HEART, EESA, and WRERA amendments
The amendment for the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) is not due until the 2010 plan year, although some plans are incorporating HEART and PPA provisions at the same time. The Emergency Economic Stabilization Act of 2008 (EESA) amendment is also not due until the 2010 plan year, but some plans are incorporating EESA and PPA provisions at the same time. An amendment for the provision suspending required minimum distributions, part of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), is not due until the 2011 plan year. The IRS has promised guidance on the scope and timing of the amendment.
New nonspouse beneficiary rollover rules
The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), enacted December 23, 2008, contains provisions pertaining to distributions made to nonspouse beneficiaries. The requirements are effective for plan years beginning after December 31, 2009, and affect the distribution options and mandatory tax withholding rules of distributions for nonspouse beneficiaries.
The provision allowing a nonspouse beneficiary the option of rolling over a deceased participant’s plan balance to an inherited IRA was introduced by the Pension Protection Act of 2006. There have been subsequent changes, but WRERA clears up the confusion and provides new rules.
Many plan sponsors have already updated their plans to allow this type of transaction. Sponsors who already offer this option — as well as sponsors who don’t — may not be aware of the changes that WRERA requires starting in 2010.
No longer optional. Under WRERA, the nonspouse beneficiary rollover distribution is a required plan provision. Thus, all qualified plans must allow for nonspouse beneficiary distributions by direct rollover.
Mandatory withholding applies. An equally important change is that nonspouse beneficiary distributions will be considered “eligible rollover distributions,” thus making them subject to mandatory 20% tax withholding and notice requirements. Changing this type of death benefit to an eligible rollover distribution will now result in a 20% mandatory tax withholding on any amounts not directly rolled over to an inherited IRA.
Notice requirements. If they have not already been doing so, plan sponsors must begin providing nonspouse beneficiaries with the 402(f) notice, also known as the “Special Tax Notice” or “Rollover Notice,” when a distribution is requested. The normal 30- to 180-day time frame for this notice applies.
Take heed. All plan sponsors should ensure that these requirements are met and that distributions to nonspouse beneficiaries have federal income tax withheld appropriately. Special explanations may have to be provided to nonspouse beneficiaries so that they fully understand the tax impact of their decisions beginning next year.