403(b) Account Rollover for Non-Spouse Beneficiary

“Can a non-spouse beneficiary of a deceased employee who participated in a 403(b) plan roll over account assets to an IRA tax free?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Yes! Internal Revenue Code section 402(c)(4) defines an eligible rollover distribution as any distribution to an employee of all or any portion of the benefit to the credit of an employee in a qualified retirement plan. Distributions that are eligible rollover distributions can be directly or indirectly rolled over/transferred to another eligible retirement plan or individual retirement account (IRA) tax free. Under Code section 402(c)(9), spousal beneficiaries generally have the same rights.

Further, under Code section 402(c)(11), a non-spouse designated beneficiary (including certain trusts) of a deceased employee who was a plan participant in a 403(b) plan must be offered the opportunity to transfer to an IRA the deceased employee’s benefits under the plan. However, the rules here are a little different: (i) the non-spouse beneficiary may only make a direct rollover/transfer, an indirect rollover is not available; and (ii) such amount may only be rolled over to an IRA that is an “inherited IRA.” Amounts rolled over from a deceased participant’s 403(b) plan to an inherited IRA are (i) not includible in the non-spouse beneficiary’s income in the year of the distribution from the 403(b) plan, (ii) with limited exceptions, not allowed to be rolled over to another IRA or eligible retirement plan, (iii) not permitted to be supplemented by additional contributions or rollovers to the inherited IRA, and (iv) eventually required to be received as taxable income over a specified period, under the applicable required minimum distribution (RMD) rules.

Code section 402(c)(11) does not extend to a beneficiary of a non-spouse designated beneficiary. As such, under Code section 402(c)(11), if the non-spouse designated beneficiary dies after having made a transfer of the deceased employee’s benefits to an inherited IRA, any beneficiary named by the non-spouse beneficiary to receive such IRA amounts could not transfer the amounts to another inherited IRA (or, for that matter, to any retirement plan or IRA).

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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