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Are You Up to Date on Qualified Plan Beneficiary Rules? Part Three


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In parts one and two, we provided some basic guidelines to help plan administrators understand what is involved in paying the correct beneficiary the correct amount and avoid costly mistakes. In this article, we address the beneficiary options available to the surviving spouse of a deceased plan participant.

Spouse Beneficiary Rules 2017
When a plan participant dies, different regulations covering surviving spouse beneficiary payments apply. For example, a surviving spouse has the option of rolling the funds into his or her own IRA or to a qualified plan, if the qualified plan accepts rollovers. However, many factors determine how and when the rollover should occur.

Rollover to IRA
A spouse may roll the deceased spouse’s plan funds over to their own IRA, regardless of whether the participant dies before or after the required beginning date for required minimum distributions (RMDs). However, if in RMD status, the RMD for the year of the decedent’s death must be distributed and may not be rolled over. Once the funds are rolled into the surviving spouse’s IRA, the IRA rules apply for further distributions. Thus, if the spouse is under 70½, no minimum distributions are required until the spouse reaches that age. At that time, the surviving spouse could use the uniform lifetime table for the IRA RMDs – a very popular choice of many surviving spouses.

Death before age 70½
If the participant dies before December 31st of the year in which age 70½ would be attained, Code Section 401(a)(9) and the final RMD regulations provide special rules that apply only to a spouse beneficiary. The surviving spouse must begin life expectancy distributions by the later of December 31st of the year after the participant died, or December 31st of the year in which the participant would have attained age 70½. The spouse may establish a life expectancy payout based on the greater of the remaining single life expectancy of the participant or on their own single life expectancy.

The spouse may utilize the five-year rule (if the qualified plan offers that option), or directly roll the funds to an inherited IRA and use the five-year rule or the life expectancy rule from the inherited IRA. The spouse may also name a beneficiary(ies), even if the payouts are being made from the participant’s plan.

To recap the special spouse beneficiary rule, a spouse of a participant in a qualified plan may leave the account in the plan and not have any required distributions until the later of the end of the year the participant would have turned 70½ OR December 31 of the following year.

Example: Participant is age 66 and spouse is age 75. The participant died during 2017. The spouse may delay benefit payments until 2021 (assuming participant’s 70½ birthday is during that year).

The surviving spouse can only treat the account as their own if they are the sole beneficiary and have an unlimited right to draw the money from the account. If a trust is the beneficiary (even if the spouse is the sole beneficiary), the spouse cannot roll the account to their own IRA.

Assuming that the spouse, as beneficiary, takes distributions over their life expectancy, they can name their own beneficiary and contingent beneficiary.

After the surviving spouse dies, payments will be continued to the beneficiary named by the spouse. Payments are generally made based on the participant’s single life expectancy (or the deceased participant’s, if longer), which gets reduced by a factor of 1 for each year paid (rather than looking up the single LIF table each year).

Death after age 70½
If the participant dies after the year in which age 70½ was attained, the above rule of waiting to age 70½ is, of course, no longer available. However, the spouse beneficiary options are different from other beneficiaries. The spouse must start distributions by December 31st of the year after the participant dies, or roll the funds to an IRA (except for the RMD for the year of death). If the qualified plan permits, the spouse may elect to take distributions from the qualified plan (as beneficiary of the deceased participant).

Payouts from the qualified plan to the surviving spouse.
If the qualified plan permits, the spouse may take beneficiary RMD payments directly from the qualified plan. When using this method upon distribution, the actual age of the spouse is used each year to determine the distribution factor by using the single life expectancy table. The surviving spouse does not become the participant, but rather remains the beneficiary. The spouse can also accelerate the payments, unless the plan or beneficiary form overrides any acceleration. The surviving spouse may name a beneficiary.

Inherited IRA option.
If desired, the surviving spouse beneficiary of a qualified plan participant may choose to open an inherited IRA. This option is sometimes chosen by the spouse of a participant who died under age 59½ because all distributions from the inherited IRA are exempt from the 10% early distribution excise tax; whereas if the money was rolled into the surviving spouse’s own IRA, the under age 59½ 10% excise tax would apply until the surviving spouse attained age 59½ (or incurred a different exception to the 10% penalty). Note that the Supreme Court has ruled that inherited IRAs are not exempt from the bankruptcy estate.

Surviving spouse death before “benefits commence”
Benefits commence to a surviving spouse starting on December 31 of the calendar year in which the deceased participant attained or would have attained age 70½. If a participant died at age 57 and the surviving spouse started to receive distributions by December 31 of the year after the participant died, and then the surviving spouse died at age 67, the spouse did not actually have benefits commence. This is a key point because there are different options for the surviving beneficiaries based on whether the participant’s surviving spouse had actually “commenced benefits” or not.

In the final RMD regulations, if the spouse dies before benefits commence, the beneficiary rules apply as if the spouse were the participant. The spouse’s beneficiary(ies) would use the normal non-spouse beneficiary options, but they would use the spouse’s date of birth instead of the participant’s. If no designated beneficiary, the five–year rule applies.

Special “benefits commence” rule does not apply in the following cases:

  • If the participant dies after the year in which the participant attains age 70½.
  • If the spouse is not the sole primary beneficiary, the benefit commencement rules above do not apply. In such a case, the spouse must commence benefits by the December 31st after the year of the participant’s death.
  • If the surviving spouse remarries and names the new spouse as beneficiary.

“Stretch IRA” Concept
If a participant in a qualified plan dies after his or her required beginning date for distributions and the surviving spouse is the sole primary beneficiary, the spouse must decide whether to continue taking distributions from the qualified plan or roll the funds over to one of three options:

  • The spouse’s own IRA
  • The spouse’s own qualified plan (if the plan accepts such rollovers)
  • An inherited IRA

The decision can have long-term tax consequences for the beneficiaries named by the surviving spouse.

The spouse beneficiary has the option of taking minimum distributions from the qualified plan over their single life expectancy. Even though the assets are being distributed from the participant’s qualified plan, the surviving spouse may name their own beneficiaries. In such a case, when the surviving spouse dies, the longest distribution period available to the beneficiaries is the surviving spouse’s life expectancy in the year of death, reduced by one for each year that elapses.

If, however, the spouse had rolled the assets into their own IRA and named their own beneficiary(ies) to the IRA, and then died, the beneficiary(ies) would be able to establish a life expectancy payout based on the new beneficiary’s own life expectancy. This effectively “stretches” the period of time over which the payments may be made to that beneficiary.

Example: Jonathan has been a participant in a qualified retirement plan and has been receiving minimum distributions since age 70½. Jonathan dies at the age of 85. His surviving spouse, Sarah, age 84, decides to take distributions from his qualified plan and also names her son, Jim, as her beneficiary. Sarah dies two years later at age 86. Jim was age 50 at the time of his mother’s death, so the longest he could continue to take payments would be based upon the remaining life expectancy of his mother (7.1 years). If Sarah had decided to roll the money over into her own IRA and named Jim as her IRA beneficiary, instead of having taken distributions from the qualified plan, Jim would have been able to use his own life expectancy (34.2 years) to determine the payout period going forward. (Remember that the minimum required distribution for the year of death may not be rolled over by the spouse.)

Over the past several years, there have been a number of bills introduced in Congress to eliminate the “stretch IRA” and to limit the payout period for non-spouse beneficiaries to five years. None of these bills have become law, but it is worth noting that Congress might change the laws for the beneficiary options in future legislation.

To summarize, plan administrators need to be aware of a host of different regulations in order to make beneficiary distributions to the right person for the right amount. Correct, compliant distributions will save a lot of time and aggravation, as well as possible financial losses. This three-article series was designed to make you aware of many beneficiary regulations. However, we always recommend consulting with a beneficiary distributions specialist when designating and making payouts to beneficiaries.

William C. Grossman, ERPA, QPA, APA, MBA is the Managing Member of WCG ERISA CONSULTING, LLC. He assists TPAs and financial institutions in complying with IRS and DOL regulations regarding qualified plans, such as 401ks, as well as 403(b)s and IRAs; and has spoken on a wide variety of retirement plan topics at ASPPA and NIPA national conferences.

As a contributing author to PenChecks Trust, Grossman writes about current retirement plan compliance and implementation issues.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust, its subsidiaries or affiliates.

PTCA – 2017058b

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