Death Benefit Payment

[Jilliandiz]

Participant dies in 2003, and the beneficiary is his brother, who receives the death benefit payment in 2003, as a rollover. However, when does he have to pay the taxes on that amount he inherited? Does it have to be in the year he received the benefit? What's the deal with the 5-year rule??? What are the beneficiaries options on paying the taxes from the benefit?

Thanks.

[Harwood]

I was unaware that a brother could receive a rollover from a qualified plan.

[Jilliandiz]

I was under the impression that rollovers were only permitted to spousal beneficiaries also. But I think somehow this guy received a rollover death benefit. Would that answer the question then about the taxes needed to be paid?

Because if he would have received the distributon in lump sum, then he would have had taxes withheld already???

Also, how would you solve the problem of the death benefit was a rollover and taxes still need to be paid, since he did actually receive it as a rollover?

What is the 5 year rule? How should this guy pay taxes, what is his time limit to pay them???? Anything to help me understand this better please!!!

I need some advise as to how someone might handle this situation.

Thanks again!

[Mike Preston]

Harwood is right. Unless there is something unusual going on such as if the brother had or set up another plan to which the beneficiary's entitlement was transferred, the fact that the money was paid out of the plan makes it all somewhat easy. The distribution was made. It wasn't rollable. Therefore, the brother owes taxes on the entire distribution. The fact that withholding wasn't done is water under the bridge. Ingore it. Now, turn your attention to the rollover. It wasn't allowed. Hence, if not distributed by 4/15/04 it will (to the extent not allowed - maybe around $2k?) constitute an excess contribution to an IRA. Excise tax and all that. It was rolled to an IRA, wasn't it? Was it rolled to a qualified plan? If so, there are bigger issues to deal with.

[mbozek]

Q- Was the distribution reported to the recipient on a 1099-R? Were the funds transferred to another custodian as a rollover or a trustee to trusteee transfer? I thought that trustee to trustee transfers are not reported to the IRS.

[Jilliandiz]

Ok, the distribution came from a 401(k) Plan, and the money was transferred to a new account set up under the beneficiaries name. Was that handled correctly? If so, then the beneficiary didn't really receive a distribution at this time? He would need to take the money from the new account as a lump sum within 5 years right?

[Mike Preston]

Cool. Facts. Always good to have.

So, no distribution has been made.

Just an accounting modification on the plan's records indicating that the monies are being held on behalf of a beneficiary, rather than on behalf of a participant. That appears to be ok.

If death took place in 2003, I think that the brother has two choices:

1) Decide that the distributions he wants will be completed within 5 years (actually, I think the rule is by 12/31/2008, but this should be verified) and, hence, take any and all that he wants before then (consistent with the terms of the plan) with the recognition that anything not distributed before 12/31/2008 will be distributed on that date. Many plans, to avoid administrative complexity only allow the option you indicated: that a lump sum can be paid at any time, at the election of the beneficiary, but not later than 12/31/2008.

2) Begin to receive payments from the plan before the end of the year after death (12/31/2004, in this case) that satisfy the rules of a "lifetime distribution". That is, if the plan so allows. See 401(a)(9)(B)(ii).

Taxes are paid on the monies in the year(s) received by the brother.

This whole thing assumes that the participant wasn't already in pay status. For example, if the participant was over age 70 and 1/2 and was a 5% owner, then different rules apply.

[Jilliandiz]

Mike, thanks so much for clearing that up for me. I appreciate it!

[Mike Preston]

YW.

[david rigby]

Might be some helpful information here: http://www.irs.gov/pub/irs-pdf/p575.pdf

For example, search for the word "beneficiary", and look on page 25.