The Pension Protection Act of 2006 contained a provision allowing nonspouse beneficiaries to roll over funds from an employer pension plan to an inherited individual retirement account (IRA) starting in 2007. This was viewed as a significant development for nonspouse beneficiaries, who would be able to extend distributions from employer pension plans over their life expectancies rather than the typical five-year period imposed by most plans.
The Internal Revenue Service (IRS) then issued guidance indicating that the plan was not required to give nonspouse beneficiaries the ability to roll funds over to an inherited IRA. There is currently a bill in Congress to make these rollovers mandatory beginning in 2009, but until it is passed, it is still up to the plan to decide whether to allow rollovers by nonspouse beneficiaries.
If allowed by the plan, beneficiaries must ensure that the rollover is handled properly so that it is not considered a distribution. The rollover, which must be completed by the end of the year following the decedent's death, must be a direct trustee-to-trustee transfer to a properly titled inherited IRA that retains the decedent's name in the title. The funds cannot be transferred to an existing IRA belonging to the beneficiary. If the funds are issued to the beneficiary via check, it is considered a distribution, and those funds cannot be rolled over to an IRA. If a plan won't make a trustee-to-trustee transfer, a check can be made out to the inherited IRA and still meet the requirements.
Once funds are rolled over, the distribution rules that applied when the funds were in the employer's plan continue to apply, unless the beneficiary takes the first required distribution using his/her life expectancy by the end of the year following the decedent's death. If this is not done, the beneficiary must take distributions based on the plan's rules, which generally require the entire balance to be withdrawn in five years.