IRS Clarifies Nonspouse Rollover Guidance

February 14, 2007 ( - Faced with questions on already-issued guidance about nonspouse rollover rules, regulators have further clarified several issues including whether a plan is required to allow nonspouse beneficiaries to roll over inherited funds to an IRA.

Released in January,  the guidance governed how to implement new rules from the Pension Protection Act (PPA)   on a variety of qualified plan distributions (See  Regulators Issue Post-PPA Distribution Guidance).

Regulators had a quick answer on the nonspouse rollover issue in the  latest clarification : “Pursuant to § 402(c)(11) of the Code and Notice 2007-7 Q&A-14, a plan may, but is not required to, offer a direct rollover of a distribution to a nonspouse designated beneficiary.”

“This is consistent with the IRS’ previously stated position that the distributing plan must be amended to provide for rollovers by non-spouse beneficiaries and that the amendment was optional, not mandatory,” Los Angeles attorney Bob Lowe of the Mitchell Silberberg & Knupp LLP firm wrote in  an advisory bulletin .

The latest IRS release also dealt with the issue of whether nonspouse beneficiaries who make a rollover to an IRA have the right to stretch out distributions over the beneficiary’s life expectancy, even if the distributing plan would not have provided this right.

Regulators responded that a non-spouse beneficiary can use the life expectancy payout in the IRA provided that the rollover from the distributing plan is made no later than the last day of the year following the year in which the participant died.

In his advisory bulletin, Lowe urged potential users of the rollover to discuss the issue with their financial advisers.

“What all this means for non-spouse beneficiaries (and their advisors) who want to be able to stretch out distributions in a rollover IRA is that if they wait too long to make the rollover they may lose the opportunity to use the life expectancy rule in their rollover IRA,” Lowe wrote.