829 added 402(c )(11) which says a direct trustee-to-trustee transfer by a nonspouse bene shall be treated as an eligible rollover distribution.

Since PPA made it an eligible rollover distribution, it has to be provided by the plan. And since PPA Sec 829 was effective for plan years starting after 12/31/06, they're giving everyone credit for good behavior by not mandating nonspouse rollovers before 1/1/08.

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Guest mjb
I stated why in my initial post. Again, I'm having a problem with the idea that the IRS can say it is going to interpret a law in a certain way because of another law that has not yet been passed based on the notion that it goes without saying that the other law will be passed expeditiously. If that is the case, and given that we're on the edge of 1/1/08, why hasn't the IRS come out with more formal guidance to state explicitly that such rollovers are mandatory. Why didn't it make more noise? I have to believe that there are a number of plans that will not be in compliance come mid-next week.

The IRS statement on this (issued on its website) is ambiguous: "Pursuant to an impending technical correction, nonspouse beneficiary rollovers will be required for plan years beginning on or after January 1, 2008." Yes, I agree that it could be read to mean that no matter what the circumstances, the IRS thinks it's a foregone conclusion that the corrections bill will be passed as drafted in August (or whenever it was), and therefore it is going to reverse course from N 2007-7. However, I think it can also be interpreted to mean that the passage of the legislation in a reasonably short timeframe is a condition precedent to the IRS's interpretation. Now that we're in the twilight zone of the law not having been passed in a particularly "impending" manner (one would think it would have at least have to have been passed by the date stated by the IRS for compliance to be impending), it puts some plans in a quandry of having to comply with a law that has not yet been passed. I see a breakdown in the logic there and therefore think it is at least justifiable to view the IRS's interpretation as moot. I'm not saying that's necessarily right, but I'm saying that's what I'm arguing.

There is no logic in the tax law. It is what Congress and the IRS says it is. In the 1986 Tax Reform Act Congress enacted a provision that inadvertently gave an income tax benefit to estates of holders of ESOP shares who tendered the shares back to the plan within 9 months after the shareholder's death even though the shares were not owned at death which was not intended by the Tax writing committees. Shortly after the law was signed on October 1986, the IRS discoverd the glitch and after consulting with the tax writing committees notified taxpayers that the income tax benefit was only available to the estates of taxpayers who owned the stock at death. Congress retroactively amended the law in 1987 back to the date of the 1986 act became law. The estate of a taxpayer who purchased the company's shares after the death of the taxpayer and sold the shares to the ESOP under the law as passed by Congress before it was amended sued the IRS after the tax benefit was denied on the grounds the the tax law could not be retroactivley amended. The taxpayer's claim was dismissed by the courts.

By the way if you review PPA which was enacted in in August 2006 you will discover that there are provisions aff3ecting benfits payments that were effective on January 1, 2006.

My question is why do you insist on opposing something that is going to happen, which is a no brainer to comply with and which the courts will not invalidate.

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Guest lvegas

Why would anyone do anything but that which is the seemingly easiest and most practical solution? Well, we do not all live in a cookie-cutter world.

That's a fine point that the PPA (and various other tax laws on occasion) applied retroactively on certain matters. But did the IRS espouse an opinion with respect to how those particular ppa provisions applied prior to and in anticipation of the ppa's enactment? Not to my knowledge - certainly correct me if I'm wrong.

It's one thing to say after the fact that a tax law applies with retro effect. It's entirely another to say we think this law that hasn't even been passed, but probably will be, should have immediate effect pending its passage b/c it's likely to have retroactive effect (this is pure speculation, naturally, given the prospective effective date in the corrections act as originally proposed). If the IRS was so sure of its position, why didn't it come out with something more substantial than the equivalent of a footnote on its website?

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Why not just do it? Not everyone wants to allow non spouse beneficiaries to rollover their benefits.

In the view of certain narrow minded types, that could be interpreted as condoning same sex partners or approving of other non marital relationships that are perceived as morally objectionable. I've even heard some talk of plans wanting to allow children and grandchildren to rollover, but prohibiting other non spouse beneficiaries from doing the same thing.

There are a lot of bizarre ideas out there!

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Our plans are all being amended to allow it, so I have no axe to grind either way. However, for purposes of the discussion, I offer the following excerpt of a recent commentary by Natalie Choate:

"A new version of technical corrections is now proposed in Congress, the "Tax Technical Corrections Bill of 2007" (S. 2374, H.R. 4195). The new version says nothing about beneficiary rollovers; the provision clarifying that beneficiary rollovers are mandatory on plans is gone without a trace. And the IRS has issued its annual list of amendments that qualified retirement plans must adopt in order to stay qualified, Notice 2007-94.

For guidance on implementing beneficiary rollovers, this "2007 Cumulative List of Changes in Plan Qualification Requirements" refers only to Notice 2007-7…which of course says that beneficiary rollovers are optional for the plan. There is no mention of mandatory beneficiary rollovers coming in 2008 or any other time."

So I dunno what will ultimately happen on this.

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Guest lvegas

I've been informed by an IRS agent that nothing official has been issued internally at the Service to indicate that nonspouse rollovers are currently mandatory as of 1/1/08 and that until further notice N 2007-7 is to be followed. The indication was that the statement on the website we've been quibbling about was only meant to alert plans that this change in law was seemingly coming soon and would require action (as distinguished from the IRS independently taking immediate affirmative action prior to and because of the expected passage of the technical corrections bill). Naturally, the guidance dispensed was in no way official, and one certainly might be able to get an entirely different answer from a different IRS representative.

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Guest MargeM
I've been informed by an IRS agent that nothing official has been issued internally at the Service to indicate that nonspouse rollovers are currently mandatory as of 1/1/08 and that until further notice N 2007-7 is to be followed. The indication was that the statement on the website we've been quibbling about was only meant to alert plans that this change in law was seemingly coming soon and would require action (as distinguished from the IRS independently taking immediate affirmative action prior to and because of the expected passage of the technical corrections bill). Naturally, the guidance dispensed was in no way official, and one certainly might be able to get an entirely different answer from a different IRS representative.

That sounds right to me. Also note that the Senate version of the Technical Corrections that was passed in December and awaits House action did indeed include the nonspouse rollover change - with a 2009 effective date. The earlier language in the bills last summer would have directly modified 401(a)(31). The current version modifies 402 - but the end result is the same.

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