Beneficiary lump sum 1 year or 5?

[401ok]

Hi all you knowledgeable people.

I am the executor and while I realize that my deceased brother's nontraditional 401(k) is not going through probate I still need to help. This is a profit sharing plan sponsored and contributed to by his sub S for his retirement and he is the only employee and sole participant filing a 5500-EZ. He died a few weeks ago prior to his RBD. No spouse. The plan was adopted in 1988 and includes a Beneficiary Designation Form naming his 2 children and checking the box "lump sum payment". Publ. 575 suggests that there are only two options, one of which is taking the distribution within 5 years. Yet I have read elsewhere that a lump sum needs to be taken by December 31st of the year following death. I need to know when to distribute via the 1099-R. If it needs to be a total distribution by the following year what is that Code Section citation please? To me lump sum means lump sum so how could Publ 575 say that there are only two options for non-periodic/total distributions. Do they really take a "lump sum" over 5 years which greatly reduces their tax burden?

[Tom Poje]

hello, and welcome. (and my condolences)

you are correct, lump sum means everything within one taxable year.

I can't quite tell from your post because you only mentioned the beneficiary form, but does the document have something like the following which has different options for payout upon death, in this example item c was checked so that is what is followed - e.g. if B was checked then payout is lump sum.

In this particular plan (though not shown below) distribution is by lump sum, but that is to the participant only, but as noted below, in the case of death while it could be lump sum, it allows for extended payments

(this example is from a document that has a checklist, some are simply described in the distribution section under death. 

Payment upon Participant's Death

Distributions on account of the death of the Participant shall be made in accordance with the following:

a. [ ] Pay entire Account balance by end of fifth year for all Beneficiaries in accordance with Sections 7.02(b)(1)(A) and

7.02(b)(2)(A) only

b. [ ] Pay entire Account balance no later than the 60th day following the end of Plan Year in which the Participant dies

c. [ X ] Allow extended payments for all beneficiaries in accordance with Sections 7.02(b)(1)(A), (B) and (C) and

7.02(b)(2)(A) and (B)

d. [ ] Pay entire Account balance by end of fifth year for Beneficiaries in accordance with Sections 7.02(b)(1)(A) and

7.02(b)(2)(A) and allow extended payments in accordance with Sections 7.02(b)(1)(B) and (C) and 7.02(b)(2)(B) only if the

Participant's spouse is the Participant's sole primary Beneficiary

e. [ ] Other:

[Bird]

I'm sorry for your loss, and that you are having to deal with the aftermath. 

"lump sum" in the plan definition means it has to go out of the plan in one lump sum.  It does not mean it has to be taken as income - the beneficiaries can set up beneficiary payout IRAs and take minimum distributions over their lifetimes.

If they want to do this, it has to come out of the plan by Dec 31 of the year following date of death.  If they wait beyond that, it would in fact have to be taken under the 5 year rule and would not be eligible for rollover.  There is some confusion between the plan rules and the RMD rules that I'm not trying to explain because I think the answer is to just roll it to bene payout IRAs.

Did he have a third party administrator assisting him or was this done through an investment company?  A third party administrator is the best source of direct assistance for this (not an accountant, or broker if he was using one, with all due respect).  And not that we mind you asking; feel free to write back for clarification.

[401ok]

Thank you for your input.

The lump sum will come out this calendar year of death in a direct transfer to each named beneficiary's IRA. I understand that if it went to the beneficiary first then the entire amount would be taxed so it goes directly to their IRA's.

Yes, the Beneficiary Designation form included check boxes and lump sum was checked rather than "Let beneficiary decide". And no there was no plan admin.. My brother was the admin, trustee, and sole employee of his S Corp which adopted the prototype plan and made the annual employer contributions that were then invested at the bank and brokerage. Thanks again.

[Bird]

3 hours ago, 401ok said:

 invested at the bank and brokerage.

That's a red flag for me, especially if your brother was doing everything.  You might have two plans - banks, and especially brokerage firms, just care about getting the money and don't care about doing things right.  Now, it may not be a disaster to have two plans, but be aware that you might have to do two sets of paperwork to unwind all of this.  And don't forget, or be advised, that even if the plan(s) were under the $250,000 threshold for filing a plan tax return, you are required to file a return for the final plan year.