Rollover from deceased spouse's account and top-heavy status

[lcollins300]

We have a key employee (5% owner) whose wife passed in late 2014.  He took distribution of her account balance in 2015 and rolled it over within the same plan.  Would the distribution from her account to his be considered a "related" rollover for calculating top-heavy status as the $ remains in the plan?  If yes, would it drop off after 1 year?

[lcollins300]

Anyone who has any opinion on this one I'd love to hear...……..

 

[Luke Bailey]

You could look for PLRs or other subregulatory guidance, but in absence of same literal application of the first sentence of Treas. reg. 1.416-1, Q&A T-32 would say related, because the rollover was "to a plan maintained by the same employer." Again, in absence of any other guidance (which I have not researched), you could argue that's not what the reg writer meant (i.e., the reg writer meant, e.g., a rollover from employer's terminated DB to DC), but tough to argue against literal wording based on what you think it should have said instead of what it does say.

[ETA Consulting LLC]

I would, respectfully, disagree. A rollover, by definition, takes on the characteristics of the plan it is rolled in to. This may sound dumb that I would is this as the basis of my argument, but that rollover (by that same definition) would be the equivalent of rolling into an IRA and then into the plan. I think the rollover loses its relation to the plan; and this is despite the fact it is rolled into the same plan. 

Good Luck! 

[Luke Bailey]

ETA Consulting LLC, I sympathize with your argument, but it is saying that the IRS doesn't really mean what they say in their reg. Spirit of law not letter, and all that. It might win in Tax Court.

[ETA Consulting LLC]

Without researching it directly, there is a difference between a transfer (where the Employer is the decision making authority for the movement of the funds) and a rollover (where it is solely the participant making the decision). I didn’t read the PLR, but would look for that distinction.

Good Luck 

[PensionPro]

I would treat it as unrelated because it is being rolled over from another participant's account.  I don't think rolling it over to a plan maintained by the same employer changes the fact that it is not the participant's account, but the participant as beneficiary of someone else's account.

[Larry Starr]

I'm sorry, but I think this is easy. It is clearly UNRELATED. The reg (1.416-1 T-32 ) clearly contemplates the transfer of assets that belonged to the benefit of the one making the transfer or on whose behalf the transfer is made. In this case, that person is dead; the spouse does not step into those shoes.  Any other reading is tortured.

[Luke Bailey]

I'm going on what it says, not what it contemplates. Typically safer with IRS. I have come across contemplative EP agents, but don't count on doing so.

[lcollins300]

Thank you all as you are all highly respected for your opinions!  After reading and rereading 1.416-1 T-32 we are calling it a related rollover.  I would love to her what Uncle Sal would say.  :)

[CJ Allen]

I have to tend to agree with Larry since the term "employee" would seem to define a single person (i.e., SSN) rolling from one plan of the employer to another for the same employee.  In this situation, the deceased spouse is the "employee" whose account is being distributed.  The "employee" distribution is not creating another account under the plan for the same employee.  Rather, it's the "beneficiary" who is rolling over the funds.  Thus, the employee rolling over funds has not transacted an eligible distribution from an account in his/her SSN based on the definition of related rollover as evidenced by treasury regulations.

[Larry Starr]

4 hours ago, lcollins300 said:

Thank you all as you are all highly respected for your opinions!  After reading and rereading 1.416-1 T-32 we are calling it a related rollover.  I would love to her what Uncle Sal would say.  :)

You can do that, but to quote our 37th president: "that would be wrong"! :-)

[Luke Bailey]

For some reason, below did not post timely, but I post it now for completeness.

With respect to your last comment, Larry, and having Googled who was the 37th Pres to make sure, I rest my case.

 

First of all, I inferred from question that both the deceased and widower are employed by same employee, so they were both "employees," right? The reg does not make a distinction between employee who is rolling over amount received as survivor and employee who is rolling over amount received as employee. Also, the reg literally says it is "related" if made to a plan of the same employer. You are guessing (probably correctly) that the people who wrote the reg didn't think about how their words might apply to the relatively rare situation of an employee of same employer as his/her decedent spouse, who chooses not to roll to an IRA. But maybe they did, and just didn't want to get too carried away with the exceptions to exceptions, and figured a person in that situation who wanted could roll the money to an IRA, just like someone who receives a distribution from a terminating DB of same employer could roll to an IRA.

As I stated at outset, maybe there is a PLR or something on point that would support the counterargument, but in absence of that, I would be cautious. Also, I'll bet if this was a large distribution to a non-key that saved the plan from being top-heavy, you'd be arguing that, "well, the reg's the reg, and it is counted." And you'd be right.

 

[Kevin C]

This is going to seem strange at first. I think it is excluded from the top heavy calculation, but for a different reason.  I think the regs are saying that for purposes of the top heavy calculation, the death benefit doesn't become part of the also employed beneficiary's own account balance.  Instead, it remains treated as belonging to the deceased participant, even after distribution. 

I tried searching for a PLR, but didn't find anything even remotely on topic.

The terms employee and key employee are defined in

Quote

 

416(i)(5) Treatment of beneficiaries

The terms "employee" and "key employee" include their beneficiaries.

 

 

 

It's addressed further in example 2 in 1.416-1 Q&A T-12 (emphasis added)

 

Quote

 

Example 1. An employer maintains a calendar-year plan. An individual who was an employee of the employer and a 5-percent owner of the employer in 1986 was neither an employee nor an owner in 1987 or thereafter. Even though the individual is no longer an employee or owner of the employer, the individual would be treated as a key employee for purposes of determining whether the plan is top-heavy for each plan year through the 1991 plan year. However, for purposes of determining whether the plan is top-heavy for the 1992 plan year and for subsequent plan years, the individual would be treated as a former key employee.

Example 2. The facts are the same as in example (1), except that the individual died in early 1987 and his total benefit under the plan was distributed to his beneficiary in 1987. Such distribution would be treated as the accrued benefit of the individual for each year through the 1991 plan year. However, such individual would be treated as a former key employee for purposes of determining whether the plan is top-heavy for the 1992 plan year and for subsequent plan years. The conclusions are not affected by whether the beneficiary of the individual is a non-key employee or a key employee of the employer.

 

 

 

I'm reading this is saying that for the top heavy determination, the death benefit, even after distribution, is always treated as belonging to the deceased employee.   Under 416(g)(4), when the deceased employee has not performed services for at least 1 year as of the determination date, he/she would be excluded from the top heavy calculation. I don't see why a rollover to the beneficiary, even inside the same plan, would change how the distribution is treated.  If it did, this would have been a really good place for the IRS to say it.

If it's in the beneficiary's rollover account in the valuation system, you would need to tell the system it is an unrelated rollover to get it excluded from the top heavy calculation.

 

[Luke Bailey]

Kevin C, you bring an interesting perspective , but it seems to me your mixing apples, pears, and oranges. There are rules for how you draw distributions back in for top-heavy calculations, whether rolled over or not, rules for determining who is a key employee, and rules for rollovers. We are dealing with the last, and to me that rule says that you have to count this one, because it was rolled back to a plan of the employer that sponsored the distributing plan. That's what the reg literally says, and I don't think it's so clearly out of step with the Congressional purpose of the top-heavy rules, as any of us might perceive that purpose to have been, that it was clearly unintended by the reg writer, so why would an EP agent in the field take it upon him- or herself to rewrite the rule mentally?

Most plans allow distributions out of rollover accounts at the participant's discretion, so although I would agree that my reading of the reg makes it a "trap for the unwary," and such traps are sometimes disfavored by the courts, this is one that is pretty easy to get out of.

[Kevin C]

Luke, I think you missed my point.  I'm reading the rules as saying that for the top heavy determination, the death benefit is always treated as belonging to the deceased "employee" and is never treated as part of the account balance of the participant who receives it as the beneficiary. Basically, the beneficiary has two hats, a beneficiary hat and a participant hat and the benefits he has under the respective hats are kept separate for the top heavy determination.

Example 2 also tells what happens for determination years after the distributions are no longer added back in and says the determination is not affected by the beneficiary's key/non-key status under the plan.  Under the rules in effect when the regs were written, a distribution paid in the calendar year 1987 plan year would be added back in for the 1987-1991 plan years.  With the distribution in the example no longer being added back after 1991, why do you think the example says what happens in 1992 and subsequent years? The only situation I can think of where the death benefit in the example might be relevant to the top heavy determination beyond 1991 is if the distribution had been rolled into the plan. 

 

This is also consistent with the language in T-30 that refers you to T-32 for determining whether a rollover is counted.  "Certain distributions that are rolled over by the employee are not included as distributions. See Question and Answer T-32."  Remember that the term "employee" includes the beneficiary, so the "employee" who is rolling over the death benefit is not the surviving participant, it is the "employee" that is made up of the deceased participant and the beneficiary.  T-32 tells you when a rollover is considered a related rollover for the "employee" who rolled over the distribution. 

[Luke Bailey]

Kevin C, the decedent was a key by attribution under 318. Dies in 2014. Distribution in 2015. Under 416(g)(3), the Q&A you cite and its examples (which use the old 5-year period, which of course was later changed to 1 by Congress), and Q&A-31, the amount of distribution is included in top-heavy for 2016, whether rolled back in or not. But it is rolled back in. We don't double count it, but it is in for 2016 for two reasons. After 2016, it is included because of the literal application of the rollover rule. I think that's the literal, plain language, straightforward, however you want to call it, way of applying the reg (Q&A T-32). You can say, they did not think of this odd situation where they were both in same plan so when the survivor rolls to his/her employer's plan, it happens to be the same plan from which the distribution was made, but I think we need to have the IRS say that, not us say they should have said that. All I'm saying.

[Larry Starr]

On 10/25/2018 at 8:45 PM, Luke Bailey said:

Also, I'll bet if this was a large distribution to a non-key that saved the plan from being top-heavy, you'd be arguing that, "well, the reg's the reg, and it is counted." And you'd be right.

 

Absolutely not; I am nothing if not consistent.  My determination has nothing to do with whether it helps or hurts the "situation".

[C. B. Zeller]

I'm not going to claim that this would (or should) ultimately make a difference, but I'm simply curious: was this reported as a distribution and a rollover contribution on the 2015 5500, and was a 1099-R issued?

[Larry Starr]

2 minutes ago, C. B. Zeller said:

I'm not going to claim that this would (or should) ultimately make a difference, but I'm simply curious: was this reported as a distribution and a rollover contribution on the 2015 5500, and was a 1099-R issued?

You are right, it wouldn't make a difference, but we would do a 1099R for the death payout and it would be reported on the 5500.

[Luke Bailey]

Larry, just for full disclosure, I did not have you personally in mind when I wrote that, but rather everyone who was on that side of the issue. And I have to say that if the straight, unadulterated text of the reg got me out of a problem and I wasn't sure it made sense, I would nevertheless feel very safe relying on it. I'm a big believer that if the law is with you, you argue the law, if the facts, you argue them, and if you have neither, you pound the table. Done all them at various times. :)

 

[Kevin C]

On ‎10‎/‎26‎/‎2018 at 7:09 PM, Luke Bailey said:

You can say, they did not think of this odd situation where they were both in same plan so when the survivor rolls to his/her employer's plan, it happens to be the same plan from which the distribution was made, but I think we need to have the IRS say that, not us say they should have said that. All I'm saying.

The IRS did address the situation where both deceased participant and the beneficiary are in the same plan.  The last sentence of Example 2 in T-12 (defining key employee) that I quoted above says "The conclusions are not affected by whether the beneficiary of the individual is a non-key employee or a key employee of the employer. "  I see your interpretation as contrary to the language of the regs because it bases the treatment of the death benefit on the non-key/key status of the beneficiary.

What you are overlooking is the definition of "employee" under 416.  The "employee" doing the rollover is the "employee" made up of the deceased participant and the beneficiary.  In this case, it doesn't matter if the rollover is related or unrelated, because under 416(g)(4), this "employee" is excluded from the top heavy calculation for 2016 and later years.

And, yes, I would reach the same determination regardless of the effect it has on the test.

[Luke Bailey]

Kevin C, maybe you're right and I am just too stubborn or whatever to get it, honestly. But I don't, yet. T-12 is addressing who is a key employee for purposes of determining whether plan is top-heavy. Says a dead key is a key until he or she falls off under what was then a five-year rule, now by statute a one-year rule. It seems to me that when example 2 of T-12 says its conclusion is indifferent to whether the beneficiary is a key or non-key, they are just saying that for purposes of clawing the distribution back in, the key- or non-key status does not matter because T-12 is just talking about the status of the person that had the account prior to its distribution. Notice that nowhere in T-12 or its examples are rollovers discussed, since they are a separate topic taken on in T-32.

I don't see how you can say my interp depends on the key or non-key status of the beneficiary. If in lcollins' original question the beneficiary had, for example, been a non-key coworker of the deceased, I think the rollover would still be "related" under T-32, and so would tip the plan towards NOT being top-heavy. I would ask you: Suppose that was the situation here. Literally, then, a non-key employee would have made what, under the literal wording of the reg, was a "related rollover." If that kept the plan from being top-heavy, would you really be concerned that the IRS might come along and successfully argue that the plan was still top-heavy, because while their reg said it was a related rollover, that's not really what they meant?

One thing I did get wrong in a prior post was to say that there was potential overlap between T-12 and T-32, in that a distribution with respect to a dead key that is the subject of a "related rollover" under T-32 would be counted both under T-12 and T-32, but would of course not be double-counted. Actually, I see now that the latter part of T-32 says that if both T-12 and T-32 might apply to a "related rollover," T-32 takes precedence.

As for your statement that,

4 hours ago, Kevin C said:

What you are overlooking is the definition of "employee" under 416.  The "employee" doing the rollover is the "employee" made up of the deceased participant and the beneficiary.

, I'm having trouble understanding exactly what you mean by the "'employee' made up of the deceased participant and the beneficiary," or where that concept is explained in the statute or regs. My guess is that you are saying that even though the beneficiary of the deceased employee is a key employee, we should disregard that fact in this situation, because it makes more sense to say that the beneficiary rules apply to him, and not treat him as an "employee" for purposes of T-32. My point is simply that he is an employee, and T-32 doesn't seem to contemplate the "'employee' made up of the deceased participant and the beneficiary" concept that you want to base the outcome on. Correct me if I'm wrong on this, but what you are really saying is that, if the IRS had thought about the issue, they would have added the following sentence after the first sentence of the "A" part of T-32: "For purposes of the preceding sentence, an employee who rolls over a distribution received from a plan of the same employer that the employee received as a beneficiary of another participant is not considered an employee." My argument is simply that the IRS might have done that, but didn't.

Finally, I would note that 416(g)(4)(A) specifically grants the IRS authority to prescribe in regs which rollovers are taken into account. Such a grant of authority by Congress for the IRS to promulgate a "legislative" reg usually makes it more difficult to get around the reg's wording, even if that wording arguably causes an unexpected result.

I could be wrong. The interp you are advocating makes at least as much sense as the one I am putting on T-32, but unless you or someone else can find some other provision of the regs, or something else from IRS, putting the desired gloss on T-32, I'm stickin' to my story.

[Kevin C]

I said it was going to seem strange at first.  It took me a couple of days of going over it before it made sense.  Remember, you asked for clarification.

416(I)(5) says that the terms "employee" and "key employee" include their beneficiaries.   At death, the deceased participant's benefit now belongs to the beneficiary.  Under this definition of "employee", the death benefit still belongs to the same "employee". That's why I referred to it as the "employee" made up of the deceased participant and the beneficiary. Another way to describe it is that the death benefit is always treated as belonging to the deceased participant.

T-12 Example 2 tells how the death  benefit is treated through the period that the distribution to the "employee" is added back in.  It also tells how it is treated for later years by saying that the "employee" is a former key for 1992 and for subsequent years.  In most cases with this example,  the former key status of the deceased participant would be completely irrelevant because for 1992 and later years, there would be no balance in the plan and no distribution that gets added back in.  The only way the comment about 1992 and later years has any effect is if the death benefit was rolled into the same plan (or another plan of the same employer) by the beneficiary.  It says that for 1992 and later years, this benefit belongs to a former key (so it is excluded from the test). 

With your interpretation, once the amount has been rolled over to the beneficiary in the same plan, you are treating it as part of his account balance.  That makes it treated based on the key/non-key status of the beneficiary.  T-12 Example 2 says that doesn't happen. 

I'll add another piece from the regs.  T-31 says "The distribution from a defined contribution plan (including the cash value of life insurance policies) of a participant's account balance on account of death will be treated as a distribution for purposes of section 416(g)(3)."  Treating it as a related rollover under T-32 means you are treating it as not being a distribution. 

To me, all of this is saying that in the OP's case, the death benefit is excluded from the 2016 and later top heavy calculations and the fact that it was rolled over to the same plan doesn't change that.

[Larry Starr]

On 10/28/2018 at 6:20 PM, Luke Bailey said:

Larry, just for full disclosure, I did not have you personally in mind when I wrote that, but rather everyone who was on that side of the issue. And I have to say that if the straight, unadulterated text of the reg got me out of a problem and I wasn't sure it made sense, I would nevertheless feel very safe relying on it. I'm a big believer that if the law is with you, you argue the law, if the facts, you argue them, and if you have neither, you pound the table. Done all them at various times. :)

 

Understood; but that is the difference between a lawyer and a plan consultant.  As an expert witness, my testimony is going to be the same no matter which side hires me (and I always explain that to anyone who is thinking of hiring me for that purpose).  If I was being hired to deal with an audit of a plan that I did not administer, then I (like you) would make the best argument that would favor the client, but in my admin role, that would not be the case. And I would hope that situational ethics would not apply to an admin firm, but I have been well known for tilting at windmills!

[Luke Bailey]

Kevin C, T-12 says that after the relevant period has elapsed, the "individual" who was a key (in this case, W) is no longer a key. H, here, who is still a key, is a different "individual" who has made what T-32 classifies as a "related" rollover. Anyway, that's my reading. Has the virtue (for me!) of being easier to explain. My fingers are wearing out on this one. :)

[Kevin C]

This starts with the definition of "employee" and "key employee" in 416, which says "The terms "employee" and "key employee" include their beneficiaries."

Your last post starts off close. T-12 says that after the relevant period has elapsed, the "employee" who was key (in this case, W and her beneficiary) becomes former key.  H is a different "employee".  You are saying the death benefit now belongs to "employee" H and gets treated for top-heavy purposes based on H's status as a key employee.  The last sentence of T-12, example 2 says that does not happen.

Treating the death benefit as a related rollover  for "employee" H also means that it is no longer being treated as a distribution per T-30 and T-32.  That is contrary to T-31which says death benefits from a DC plan are treated as distributions (with no exceptions listed).

This exercise hasn't been entirely academic for me.  I have a client with the same situation.  

[Luke Bailey]

Maybe one way to look at this is, suppose that there had been no distribution or rollover, because the plan and RMD rules had not required (e.g., plan permits installments to beneficiary and W would not have attained 70-1/2 for 10 years). So we get to 2018 and now, in addition to his own account, H is the sole beneficiary for the account of W. Do you have a definite textual basis in Code or regs for arguing that the portion of H's total 2018 plan benefit attributable to W's account would be excluded from consideration? Note that H is clearly a key employee and the first sentence of Q&A-T-24 refers to the accrued benefit of an "individual."

[Kevin C]

The same code and reg sections I've listed before.  Under the 416 definition of "employee", H as beneficiary of W and H as participant are two different "employees".  I don't see that T-24's use of the word "individual" changes that.  You are still determining the accrued benefits separately for each "employee" because the top heavy determination compares the accrued benefits of the "key employees" with those of all "employees" included in the calculation [416(g)(1)(A)].

Let's change your example so that H is not a participant in the same plan.  I think you would agree then, that H's benefit as beneficiary of W would no longer be counted in the top heavy calculation when you get to the determination year after the year in which W died.  What do you see in the code or regs that tells you that for the top heavy determination, the death benefit moves to a different "employee" when the beneficiary is also participant in the same plan?  Remember Larry's first comment on the issue? "The reg (1.416-1 T-32 ) clearly contemplates the transfer of assets that belonged to the benefit of the one making the transfer or on whose behalf the transfer is made. In this case, that person is dead; the spouse does not step into those shoes.  Any other reading is tortured."

 

[Luke Bailey]

I do agree that had he rolled to a different plan, not included. I also agree that the policy rationale for the result I am arguing for is arguable. As to the rest, I think I'm just applying the regs as they are written. The guy is a key employee, now, and he rolled the amount back into a plan of the employer that sponsored the plan from which the distribution was made. So it counts as the benefit of a key employee. Just what it says.

[Kevin C]

Luke, I don't think we are ever going to agree on this one. 

[Luke Bailey]

Agreed, Kevin C.