The Pension Protection Act Blog

When the House of Representatives failed to act on the Pension Protection Technical Corrections Act of 2007 last week, it created a terrific end-of-the-year PPA question.

The question: Are plans required to provide rollovers to nonspouse beneficiaries?

The answer: Yes No Yes

The reason behind changing the answer from “Yes” to “No” to “Yes” is the revised interpretation the IRS, with a little help from Congress, has provided regarding the plan document impact of new Internal Revenue Code section 402(c)(11).

Effective December 31, 2006, Section 829 of the Pension Protection Act added new Internal Revenue Code section 402(c)(11), which states:

‘‘(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT PLAN OF NONSPOUSE BENEFICIARY.—

‘‘(A) IN GENERAL.—If, with respect to any portion of a distribution from an eligible retirement plan of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee—

‘‘(i) the transfer shall be treated as an eligible rollover distribution for purposes of this subsection,

‘‘(ii) the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and

‘‘(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan.

‘‘(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES.—For purposes of this paragraph, to the extent provided in rules prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a trust designated beneficiary.’’.

The IRS provided guidance in Notice 2007-7, including how to accomplish a rollover to a nonspouse beneficiary. Q&A 14 of Notice 2007-7 stated that a plan was not required to offer a direct rollover of a distribution to a nonspouse beneficiary. Thus, Q&A 14 of Notice 2007-7 provides the “No” answer to the question on whether a plan is required to provide rollovers to nonspouse beneficiaries.

On February 13, 2007, the IRS released a special edition of Employee Plan News devoted to clarifying the provisions of Notice 2007-7 relating to rollovers to nonspouse beneficiaries. It states that:

There has also been a question whether a plan is required to offer a direct rollover of a distribution to a nonspouse designated beneficiary. Pursuant to section 402(c)(11) of the Code and Notice 207-7 Q&A-14, a plan may, but is not required to, offer a direct rollover of a distribution to a nonspouse designated beneficiary.

Congress answered this interpretation of IRC section 402(c)(11) in August of 2007 with the Pension Protection Technical Corrections Act of 2007. Specifically, section 9(e) of both S. 1974 and H.R. 3361, which prompted the IRS to reverse their “No” position back to “Yes” on rollovers to nonspouse beneficiaries.

The IRS then released the 2007 List of Interim and Discretionary Amendments, which included this statement:

§ 402(c)(11) [Discretionary]: PPA ’06 § 829(a)(1) added § 402(c)(11) to allow nonspouse beneficiaries to roll over distributions from a qualified plan to an individual retirement plan. Nonspouse beneficiary rollovers are an optional plan provision for 2007. See, Notice 2007-7. Pursuant to an impending technical correction, nonspouse beneficiary rollovers will be required for plan years beginning on or after January 1, 2008. See, section 9(e) of S. 1974, the Pension Protection Technical Corrections Act of 2007, as introduced in the Senate on August 2, 2007 and section 9(e) of H.R. 3361, the Pension Protection Technical Corrections Act of 2007, as introduced in the House of Representatives on August 3, 2007.

Even though the Pension Protection Technical Corrections Act of 2007 did not become law before the end of 2007, the IRS has not announced a new interpretation of the plan document requirement for rollovers to nonspouse beneficiaries. It remains as last stated by the IRS in the 2007 List of Interim and Discretionary Amendments – rollovers to nonspouse beneficiaries are required for plan years beginning on or after January 1, 2008.

Section 1107 of PPA permits plans to adopt amendments for PPA as late as the last day of the first plan year which begins on or after January 1, 2009, as long as the plan timely operates according to PPA. For rollovers to nonspouse beneficiaries, until the IRS or Congress states differently, plans are required to permit rollovers to nonspouse beneficiaries for plan years beginning on or after January 1, 2008, and can adopt an amendment to include this provision as part of the plan document no later than the last day of the first plan year which begins on or after January 1, 2009.

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