SOME SURPRISING RULES FOR INHERITED IRA’S

A few months ago, we discussed how the Pension Protection Act of 2006 provides for the use of “inherited IRA” accounts for the receipt of nonspousal qualified plan assets at the death of a participant. See MORE DETAILS ON NONSPOUSAL ROLLOVER OF INHERITED QUALIFIED PLANS (click on the link and read the August 29, 2006 entry). As noted, a primary purpose of the new option was to allow nonspousal qualified plan recipients to have certain available deferred payout options even if the plan itself did not specifically allow for them – such payout options are available if the proceeds are placed into a qualified “inherited IRA.”

The IRS has now issued guidance on inherited IRA accounts, and there are some unexpected provisions. These include:

·A qualified plan IS NOT required to allow for distribution to an inherited IRA. This appears to contradict the expressed purpose of the changes in the law, which was to make the deferred payout arrangements available to all nonspousal beneficiaries regardless of the provisions of the qualified plan from which the proceeds would be paid. We can expect some vocal opposition to the IRS’ interpretation of the new law in this regard.

·If the qualified plan provides for a 5 year payout of benefits to nonspousal beneficiaries if the participant dies before the “required beginning date,” the inherited IRA is also stuck with that 5 year payout rate instead of being able to use the life expectancy of the beneficiary.

·The IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.”

·If a qualified plan does offer the inherited IRA rollover option, but not to all participants, it must offer them in a nondiscriminatory manner.

·If the decedent was required to take a required minimum distribution (RMD) before he died but did not, that RMD portion cannot be rolled over to the inherited IRA.

Notice 2007-7, 2007-5 IRB ; IR 2007-7