Beneficiary and participant in same plan, can death benefit just be tr

[John A]

If 2 people are participants in the same qualified plan, and one is the 100% beneficiary of the other, can the participant's account balance simply be transferred to the beneficiary's account balance upon the death (on or after 1/1/2002) of the participant? If the beneficiary is the spouse, does the plan have to provide for accepting spousal rollovers in order to do the transfer? Can the amount be considered a trustee-to-trustee transfer, or would it have to be considered a rollover?

[BPickerCPA]

The only way it can be transferred is if the the beneficiary is the decedent's spouse. Otherwise it is an illegal rollover.

[mbozek]

I have never seen a ruling authorizing a trustee to trustee transfer between two participants in the same plan. I think there needs to be a distribution and then a corresponding rollover back to the plan by the spouse. If the beneficary is a non spouse then there must be a taxable distribution because tax policy is to permit rollovers only between spouses.

[QDROphile]

I think it is best to follow mbozek's approach. The coincidence of the beneficiary having an account should be disregarded and all the rules for distributions to beneficiaries should be observed. No shortcuts. If the rollover or transfer by the beneficiary (assuming eligibility for a rollover or transfer) wants to come back to the same plan, then the plan's rules should be observed for accepting the funds as well. For example, the funds should be accounted for as a rollover or transfer in the beneficiary's account under the plan.

[BPickerCPA]

QDROphile,

I don't disagree with you. The original question was CAN it be done. Lot's of things CAN legally be done, assuming the custodian/administrator permits it and the plan permits. That doesn't mean it's the best way to go.

In this case, I can't think of any reason why it shouldn't be done, but I doubt that any administrator would permit, just from their own record keeping standpoint.

Maybe I need to stop being so theoretical.

[mbozek]

BPicker: I think the question is whether such a transfer is legally permissible under the applicable tax law provisions since a qualified plan can be disqualified for accepting an impermissible transfer. There is no reason for a plan administrator to make a trustee to trustee transfer/rollover (other than a rollover to a spouse) under facts presented by John A without some IRS precedent and put the plan at risk regardless of wither the plan permits such transfers.

[BPickerCPA]

MBozek,

Under the 2001 Act's portability provisions, I'm pretty sure it's legally permitted. It would be permitted if decedent worked at company A and spouse at company B. The spouse can transfer decedent's plan benefits from company A into spouse's plan at B. If both work at A, why would that be different. So I think all you need is for the plan to permit it. The IRS is not a problem.

[mbozek]

Being pretty sure may not be good enough for a plan administrator who must put the plan's qualified status at risk without IRS guidance. My queston is why should the PA take such a risk in the absence of IRS guidance by transferring assets between the accounts of two spouses within the same plan when it could do a rollover from the account of the deceased spouse to the surviving spouse without any risk.

[John A]

There are at least 3 possible reasons a plan administrator might want to allow this:

1) To save having to do a 1099-R

2) To save the time and paperwork involved in cutting a check, distributing it, and then accepting it again (but would still need the paperwork for the rollover election)

3) To prevent the need to sell an investment the beneficiary might want to keep as is (although that would probably mean the plan would have to require in-kind distibutions)

It is hard to imagine why the IRS would think this would be a disqualification issue. The answer would have been a clear no before EGTRRA changed the rollover rules.

[Disco Stu]

I'm with John A on this one & would add another to his list of reasons to do this.

The IRS has relaxed their draconian rules about plan disqualification for accepting impermissible rollovers. They now allow plans to purge impremissible rollovers without jeopardizing the plan's qualified status. And with the EGTRRA changes, there aren't many impermissible rollovers left anyway.

It is certainly possible to make accounting entries to record this transaction as a distribution from the deceased and a subsequent rollover contribution without actually initiating any transaction at the trust level. It's a good faith approach to an unusual situation. Even in the event the IRS comes in and takes issue, it seems to me that any correction is without consequence to the plan.

The thing that I was thinking of as a roadblock to going ahead with the propsed transaction was if it could be viewed as an improper assignment of trust assets. Since it's staying inside the trust, I don't think this would be a good argument either though.

[mbozek]

You can do whatever the client is comfortable with. My query was directed to the need to engage in the additional effort to determine whether the are any tax issues (e.g., assignment of income/separate account requirements?) which have to be resolved before transfer when there is a perfectly acceptable means of tranferring the funds by rollover or doing nothing and maintaining separate accounts. Finally who is going to sign off on the transfer approach and be responsible if it is not correct?