Having spent the holidays catching up on some professional reading, I came across the IRS Fall 2009 issue of Retirement News for Employers which has some valuable information about .

Non-spousal rollovers were not available before the new Pension Protection Act provision, which became effective for distributions made after December 31, 2006. After PPA, plans were permitted to allow non-spouse beneficiaries the option of rolling over distributions, but plans were not required to provide that option. The Worker, Retiree and Employer Recovery Act of 2008 makes the non-spousal rollover provision mandatory for plan years beginning after December 31, 2009.

Plans will have to offer the rollover alternative to non-spouse beneficiaries receiving plan death benefits.

Plans are required to offer a non-spouse beneficiary the option to do a direct rollover (a trustee-to-trustee transfer) of an eligible rollover distribution to an inherited IRA. Plan administrators are required to give all non-spouse beneficiaries a written notice explaining the direct rollover rules and the mandatory 20% income tax withholding rules for distributions not directly rolled over. This explanation should be provided to the non-spouse beneficiary no earlier than 180 days and no later than 30 days before making the distribution. The good news is that sample notices to non-spouse beneficiaries are available in IRS Notice 2009-68.

Rollover must be to inherited IRA. The IRS makes clear that a non-spouse beneficiary can only roll over the distribution of an inherited amount into an inherited IRA. Under an inherited IRA, the designated non-spouse beneficiary:

  1. cannot make any contributions to the inherited IRA;
  2. cannot roll over any amounts into or out of the inherited IRA, but may do a trustee-to-trustee transfer into another inherited IRA in the original deceased account owner's name with the same beneficiary;
  3. has the same basis in the inherited traditional IRA assets as the original deceased account owner;
  4. may not combine the basis in this inherited IRA with the basis in his or her own traditional IRAs, or any of his or her other inherited IRAs;
  5. will not owe taxes on the inherited traditional IRA assets until he or she receives distributions from the IRA; and
  6. must begin receiving distributions under the beneficiary distribution rules.  

So as we start out 2010, add model notice 2009-68 to your plan administration repertoire and use when necessary. And if you have not looked at the new required amendments for 2010, consider reaching out to your plan professionals or legal counsel for information about what you might be missing.