Nonspouse Beneficiary Meets PPA ’06 Rollover Requirements

A is the sole primary beneficiary in E’s retirement plan, X. Prior to E’s death, the sponsors resolved to terminate X.  E completed a “Termination Distribution Form,” selecting a direct rollover option to Y (his preexisting IRA), also naming A as the sole beneficiary. However, the rollover was not accomplished before E’s death. E died in 2005, unmarried and prior to reaching age 70½.

Nonspouse Rollovers

Section 829(a)(1) of the Pension Protection Act of 2006 (PPA ’06) added Sec. 402(c)(11), to allow rollover distributions to an inherited IRA of a nonspouse beneficiary after 2006. Under this provision, a direct trustee-to-trustee transfer of a distribution from an eligible retirement plan to an IRA established for the purpose of receiving the distribution on behalf of a designated nonspouse beneficiary is treated as a direct rollover of an eligible rollover distribution for purposes of Sec. 402(c). The IRA of the nonspouse beneficiary is treated as an inherited IRA within the meaning of Sec. 408(d)(3)(C); Sec. 401(a)(9)(B) distribution rules apply. Notice 2007-7, Q&As -11 to -19, provide guidance on PPA ’06 Section 829 and Sec. 402(c)(11). In this case, the taxpayer represented that X will be amended to comply with PPA ’06 Section 829, consistent with the guidance in Notice 2007-7.

RMDs

When an employee plan participant dies prior to his or her “required beginning date,” Sec. 401(a)(9)(B)(ii) provides that distributions of that employee’s entire interest under a plan must be made within five years of the employee’s death. However, under Sec. 401(a)(9)(B)(iii), an exception to the five-year rule applies to distributions made to (or for the benefit of) a designated beneficiary, if such distributions begin no later than one year after the death of the employee and are made over the life of the beneficiary (or over a period not extending beyond such beneficiary’s life expectancy).

To satisfy the exception to the five-year rule for a nonspouse beneficiary, Regs. Sec. 1.401(a)(9)-3, Q&A-3, provides that distributions must begin no later than the end of the calendar year immediately following the calendar year of the employee’s death.

In this case, A will begin to receive required minimum distributions (RMDs) from Y using her remaining single life expectancy beginning no later than Dec. 31, 2008. Other RMDs from amounts in Y at E’s death began no later than Dec. 31, 2006.

Due to E’s death, X did not follow E’s rollover instructions. However, during calendar-year 2007, E’s X account will be transferred, by means of a trustee-to-trustee transfer, into Y. A will timely receive Sec. 401(a)(9) required distributions from Y based on her remaining life expectancy. Additionally, if X’s sponsor does transfer the X balance, less the calendar-year 2006 and 2007 RMDs as represented, Y will be payable to A, E’s named (designated) beneficiary. A is the designated beneficiary, as defined in Sec. 401(a)(9), as to the X interest, and the named beneficiary of Y. A survived E and was not married to E at his death.

Conclusion

The Service ruled that:

1. Under PPA ’06 Section 829, A, the sole named beneficiary of E’s interest in X, may make a trustee-to-trustee-transfer of E’s remaining interest in X into Y, with said transfer occurring no later than Dec. 31, 2007.

2. A may receive RMDs from Y, calculated using her remaining single life expectancy. As to amounts remaining in Y at E’s death, said required distributions must have begun no later than Dec. 31, 2006. For amounts directly rolled over from X to Y during calendar-year 2007, RMDs must begin no later than Dec. 31, 2008.

3. The retitling of Y as “Taxpayer A as beneficiary of Decedent (deceased)” is consistent with PPA ’06 Section 829; the retitled IRA will constitute an inherited IRA as that term is used in PPA ’06 Section 829. Sec. 401(a)(9)(B) will apply to RMDs from that IRA.

IRS Letter Ruling 200717023 (4/27/07)