Pension Protection Act and Non-Spouse Beneficiary

[Guest EMM118]

Assume a plan participant had named her 18 year old daughter as her designated beneficiary under a 401(k) plan. The plan participant dies in late 2006, Under Section 829 of the Pension Protection Act of 2006, the daughter can elect to roll over the 401(k) account balance into an inherited IRA. Is the daughter required to begin receiving distributions during 2007 over her life expectancy? If this was the situation under the 401(a)(9) regulation effective in 2002, is the importance of this change only that the daughter can name a beneficiary of her inherited IRA? Thanks. Ed

[Bird]

I think you have it correct, except that the new law "fixes" a couple of other "problems."

First, not all plans permit lifetime payouts, i.e. lump sums only for death benefits, so your bene (under those conditions, under old law) would have been required to take a lump sum within 5 years.

Second, even if the plan permits stretched-out payments, the bene might not like the investments and/or the trustee might not want the responsibility. (Think of two dentists in partnership, each with significant benefits, one dies, naming a trust as beneficiary. That money is (was) stuck in the plan, and if the surviving dentist was the trustee, and it's a pooled account, no one will be happy.) The new law takes care of that situation.

Finally, consider the same facts, but everyone is happy, except now the surviving dentist closes the business, merges with another practice, dies, whatever and the plan is terminated. Those stretched out payments, so carefully drafted by the estate planning attorney, now are out the window since the plan is being shut down.