The Pension Protection Act of 2006 included a provision, applicable to distributions after Dec. 31, 2006, permitting the rollover of plan assets of a deceased participant in a qualified plan to an IRA for a non-spousal beneficiary. Previously, the law had permitted such rollovers only if done by a participant during their lifetime or, if after death, only to a spousal IRA. Unfortunately, certain restrictions under the new law that are out of a taxpayer/participant's hands may actually prove to be the reason why rollovers by non-spousal beneficiaries will never catch on as a viable tax strategy.The non-spousal rollover provisions may be the latest example of a good rule that provides no incentive for change by those who control the infrastructure - in this case, the plan sponsors and administrators. Some practitioners are hoping for a technical or substantive correction eventually to fix the problem.
Retirement plans often pay out distributions to non-spousal beneficiaries in a lump sum soon after a plan participant's death, even though the minimum distribution rules would permit a longer payout period. According to a Senate Finance Committee report from an earlier version of the legislation, this law change was designed to give non-spousal beneficiaries more flexibility to extend the payout period, in accordance with the minimum distribution rules.
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