Non-spousal direct payment tax withholding?

[pmacduff]

ok - I'm sure this can be found relatively easily, but I am lazy this morning and looking for a quick answer...

I have a plan beneficiary (son) who took distribution of a portion of his mother's account when she first passed away a while ago (balance forward PS is part of the plan, so plan needed to wait until following plan year end to pay out remainder of account). In any event now he is going to take the balance. With the initiation of the non-spousal beneficiary rollovers, does this mean that non-spousal beneficiaries who elect direct payment will now be subject to mandatory Federal withholding of any sort?

Thanks in advance!!

[masteff]

does this mean that non-spousal beneficiaries who elect direct payment will now be subject to mandatory Federal withholding of any sort?

No. Notice 2007-7 Q&A-15

A-15. Section 402©(11) provides that a direct rollover of a distribution by a

nonspouse beneficiary is a rollover of an eligible rollover distribution only for purposes

of § 402©. Accordingly, the distribution is not subject to the direct rollover

requirements of § 401(a)(31), the notice requirements of § 402(f), or the mandatory

withholding requirements of § 3405©. If an amount distributed from a plan is received

by a nonspouse beneficiary, the distribution is not eligible for rollover.

[GBurns]

Shouldn't that be Yes ?

It is a direct payment to a nonspouse beneficiary, not an eligible rollover.

[Guest Sieve]

But, Geroge, isn't mandatory withholding only required for "eligible rollover distributions"? (IRC Section 3405©.) And, isn't a distribution to a non-spouse beneficiary now considered an eligible rollover distribution under IRC Section 402© only if it's actually rolled over? (IRC Section 402©(11)(A).) In other words, if the non-spouse beneficiary receives the distribution in cash, it cannot be rolled over, and therefore it is not an eligible rollover distribution (and, anyway, such a distribution doesn't meet the definition of IRC Section 402©(4)). That means that a distribution to a non-spouse beenficiary should not be subject to mandatory withholding (which was the rule, I believe, for non-spouse beneficiaries before the non-spouse rollover provisions of PPA).

[Guest mjb]

Shouldn't that be Yes ?

It is a direct payment to a nonspouse beneficiary, not an eligible rollover.

A rollover by a non spouse to an IRA under IRC 402(a)(11) is a trustee to trustee transfer that is treated as a rollover. Therefore the witholding rules do not apply.

[Guest Sieve]

mjb - OP indicated this was a distribution paid directly to the non-spouse beneficiary, & not a trustee-to-trustee transfer. Is your answer to the withholding question different in that case? I think there still is no withholding.

[rcline46]

Taxes must be withheld on the 'old' schedule (minimum 10%) UNLESS the recipient files a (substitute) W2-P and elects not to have withholding.

[Guest Sieve]

Agreed. Waivable withholding required, but no 20% mandatory withholding required.

[pmacduff]

This beneficiary has waived withholding.

I was more interested to learn if the distribution was now considered to be an "eligible rollover" distribution (and therefore subject to mandatory withholding) because the non-spouse bene has the option to roll to a non-spouse beneficiary IRA.

Clearly it is not (see masteff's cites).

Thanks for all the responses and input!

[John Feldt ERPA CPC QPA]

W-4P?

[Appleby]

Update...

http://www.mhco.com/Library/Articles/2009/...0WH_080709.html

[Guest Sieve]

Is McKay Hochman correct? I didn't think the mandatory withholidng rule changed. Since the non-spouse distribution is an eligible rollover distribution for all purposes only if it is received in a direct trustee-to-trustee transfer to an IRA (as still stated in IRC Section 402©(11)(A)), how could there be mandatory withholding when it is paid in cash if it is not an eligible rollover distribution unless directly transferred?

I must be missing something (other than a few screws!!) . . .

[Belgarath]

Hi Sieve. I started out with the same opinion as you, but after looking into it, I've changed my mind. Emphasis below is mine.

Although the plain language under the 402©(11) title line and 402©(11)(A) is dealing only with a direct transfer to an inherited IRA, it seems to me that the trump item is 402(f)(2)(A), which says that it will be considered an eligible rollover distribution if it is a distribution to a designated beneficiary that would be treated as an eligible rollover distribution if the requirements of ©(11) were satisfied.

Therefore, under 3405©(3), the mandatory withholding would apply, I think.

[Appleby]

It seems McKay Hochman is right.

If we look at Notice 2007-7 , it says that the amount is rollover eligible only for purposes of 402©, and not the withholding rules under 3405. Q&A 15.

A-15. Section 402©(11) provides that a direct rollover of a distribution by a nonspouse beneficiary is a rollover of an eligible rollover distribution only for purposes of § 402©. Accordingly, the distribution is not subject to the direct rollover requirements of § 401(a)(31), the notice requirements of § 402(f), or the mandatory withholding requirements of § 3405©. If an amount distributed from a plan is received by a nonspouse beneficiary, the distribution is not eligible for rollover.

http://www.irs.gov/pub/irs-drop/n-07-07.pdf

If you look at WRERA, for the amendment to Section 829 of PPA, it says

(2)(A) Section 402(f)(2)(A) of the 1986 Code is amended by adding at the end the following new sentence: ‘‘Such term shall include any distribution to a designated beneficiary which would be treated as an eligible rollover distribution by reason of subsection ©(11), or section 403(a)(4)(B), 403(b)(8)(B), or 457(e)(16)(B), if the requirements of subsection ©(11) were satisfied.’’

©(11) applies to rollovers for non-spouse beneficiaries and can be viewed here http://www.law.cornell.edu/uscode/html/usc...02----000-.html

The amendment to Section 829 , subsection © says

© The amendments made by this paragraph shall apply with respect to plan years beginning after December 31, 2009.

WRERA available here http://frwebgate.access.gpo.gov/cgi-bin/ge...publ458.110.pdf . The amendment to section 829 is on page 19

[Guest Sieve]

Obviously, the "something" I was missing was the change made by WRERA to IRC Section 402(f)(2)(A). Thanks to both of you for getting me on the right track . . .

[K2retire]

Obviously, the "something" I was missing was the change made by WRERA to IRC Section 402(f)(2)(A). Thanks to both of you for getting me on the right track . . .

You and MANY others!

[Guest ASU2USC]

Just to clarify, because I was confused after reading this thread - even though the 20% mandatory withholding applies, the nonspouse beneficiary still may NOT take advantage of the 60 day rule and rollover to an IRA after receiving a distribution from the plan. The distribution to the nonspouse beneficiary is only an eligible rollover distribution if it is made by directly transferring the distribution to an Inherited IRA.

This is consistent with the way that the Service describes the options for nonspouse beneficiaries in their model safe harbor notices in Notice 2009-68:

http://www.irs.gov/pub/irs-drop/n-09-68.pdf

[masteff]

the nonspouse beneficiary still may NOT take advantage of the 60 day rule and rollover to an IRA after receiving a distribution from the plan.

Correct. The 60-day rule provided in 402©(3) explicitly references ©(1) which applies to distributions "paid to the employee". As for surviving spouses and alternate payees, 402©(9) and 402(e)(1)(B) say the rules of subsection © apply to those persons respectively as if they were the employee. Nonspouse beneficiaries are handled in a different manner in 402©(11).

The distribution to the nonspouse beneficiary is only an eligible rollover distribution if it is made by directly transferring the distribution to an Inherited IRA.

No, that's the point of Appleby's two posts above (especially the McKay Hochman article that's linked). But "rollover eligible distribution" is not the same as being eligible for a 60-day indirect rollover.

[BG5150]

The WRERA rules are in effect for 2010, but I think they are "optional" for 2009. Doesn't the plan have to adopt an amendment to allow for the rollover of non-spouse money for '09?

[masteff]

The WRERA rules are in effect for 2010, but I think they are "optional" for 2009. Doesn't the plan have to adopt an amendment to allow for the rollover of non-spouse money for '09?

Correct. Presumably the IRS will issue something to superceed Q&A-14 of Notice 07-07.

[msimpson]

I have a question related to this stream, regarding when the mandatory withholding kicks in, or more specifically, when a plan might be permitted to begin mandatory withholding?

My issue is, I advise plans with July 1 fiscal years who began offering nonspouse beneficiary rollovers in 2008 under the permissive language of PPA, which did not require mandatory 20% withholding if the nonspouse chose to receive the distribution directly. Thus far we have advised the plans to apply the elective 10% withholding to any nonspouse beneficiary distributions not directly rolled over.

As I understand it, mandatory 20% withholding became applicable to nonspouse beneficiary rollovers with WRERA, and the amendment is effective for "plan years" beginning after 2009. Thus, for these fiscal year plans the mandatory withholding is not effective until July 1, 2010. (I note that the original PPA provision on nonspouse beneficiary rollovers which added 402©(11) was effective for "distributions" after 2006.)

For 2010, must these plans continue elective 10% withholding on nonspouse beneficiary distributions that are not directly rolled over until June 30th, and then switch as of July 1 to mandatory 20% withholding? It would be much simpler if they could just implement the mandatory 20% withholding as of January 1, 2010, but I'm not sure the law allows it.