Distribution to Non-Spouse Beneficiary

[PJ2009]

The non-spouse beneficiary took a total distribution at the end of 2008 within the timeframes of the 5-year rule. However, the individual did not realize the he was able to take a non-spouse rollover under law, and I don't believe the TPA made this option clear to him. As I recall, QPs were requried to offer the non-spouse rollover option for PYs beginning on or after 1/1/08, despite lack of specific plan language per PPA. What can be done here, if anything?

Tough issue with significant tax ramifications for the client! Just looking for some ideas.

Thanks for any input.....

[Guest mjb]

The non-spouse beneficiary took a total distribution at the end of 2008 within the timeframes of the 5-year rule. However, the individual did not realize the he was able to take a non-spouse rollover under law, and I don't believe the TPA made this option clear to him. As I recall, QPs were requried to offer the non-spouse rollover option for PYs beginning on or after 1/1/08, despite lack of specific plan language per PPA. What can be done here, if anything?

Tough issue with significant tax ramifications for the client! Just looking for some ideas.

Thanks for any input.....

At this time rollovers to inherited IRAs are allowed under IRS rules but are not required to be made available under a QP. Beginning 2010 all QP will be required to offer a rollover to an inherited IRA. If QP did not offer rollover as an option in 2008, beneficiary had no other option.

[PJ2009]

The non-spouse beneficiary took a total distribution at the end of 2008 within the timeframes of the 5-year rule. However, the individual did not realize the he was able to take a non-spouse rollover under law, and I don't believe the TPA made this option clear to him. As I recall, QPs were requried to offer the non-spouse rollover option for PYs beginning on or after 1/1/08, despite lack of specific plan language per PPA. What can be done here, if anything?

Tough issue with significant tax ramifications for the client! Just looking for some ideas.

Thanks for any input.....

At this time rollovers to inherited IRAs are allowed under IRS rules but are not required to be made available under a QP. Beginning 2010 all QP will be required to offer a rollover to an inherited IRA. If QP did not offer rollover as an option in 2008, beneficiary had no other option.

Follow up question:

If this is in fact a lump sum distribution to a non-spouse beneficiary in 2008 (rollover was not permitted under the plan):

1. Is it taxable at the beneficiary's ordinary income rates?

2. Is the taxable amount of the distribution determined as of the date of distribution, or as of some other date? The amount changed significantly over the year due to market fluctuation, and we are trying to help the taxpayer. A significant portion of the distribution was "in kind" stock.

3. Given that this is a sizeable amount and a hardship situation, do you think the IRS would be willing to agree to an alternative tax payment schedule?

Thanks again, everybody!

[Guest mjb]

answers:

1. yes unless there is a distribution of employer stock which will be taxed as LTCG to extent of NUA or employee after tax contributions to plan. See IRS 4972 form.

2. taxed on value on amount paid to him by plan which will be reported on the 1099-R filed by the plan administrator.

3. no opinion.