News: New Tax Law Benefits 401(k) Plan Beneficiaries


by David C. Morganelli and Deborah DiNardo - October 2009

Beginning January 1, 2010, non-spouse beneficiaries of inherited 401(k) plans will be able to roll over plan assets into inherited IRAs, just like spouse beneficiaries historically have been able to do. This change in the law comes about as part of the economic recovery legislation enacted by Congress in December 2008. This change allows non-spouse beneficiaries to avoid the requirement of a lump sum distribution from an inherited 401(k) and the immediate tax associated with it.

Previous attempts by Congress to give non-spouse beneficiaries the same tax favored opportunity as spouse beneficiaries failed in 2007 when a ruling by the Internal Revenue Service gave employers which sponsor 401(k) plans the option to choose whether or not to amend 401(k) plans to permit this tax favored rollover. Unfortunately, many employers did not make the required change to the 401(k) plan and consequently taxpayers were unable to take advantage of the tax savings intended by Congress. Fortunately, the 2008 economic recovery tax legislation requires that 401(k) plans allow non-spouse beneficiary rollovers, as well as spouse beneficiary rollovers, and employers no longer have any option whether or not to opt out.

The ability of a non-spouse beneficiary to roll over a lump sum distribution from a 401(k) plan into an inherited IRA rather than take the previously required lump sum distribution will afford non-spouse beneficiaries substantial tax savings by deferring the tax that would otherwise be due for the tax year of distribution.

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