PPA Technical Corrections 2007 – Non Spouse Beneficiary

Submitted by Brian Rockwell on Thu, 2007-12-13 22:42

Now that the PPA has been corrected to require the non-spouse beneficiary rollovers, is there still the problem with the IRA having to follow the distribution rules of the 401k plan document, which could still be more restrictive than the Beneficiary IRA?



Submitted by Alan Spross on Fri, 2007-12-14 03:19

Yes, that problem remains, but only if the distribution is later than 12/31 following the year of death.



Submitted by Jason C on Sun, 2007-12-16 09:51

Hey,

I just spoke to the plan administrator, and they’re unaware of any of these problems.. They said that they fully amended for the PPA, and that they’re unaware of any restrictions..

They felt that once it’s rolled over, that they have no control over anything.. My father’s company has also been bought and sold like twice in the last 5 years and it’s difficult for them to even locate the original documents.

I want to do what’s legal entirely, and I have to do it THIS year.. Any last minute questions for my Ed-Slott trained advisor or decisions I should be are of? He’s been a bit long with delays on my case. Every official CPA i’ve spoken to in real life has no idea what to do, my 401k to IRA rollover is worth several hundred thousand.. Ack!



Submitted by Al Fry on Sun, 2007-12-16 13:26

The CPAs should do some reading, this is not rocket science. Just do a direct rollover to an inherited IRA. Have a shell inherited IRA opened wherever they want it and have the money transferred.



Submitted by Bruce Steiner on Sun, 2007-12-16 16:22

The accountant and financial advisor don’t have to read up on this. It’s sufficient if they are knowledgeable in their own respective fields. The lawyer handling the estate should be familiar with this. But, like Al said, the beneficiary can simply open an inherited IRA, and the financial institution will provide the papers necessary for the plan administrator to transfer the assets directly to the inherited IRA. The plan administrator has already said that they’re OK with this.

Bruce Steiner, attorney
NYC
also admitted in NJ and FL



Submitted by Alan Spross on Sun, 2007-12-16 21:27

I concur with what has been posted, and I assume your comment about having to do the transfer this year means that your father passed in 2006. If he passed prior to 1/1/06, then the employer plan provisions dictate what the RMD schedule will be for the IRA, even after a successful transfer to a beneficiary IRA. This is per Notice 2007-7. If he passed 1/1/06 or later, then you can forget the RMD requirements for the plan, as they would then be immaterial with a timely IRA transfer.



Submitted by Jason C on Sun, 2007-12-16 21:29

Sorry for the confusion, I’ve already done the trustee-to-trustee transfer from the 401k to the correctly titled inherited IRA January 5th of 2007 (before there were any supposed “clarifications” which are entirely against what congress was trying to do).

To clarify, my problem is that my father passed in 2002, leaving things to my mom.. She passed just a few minutes after he did and things were left to my sister and I.

After I took advantage of the rollover (done because the PPA said nothing negative about pre-2006 deaths, it just said the DISTRIBUTION had to occur in 2007 forward and that’s how all the professionals online and off translated it, it’s on pamphlets, fliers, news articles, etc.), the plan administrator still doesn’t think I’d be bound by any original plan documents they believe it’s out of their hands. My CPA has been a little back and forth, but you guys on here think the pre-2006 death issue will hit me.

My plan administrator can’t even find the 2002 documentation since there has been a million sales of the company since then.

I’m going to have to take out several hundred thousand and it’s going to be unbelievably difficult on my family for various reasons…

I was never explained about RMD’s or anything from anyone. I was given one original option. Remove all money in a *single* removal any time before 5 years after the death. That was from my plan administrator, and the same people are now telling me they have no idea what I’m talking about in regards to pre-2006 deaths. They still believe that since it’s rolled over and they amended for PPA that it’s been all set and I should be able to get lifetime expectancy. I wish everyone was on the same page.

I thought for so long a time that things were terrific. The PPA was supposed to be my “savior”. I think this is sick, it’s been killing me here.

I went through a lot of time and money doing this transfer with the explicit understanding from every CPA and plan administrator I spoke with that life expectancy was golden January 5th. Do I have no avenue?

Thanks for your patience, guys.. It’s the end of the year finally and I’m under a lot of stress.



Submitted by Alan Spross on Sun, 2007-12-16 23:39

You seem to understand Notice 2007-7, which was issued shortly after you did the IRA transfer. Most experts assumed as you did, that Sec 829 of the PPA had solved this problem. It was also expected that there would be a grandfather period to do a transfer just like there was when the 2002 RMD rules were issued by the IRS (12/31/03 to initiate life expectancy distributions). When the IRS issued 2007-7, Congress got plenty of feedback that people had been blindsided by the ruling, yet they have done nothing about correcting what appears to be their own oversight in the original PPA. As you know, the PPA did not worsen your position, it just failed to provide the relief that everyone was anticipating. This would have been possible by allowing a 12/31/07 transfer deadline for those under the 5 year rule for 2002-2005 deaths with interim year lifetime distributions caught up, just as they did in the 2002 Regs when life expectancy was made the default rule for deaths prior to the RBD.

Congress has still not acted, even though they have heard plenty of complaints about the IRS ruling. They could have included some relief in the Technical Corrections Bill that is floating around, but there is nothing in there on this subject to my knowledge.

I have no idea what your prospects are, but if there is enough funds in the account to pursue a letter ruling, you might try this approach:
1) In the next two weeks, distribute the 2003-2007 life expectancy RMD total from the IRA. This would show your good faith and intention as of the date you transferred the funds PRIOR to 2007-7. It would also be tantamount to a life expectancy election brought current in the year of the ruling.
2) Request a PLR stating that employer plan beneficiaries should be entitled to the same grandfather relief allowed in the 2002 RMD ruling. Consistency with the 2002 ruling would allow you to make up annual life expectancy distributions in the year of the rollover and then continue life expectancy distributions in future years.

The cost of the PLR will be around 10,000 plus legal costs, but with the figure you stated, it might be worth it even though there is no way to predict your odds of success. An major downside is the risk of a huge excess accumulation penalty if they rule against you, even though you have a justifiable reason for expecting some consistency in IRS rulings, and the IRS has been excusing the excess accumulation penalty for most plausible explanations.

Unfortuneately, I can’t think of any other approach, and the plan administrator does not seem to understand that amending their plan for the PPA will not solve your problem due to Notice 2007-7.



Submitted by Jason C on Mon, 2007-12-17 01:44

Hey!

Thank you VERY much again for all of your time and patience with my ordeal.

I will discuss the PLR and all of this on Monday and decide upon the best course of action.

I have one final question. You mentioned “2002 Regs when life expectancy was made the default rule for deaths prior to the RBD” and that there was a grandfather period for this.

My father died mid-April, 2002 and I was only given a lump sum single time option from the plan administrator (within 5 years). Was this incorrect at any time? Should I have been given the lifetime option then or after the law was enacted, given that it was “grandfathered”?

Would my dad have had the option while alive to ONLY take a lump-sum and elected not to take lifetime? I doubt he would have done that, but I don’t have any evidence either way and the plan administrator said nothing about something EVER being elected? So should the default have been lifetime anyway on the 401k?

Any thoughts? Thanks again!



Submitted by Bruce Steiner on Mon, 2007-12-17 01:54

The law allows for the stretchout over life expectancy. Most if not all IRAs permit it. But, even though they could, many profit-sharing and 401(k) plans do not permit it. That’s why the provision in the Pension Protection Act allowing nonspousal beneficiaries to transfer the benefits into an inherited IRA was needed.

Smaller company plans (particularly if they are my clients) are more likely to permit beneficiaries to take advantage of the stretchout. Perhaps it’s because one of the principals could be the one who dies. Larger company plans are less likely to permit it.



Submitted by Al Fry on Mon, 2007-12-17 02:01

…until 1.1.2008!



Submitted by Jason C on Mon, 2007-12-17 02:24

Ah.

So if I’m understanding this, the 2002 law/grandfathering pertained exclusively to IRAs, not 401k as my father had at the time?



Submitted by Alan Spross on Mon, 2007-12-17 02:37

That’s right.
The 2002 Regs only made life expectancy the default rule IF the plan did not contain provisions. A plan could still specifically require the 5 year rule, and many of them did. For that reason, the PPA provided IRA transfer relief, but only for deaths in 2006 and beyond.

His plan may also have had optional provisions to elect life expectancy, in which case you should have been contacted with the option to elect life expectancy no later than 12/31/03. Since he died in 2002, this date is the same date as the grandfathering deadline for those that passed in prior years and were waiting the 5 years like you have been since 2002. There is no way to know if the plan had those provisions without getting a copy of the plan. They are required to provide a copy for owner’s but I am not sure if they legally have to for a beneficiary. However, there is no time for all that prior to year end. In summary, the plan did NOT mess up if it contained a mandatory 5 year distribution period, but did mess up if it had other options for which you were not notified. MOST plans only had the 5 year provision, which overrides the default provison of the 2002 Regs. Following is a pasted copy of the appropriate summary of the 2002 Regs on this issue:

>>>>> >>>>>>>
Default Rule for Post-Death
Distributions
These regulations, as did the 2001
proposed regulations, provide that, if an
employee dies before the employee’s
required beginning date and the
employee has a designated beneficiary,
then the life expectancy rule in section
401(a)(9)(B)(iii) (rather than the 5-year
rule in section 401(a)(9)(B)(ii)) is the
default distribution rule. Thus, absent a
plan provision or election of the 5-year
rule, the life expectancy rule applies in
all cases in which the employee has a
designated beneficiary, and the 5-year
rule applies if the employee does not
have a designated beneficiary. This is a
change from the position in the 1987
proposed regulations that provided the
5-year rule as the default unless the
spouse was the sole beneficiary.
Commentators pointed out that, as a
result of the default rule under the 1987
regulations, some beneficiaries did not
commence distributions under the life
expectancy rules. In response to those
comments, these final regulations
provide a transition rule that permits
beneficiaries subject to the 5-year rule
under the 1987 proposed regulations to
switch to the life expectancy rule,
provided that all amounts that would
have been required to be distributed
under an application of the life
expectancy rule are distributed by the
earlier of December 31, 2003 or the end
of the 5-year period following the year
of the employee’s death.
>>>>> >>>>>> >>>>>>



Submitted by Jason C on Mon, 2007-12-17 04:42

Every time I think I got it, there’s some other information confusing me. 😉

I looked at the above text, and since my dad had a beneficiary (my mom), who then died shortly thereafter (there was a fire), wouldn’t the life-expectancy become default for her?

Or not if the plan has a different default.. So the key here is to read the original plan document from 2002..

I do already have a request in for that (i had overnighted it days ago), as the plan administrator via phone asked that I write this physical address because they feel it’s archived there and not where he is at that he could read from.

Hopefully they’ll be able to send it my way, so I can at least see if THEY had made a mistake. Of course all of this is very late, but some of that was not my fault. I’ve been hunting around for answers for a while and getting the original document had been difficult since they’ve been purchased a couple of times since.

Exactly how does the IRS know what plan and plan revision any of this is bound by? Oy!



Submitted by Jason C on Mon, 2007-12-17 08:33

Just one more thing…

I read this old article here:
http://subscript.bna.com/pic2/ppa.nsf/id/BNAP-6Z8HXW?OpenDocument

So 2002 deaths wouldn’t count? They passed the darn act in 2006, that was just 4 years before that! If this ever does get fixed in a new notice will 2002 deaths even count? They keep dragging their heals and if they end up fixing things we might even find 2003 or 2004 being left out in the cold too?

Sheesh. We really need to fix this.



Submitted by Al Fry on Mon, 2007-12-17 14:34

I don’t believe that is going to happen. They feel it is fixed, starting 1.1.2008, for anyone dying in 2007, and for many that died in 2006. We even had a few small companies that hurriedly amended their plans after August 17, 2006 to allow direct rollovers for executives that died in 2005. I do not believe there are any plans to go back further. We actually had a solution prior to PPA 2006 for non-spouse benes, called a “Plan Distributed Annuity” which was communicated in an October 2002 Ed Slott IRA Advisor” newsletter. We had done several, however this concept was not well known (even though it is in the IRS Code & Regs), and very few companies were doing them.



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