Death benefit rollover to 401k

[WhatsESUP]

A participant's wife has passed away and he would like to rollover the 401k balance from his wife's company to his 401k account at his company.

Can 401k plans accept spousal death benefit rollovers or must he rollover the balance to an IRA?

Thanks!

[My 2 cents]

I am not a lawyer and don't practice in the 401(k) arena, but it seems to me that if the participant is already covered by the 401(k) plan and the 401(k) plan allows rollovers in, the fact that the amount being rolled over comes as a spousal rollover from the deceased spouse's account and not from another employer plan covering the participant should not get in the way of the 401(k) participant being able to roll that money in.  I could be wrong, though.

[CuseFan]

From Relius VS language. It's only non-spouse beneficiaries that are limited to IRAs.

With respect to distributions made after December 31, 2001, an eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), (other than an endowment contract), a qualified defined contribution plan described in Code Section 401(a) that accepts the distributee's rollover distribution, an annuity plan described in Code Section 403(a), an eligible deferred compensation plan described in Code Section 457(b) which is maintained by an eligible employer described in Code Section 457(e)(1)(A), and an annuity contract described in Code Section 403(b), that accepts the distributee's eligible rollover distribution. The definition of "eligible retirement plan" shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Code Section 414(p). In the case of "distributee" who is a nonspouse designated beneficiary, (1) the direct rollover may be made only to an individual retirement account described in Code Section 408(a) or annuity described in Code Section 408(b) ("IRA") that is established on behalf of the designated beneficiary and that will be treated as an inherited IRA pursuant to the provisions of Code Section 402(c)(11), and (2) the determination of any required minimum distribution required under Code Section 401(a)(9) that is ineligible for rollover shall be made in accordance with Notice 2007-7, Q&A 17 and 18.

[TPAJake]

It gets messy when you start filling out the forms, but it can be done.  The real mess happens after the fact during the 1099-R reporting at year end 

[My 2 cents]

24 minutes ago, TPAJake said:

It gets messy when you start filling out the forms, but it can be done.  The real mess happens after the fact during the 1099-R reporting at year end 

Just wondering why.  The deceased spouse's 401(k) would show the distribution as a direct rollover on the 1099-R (so no taxable event) and there would not be 1099-R reporting required from the receiving participant's 401(k), right?

[TPAJake]

That's the way it should happen, but unfortunately the reality is that it does not.  It falls on the receiving spouse/participant to defend themselves to the IRS for faulty reporting most of the time.  I have several such cases going on right now where the 1099-R was issued without a code G simply because it was a death benefit.  I was shocked to find out this is actually Merrill Lynch's stated policy!  The major pitfalls are:

Errors on the death benefit claim form (depending on provider) cause lots of delays & correspondence.  Surviving spouse is already distraught & fails to complete the process.  This can be due to incorrect SS#'s, or correct SS#'s on the wrong lines, checking the wrong payment type, incorrect check styling instructions, bad addresses for the FBO check, death certificate discrepancies, etc. etc. 

Surviving spouse gets help from TPA/CPA/CFP & the forms are perfect, but the issuing bank gets the coding wrong.  IRS correspondence ensues & the first time the distraught spouse misses a deadline or signs the wrong line, IRS calls it taxable.  

Just my experience over the last few years...  And to answer your last question, most of the IRS inquiries I've been dragged into have asked for form 5498's from the receiving account, so even though there is no 1099-R reported for the receiving account, they still want their documentation & you would not believe some of the answers I've seen to a request for 5498 copy.

[david rigby]

The spouse might also consider:

1.  There will probably be a fee to effect this transfer/rollover.

2.  There might be some positive diversification associated with leaving it alone (depending, of course on how it's currently invested and other investment offerings).

[Kevin C]

You don't mention his age.  If he is under 59.5, it may be to his advantage to either leave it where it is or roll it to an inherited IRA. Either would preserve the death benefit exception to the 10% early withdrawal penalty.  

[ESOP Guy]

It is early but are there any RMD implications here?  I can see an inherited IRA and leaving it in the deceased's plan as more likely to get the RMDs correct then a rollover source in the spouses' 401(k) plan.  I can easily see it being treated as a rollover source in the new plan not as an inherited source.  In theory they all could get it right the question in my mind is as a practical matter will the new plan get it right. 

[Kevin C]

If it is rolled into the surviving spouse's 401(k), it would no longer be considered inherited. With IRAs, the surviving spouse can choose between rolling to his own IRA or rolling to an inherited IRA.  There is a good description of the available options in the model tax notice:

Quote

If you are a surviving spouse. If you receive a payment from the Plan as the surviving spouse of a deceased participant, you have the same rollover options that the participant would have had, as described elsewhere in this notice. In addition, if you choose to do a rollover to an IRA, you may treat the IRA as your own or as an inherited IRA.

 An IRA you treat as your own is treated like any other IRA of yours, so that payments made to you before you are age 59½ will be subject to the 10% additional income tax on early distributions (unless an exception applies) and required minimum distributions from your IRA do not have to start until after you are age 70½.

 If you treat the IRA as an inherited IRA, payments from the IRA will not be subject to the 10% additional income tax on early distributions. However, if the participant had started taking required minimum distributions, you will have to receive required minimum distributions from the inherited IRA. If the participant had not started taking required minimum distributions from the Plan, you will not have to start receiving required minimum distributions from the inherited IRA until the year the participant would have been age 70½.