How did the law change?

• Before 2007, inherited retirement plan benefits could not be rolled over to an IRA on a tax-free basis if the deceased participant's beneficiary was anyone other than a spouse.
• Under the PPA, as of January 1, 2007, qualifying plans may permit any nonspouse beneficiary, including a domestic partner, parent or sibling, to roll over inherited retirement benefits paid in the form of a lump sum to an inherited IRA on a tax-free basis. These inherited retirement benefits must be rolled over directly from the plan to the IRA. They cannot be paid out to the beneficiary first.
• Under the WRERA, as of January 1, 2010, all qualifying plans are required to permit any nonspouse beneficiary to roll over inherited retirement benefits paid in the form of a lump sum to an inherited IRA on a tax-free basis. As part of this change, beneficiaries who choose to take the benefits in cash, rather than roll them over, will have 20 percent of the amount withheld in taxes.

What employer-sponsored retirement plans are covered by the new rules?

• The new laws affect tax-qualified retirement plans — including defined benefit plans (pensions) that pay benefits in the form of a lump sum, 401(k) plans, employee stock ownership plans (ESOPs), profit-sharing plans and money purchase plans — as well as 403(b) plans and governmental 457(b) plans.

Why is the nonspouse rollover provision valued by plan participants and beneficiaries?

• A nonspouse rollover allows beneficiaries to defer taxation. Without a nonspouse rollover, inherited benefits are often paid out by the plan shortly after the participant's death, with the beneficiary paying substantial taxes on the inherited amount. The amount of the benefit payout can push the beneficiary into a higher tax bracket, further increasing the tax due.
• A nonspouse rollover allows beneficiaries to control how they want to invest and receive the retirement benefits that have been left to them.
• A nonspouse rollover can also allow beneficiaries to select how they want to satisfy the "minimum distribution" requirements under federal tax law, including by stretching the payments out over life expectancy. Depending on the circumstances, this opportunity may be lost if a nonspouse rollover is not made before the end of the year following the year in which the participant died.

Is there any reason for an employer not to offer the new nonspouse rollover provision prior to the January 1, 2010 date, when they are required to do so?

• No. Virtually all recordkeepers are equipped to administer the provision without additional cost to the plan or employer, and plan documentation need not be updated until the end of 2009 (for calendar year plans).

What does an employer have to do to implement the required nonspouse rollover provision (or to adopt it prior to the January 1, 2010 required date)?

• For the vast majority of employers, all that is required to adopt the provision early is to notify the plan's recordkeeper.
• If an employer does not adopt the provision early, recordkeepers will typically implement the provision automatically as of 2010, but employers should ensure that this is done.
• A formal amendment to the retirement plan document will be required at some point, before the end of 2009 for early adopters and likely by the same date for all plans, but this is not needed to begin offering the rollover provision.

What other steps do employers usually take?

• Employers should notify participants that they will be adopting the nonspouse rollover provision.
• The plan's recordkeeper will provide a detailed notice to plan beneficiaries that will inform them of their rollover right after the death of a participant.

What if an employer wants to amend their plan now?

• Employers that adopt the rollover provision prior to 2010 may choose to formally amend the affected retirement plans now, even though this is not legally required before the end of 2009. The following is an example of such an amendment:
  "Effective for distributions after [insert date], the Plan permits nonspouse rollovers described in section 402(c)(11) of the Internal Revenue Code of 1986, as amended."

Recommended Implementation Steps for Employers:

1. Notify Plan Recordkeeper. Notify your retirement plan recordkeeper if you wish to adopt the Pension Protection Act's nonspouse rollover provision prior to 2010.
2. Determine and Confirm Implementation Date. Determine by what date the recordkeeper can implement the provision and confirm that your plan adopted this feature effective for 2010.
3. Notify Employees. Notify the participants in the relevant retirement plan of this new rollover provision and that the rollover must be made directly from the plan to the inherited IRA. Employers will likely want to make a special effort to notify employees currently enrolled in domestic partner benefit plans as well as do targeted outreach to any employee resource group for gay, lesbian, bisexual, transgender and queer employees.
4. Follow Implementation with Later Plan Amendment. Ensure that a formal plan amendment on the nonspouse rollover is adopted.

REVISED: December 2008

The information in this document does not constitute legal advice. For assistance with legal questions specific to your situation, please consult an attorney.