The Art of the Qualified Plan Audit

Posted by Christopher J. Ciminera

When I was younger my little sister would come to the park with my friends and me. One day I was walking back with my friends and realized I forgot my sister who was left playing with friends. Unlike retirement plans, most welfare plans are a combination of unfunded and fully insured, so they don’t file a Schedule H with plan financial information, and they do not have to attach audited financial statements to the Form 5500 filing, so large welfare plan sponsors often forget the filing requirement, just like I forgot my little sister.

As a testament to this, someone recently asked me about the requirement of file 5500s for its health and long-term disability plans. It appears the Department of Labor (DOL) has identified lack of welfare plan filings as a potential problem, since there have been a few articles indicating that the DOL has started a program to curtail such non-compliance. Like the reminder from my mom prior to forgetting my sister, the DOL is reminding plan sponsors by sending e-mail notifications to plan sponsors who have filed a 5500 for their retirement plan but have not filed a 5500 for their health and welfare plan. The mandated electronic filing requirements have allowed the DOL to pick out these red flags much more easily.

You may wonder, why is it a red flag to the DOL if a retirement plan 5500 has been filed, but 5500 for a health and welfare plan has not? Well, the requirements for both are that the plans must file a 5500 if the plan benefits 100 or more participants. If a 5500 is filed for a retirement plan, then the retirement plan benefits over 100 employees. Generally a health and welfare benefit plan will cover those same retirement plan participants and thus need to be reported to the DOL.

Let’s discuss the requirements for a health and welfare benefit plan to file a 5500.

A health and welfare plan that covers 100 or more employees and is covered by ERISA is required to file a 5500. The 5500 instructions list welfare plan benefits as medical, dental, life insurance, short- and long-term disability, to name a few.

There are exceptions to the requirement for a health and welfare benefit plan covered by ERISA to file a 5500.

The exceptions listed in the 5500 instructions are:

1.  A welfare benefit plan covering fewer than 100 participants at the beginning of the plan year and is unfunded, fully insured, or a combination of insured and unfunded.

a.  Unfunded – benefits paid as needed directly from the general assets of the employer or employee organization that sponsors the plan.

b.  Fully Insured – benefits provided exclusively through insurance contracts or policies, the premiums of which must be paid directly to the insurance carrier by the employer or employee organization from its general assets or partly from contributions by its employees or members.  The insurance contracts or policies discussed above must be issued by an insurance company or similar organization (such as Blue Cross, Blue Shield or a health maintenance organization) that is qualified to do business in any state.

c.  Combination unfunded/insured – benefits provided partially as an unfunded plan and partially as a fully insured plan.  As an example, a welfare plan that provides medical benefits as in an unfunded welfare benefit plan and life insurance benefits as in a fully insured plan.

Plans are NOT unfunded if they received employee contributions, except for cafeteria plans.

2.  A welfare benefit plan maintained outside the US primarily for persons who are nonresident aliens.

3.  A governmental plan.

4.  An unfunded or insured welfare benefit plan maintained for a select group of management or HCE (which meet certain requirements).

5.  An employee benefit plan maintained only to comply with workers’ comp, unemployment comp, or disability insurance laws.

6.  A welfare benefit plan that participates in a group insurance arrangement that files a Form 5500 on behalf of the welfare plan.

7.  An apprenticeship or training plan (which meet certain requirements).

8.  An unfunded dues-financed welfare benefit plan.

9.  A church plan.

10.  A welfare benefit plan maintained solely for a) an individual or an individual and his or her spouse, who wholly own a trade or business, whether incorporated or unincorporated, or b) partners or the partners and the partners’ spouses in a partnership.

There are a number of exceptions and specialized terms. It is best to discuss this with those who are familiar in this area to determine if the health and welfare plan meets one of the above exceptions.

So, in conclusion, don’t forget to file your organization’s “little sister” health and welfare plan 5500 filings. Although my mother’s admonishment for forgetting my sister was pretty bad, I know the DOL is worse if you forget your “little sister” health and welfare plan filing.

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Posted by Maria T. Hurd, CPA

Welfare plans such as health, life insurance, dental, vision, short and long term disability plans, are usually a combination of unfunded and fully insured. Unlike retirement plans, small welfare benefit plans do not have a filing requirement if the plan is unfunded, fully insured, or a combination of unfunded and insured. As a result, sponsors of growing plans that reach the 100-participant mark for the first time often miss their filing requirement. Welfare plans cannot use the 80-120 exception to delay the filing of a Form 5500, because this rule is only available to plans that filed a Form 5500 in the previous year. For more details on the application of the 80-120 rule, see our previous blog “I don’t want to grow up, I want to be a small plan.”

Welfare benefit plans that cover 100 or more participants must file a Form 5500. Some welfare benefit providers prepare the Form 5500 for their clients, others just send the required Schedule A attachments. Large plan sponsors who are not aware of the purpose for the Schedule A sometimes file the form away, not realizing that it is an indication that they must file a Form 5500. In most cases, employers who file a large plan Form 5500 for their requirement plan also have a welfare plan filing. The bad news is that electronic filing through EFAST 2 has made it very easy for the Department of Labor (DOL) to locate large plan sponsors who filed a Form 5500 for their retirement plan, but did not do so for their welfare plans.

The good news is that plan administrators who have not been notified in writing by the DOL of their failure to file a timely Form 5500 can file under the DOL’s Delinquent Filer Voluntary Compliance Program (DFVC). Under the DFVC program, the $10/day penalty for late filings, without regard to extensions, is capped at $2,000 per filing and $4,000 per plan for large plans. Although $4,000 could be a substantial penalty amount, it is often much less than the penalty that will be due if the employer doesn’t beat the DOL to it. The DOL’s website has guidance for the completion of a delinquent filing through the DFVC program. Additionally, our next blog entry will expand on the specific rules regarding the filing requirements for welfare plans. With the advent of electronic filing, it doesn’t pay to duck and cover. Sooner or later, the DOL will find your missing Form 5500, so it’s best to race them to the finish and get compliant.

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Posted by Maria T. Hurd, CPA

Were your 401(k) and 403(b) deferral deposits accurate and timely?

Picture this: it’s the last day of January and another deadline has been met successfully. Employees have their W-2s and everyone is happy.

Despite the relief payroll managers and retirement plan officials may feel from this most recent sprint to the finish, THE RACE IS NOT OVER. Before sitting down, get that second wind and verify that deferral withholdings were actually deposited to the plan, without exception. To do so, proceed as follows:

1. Make a list of each pay date during the year and the related deferral amount for each paycheck. Please note that paycheck dates for 2013 must be included, NOT pay periods.
2. Obtain a report from your vendor or vendors showing each deferral deposit by date
3. Compare the totals to the amount on your W-3′s, box 12a: deferral compensation
4. If the totals do not agree, research each pay period to locate any participants who received more or less than the amount withheld from their pay, as shown on their W-2s

Following is an example of how the schedule looks for a company with monthly payroll, and only one Form W-3:

As you can see, the deferrals by pay period agree with the total on the W-3, but the total deferrals withheld from these employees exceed the amounts deposited by $400. At this moment, it would be very important for this employer to identify what employee(s) did not receive an accurate allocation, and correct the mistake by immediately depositing the missed amount plus earnings. Needless to say, this is a reconciliation that should be performed after each payroll date, rather than just once a year. In no event should plan sponsors neglect to ensure the completeness and accuracy of their deferral deposits, just because they know that their auditor will do it. Plan sponsors’  internal controls must operate independently of the audit process to properly prevent and detect errors in plan operations.

Many plan officials have never heard of the ”Form W-3-Transmittal of Wage and Tax Statements,” because their payroll provider files the original Form W-3 with the government, as required, and gives them a pro-forma report containing payroll totals for the year. On the W-3, the crucial piece of information for the reconciliation of deferrals withheld to deferrals deposited is on Box 12a: Deferred Compensation. The total payroll page from your payroll provider will definitely show total 401(k) or 403(b) plan deferral withholdings for the year, and it will show even more payroll information than the W-3. Much of that information will be essential to produce an accurate census, the next step after the deferral deposit reconciliation. Just like fitness training is never done, plan operations and their administrative oversight is never done either.

Lastly, please note that this employer remitted the deposits within seven days after each payroll date, thereby complying with the Timeliness of Deposits rules available to small plans as a safe harbor. Large plans must deposit deferral withholdings as soon as they can be reasonably segregated from plan assets, but in no event later than the 15th business day of the month following the month of withholding. The DOL has stated that timeliness of deposits is a case-by-case determination, and that the 15th business day of the following month was never intended to be a safe harbor. Deferral deposits are no place to lose the race. Since the DOL analyzes patterns of deposits for their subjective determination of reasonableness, steady patterns of 3 to 5 days may be a better choice than erratic patterns of immediate deposits followed by longer time lags.  Just as in distance running, sometimes steady wins the race.

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Posted by Stacey Snyder

As explained in Timeliness of Deposits, the Department of Labor (DOL) has set deadlines for which salary deferrals must be deposited into the plan. If these deadlines are not met, a prohibited transaction under Section 4975 will have occurred and Form 5330 must be filed and excise taxes paid for each year or part of the year that the prohibited transaction is outstanding.

The purpose of Form 5330 is to calculate and pay excise taxes on failures related to employee benefit plans. When Form 5330 is filed because prohibited transaction has occurred under Section 4975, the amount of excise tax is equal to 15% of the amount involved. In the case of late deposits, the amount involved is based on interest on the late deposits because the late deposits are treated as a loan to the employer.

The interest is calculated by multiplying the amount of deferrals withheld by the interest rate for underpayments of tax set by the Internal Revenue Service (IRS), which is currently 5%; prorated for the number of days the deposit was late.  For example, if deferrals totaling $25,000 were deposited 30 days late, your formula for calculating interest would be: $25,000*5%*(30/365) = $103. However, let’s say the deferrals of $25,000 were withheld in November or December and deposited 50 days late – 30 days during year 1 and 20 days during year 2. The interest calculated for year 1 ($103) should be added to the original amount of deferrals when calculating year 2 interest: $25,103*5%*(20/365) = $69. Additionally, year 1 interest must be added to year 2 interest when determining the excise tax due for year 2. Therefore, the total excise tax due based on the example above is $41: Year 1 excise tax ($103*15%) + Year 2 Excise Tax (($103+$69)*15%).

Each late deposit should be reported on Schedule C of Form 5330, which must filed by the end of the 7^th month following the plan’s year end and can be extended for 3 ½ months. Additional interest and penalties will be assessed on the amount of tax due if the form is not filed on time.

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Posted by Maria T. Hurd, CPA

In a time when nonprofit organizations are facing higher demand for their services with fewer financial resources available to them, maintaining compliance with the ever-changing landscape of regulatory requirements is becoming increasingly difficult. As a result, it’s no surprise that we are seeing more and more organizations fall victim to noncompliance with DOL regulations regarding retirement plan audits.

Every year, we become aware of at least one organization that needs several years of plan audits because the participant count was not performed accurately. Inevitably, a plan official or service provider failed to count a group of participants that they did not THINK should be included. Unfortunately, the participant count is not a matter of opinion. For a defined contribution retirement plan, such as a 401(k) or a 403(b) plan, the rules are clear.  The number of participants reported on the Form 5500 must include:

1-Any employee who is ELIGIBLE to participate in the plan, regardless of actual participation

and

2-Terminated or retired employees who have left their account balance in the plan

In many cases, the preparer of the Form 5500 erroneously counts only participants whose accounts were allocated a contribution during the year, or participants who have account balances. Both methods are incorrect and result in an inaccurate participant count. In many cases, the understated participant count results in a small plan filing, when the plan is actually a large plan that would have been required to attach audited financial statements for the plan to the Form 5500.

Plan officials who annually submit census information to the plan’s third-party administrator should ensure that all employees are listed, including employees that are not yet eligible, and employees who are eligible but not participating. A good way to verify the completeness of the census information is to reconcile the number of employees listed on the census with the number of W-2s and/or K-1s. Reporting all employees is especially important for 403(b) plan sponsors such as schools, which may have a substantial number of employees who are eligible due to the universal availability rules, but who do not choose to make any elective contributions to the plan. Universal availability rules for 403(b) plans are discussed in my previous entry,  403b Plans: Universal Availability Exclusions.

After ensuring that all employees are listed in the census, plan officials must make sure they submit a list of participants who have separated from service due to termination of employment, retirement, disability, or death, but still have an account balance in the plan. Once an accurate participant count is achieved, plan sponsors can refer to our previous blog I don’t want to grow up, I want to be a small plan, to determine whether prior small plan filings need to be amended to attach a financial statement audit. If so, our blog archive includes several entries to assist with the selection of a qualified retirement plan auditor.

Contrary to popular belief, counting participants is not as easy as 1,2,3, but with practice, the process becomes much more intuitive and plan sponsors can file accurate Form 5500 information returns before learning the hard way as a result of an IRS or a DOL audit.

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Posted by Maria T. Hurd, CPA

Plan sponsors who are signatories to collective bargaining agreements agree to make contributions to their employees’ unions’ benefit funds, which generally include a welfare plan, a defined benefit pension plan, and a defined contribution annuity fund, among others. In the case of defined benefit pension plans, an employer’s contributions are not specifically earmarked only for their employees. Like all defined benefit pension plans, the plan assets fund the benefits for all eligible plan participants, including those who work for other employers who are also signatories to the collective bargaining agreement. Each year, an actuary computes the funded status of the plan by calculating whether the plan assets are expected to be sufficient to pay for promised future benefits. The funded status is often described with colors as follows:

• Green zone: at least 80% funded
• Yellow zone: between 65% and 80% funded
• Red zone: less than 65% funded

Based on the plan’s current and projected funding levels, and taking into account the projected hours of work, the actuary computes the needed funding, and helps the plan trustees determine their options when negotiating the plan’s hourly contribution rate. The signatory employers understand why they contribute to the benefit funds for each hour of work that their employees work. What they don’t always fully understand is that if they partially or fully terminate their association with a bargaining unit and they are no longer required to contribute to the multiemployer plan, and the plan is underfunded, the employer may be required to pay a withdrawal liability to the plan.

The amount of the withdrawal liability assessed against a company depends on its share of the unfunded, vested benefit and the company’s past participation in the plan. The plan actuary performs the calculation, which is subject to plan specific rules and legislative regulation. Because the actuary is required to use PBGC mandated interest rates and actuarial assumptions when computing withdrawal liability, the withdrawal liabililty can far exceed the employer’s share of the underfunding determined using the plan’s interest rate and actuarial assumptions.

Furthermore, there are exemptions to the withdrawal liability rules for certain types of plans and employers. For example, if the plan is considered a construction industry plan and the employer is a construction industry employer, such employer will not be considered to have withdrawn from the plan unless the employer stays in operation but continues (or within five years resumes) the same type of work in the same jurisdiction covered by the collective bargaining agreement. In other words, a construction contractor that decides to retire and close up shop is not subject to a funding requirement due to withdrawal liability. If an employer sells its assets, it will not have withdrawn if the purchaser of the assets continues to have an obligation to contribute for the work related to the assets in substantially the same amount as the seller. The seller will remain liable for its withdrawal liability if the purchaser later withdraws from the multiemployer pension plan.

A partial withdrawal can occur when employer’s contribution base, the work performed in covered employment  has decreased by at least 70 percent, and stayed at that depressed level for an extended period, measured by comparing the last three consecutive years with the two highest years within the five years before that three-year period. This means that to identify a partial withdrawal, the actuary studies fluctuations in employers’ contributions for an 8-year period. The liability for partial withdrawal is a prorated part of the liability for complete withdrawal. For the construction industry, there is no partial withdrawal, unless the employer maintains an “insubstantial” portion of its total work in the jurisdiction covered by the plan. For example, if a contractor goes non-union for most of its work in the jurisdiction, but keeps one or more members of the local that require plan contributions, the contractor would owe contributions for the partial withdrawal. The liability for partial withdrawal is a prorated part of the liability for complete withdrawal.

Plan Sponsor Disclosures

The employer’s potential withdrawal liability is not a required disclosure in the employer’s financial statements. Instead, plan sponsors disclose the following:

• Plan Identification – plan name and EIN number for any multiemployer plans in which an employer participates
• Level of Participation – amount of contributions made by the employer to the plan, and whether the employer’s contributions represent more than five percent of the total contributions made to the plan by all employers
• Financial Health – plan’s funded status, or zone status, or if none is available, the percentage funded level range as described previously
• Employer Commitments – disclosure of the expiration dates of the collective-bargaining agreements and a disclosure of any minimum contributions required to be made by the employer to the plan.

The above disclosures, which BLS includes in financial statements, are required for nonpublic entities for fiscal years ending after December 15, 2012, and disclosures should be made for all prior periods presented. Construction contractors that are signatories to a collective bargaining agreement that includes contributions to a multiemployer pension plan must work with their accountants and the plan’s actuary to obtain the necessary information to comply with the Financial Accounting Standards Board disclosure requirements.

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Posted by Maria T. Hurd, CPA

Much like people who make a wish to be fit with the turkey wishbone after a Thanksgiving feast, many plan sponsors think that their INTENT to be a safe harbor plan is a sufficient defense when they have not met the requirements to be a safe harbor plan. Although Keeping it Simple and Straightforward, as discussed in our previous blog, is one of the goals of a safe harbor plan, achieving safe harbor plan status requires:

1. Adopting a Safe Harbor Plan Document,

2. Contributing one of the pre-approved safe-harbor employer contributions, AND

3.  Sending Annual Safe Harbor Notices to all eligible employees

Each of the above three steps is required, such that compliance with one or two out of the three does not make a plan a safe harbor plan, but many plan sponsors try to use the “best two out of three” argument in their own defense.

For example, let’s say Company A submits incomplete census information to the third-party administrator (TPA) that computes the plan’s discrimination testing. Even if the employer contribution is consistent with a safe harbor formula, if the document is not a safe harbor document and a safe harbor notice has never been distributed, the plan is not a safe harbor plan and is not exempt from discrimination testing.

In certain cases, a plan sponsor can comply with all three of the rules enumerated above and still be subject to compliance testing. For instance, Company B has a safe harbor plan document, distributes a safe harbor notice, and makes a safe harbor employer contribution. Thinking that their plan is covered by the safe harbor protection, Company B makes an additional, class-based, discretionary profit sharing contribution which triggers the requirement for discriminiation testing and the top-heavy minimum contribution rules. Although it is possible to provide additional contributions and still be exempt from the ADP/ACP tests, it is crucial to engage a plan document provider that knows the common pitfalls. For example, safe harbor plans cannot have a two-year eligibility period or a last day of employment requirement.  Highly Compensated Employees cannot receive a rate of match at any level of deferral that is greater than the rate of match received by any Non-Highly Compensated Individual at the same level of deferral. Many of these rules are often overlooked by plan sponsors when their plans offer the opportunity to contribute additional discretionary amounts. If the additional contributions fail to comply with the safe harbor rules, the plan becomes subject to discrimination testing.

Last but not least, safe harbor plans must distribute a timely notice to all eligible employees at least 30 days, but not more than 90 days before the beginning of each plan year. That means the deadline for calendar year plans is Friday, November 29, 2013. If the day after Thanksgiving is a holiday for your company or organization, then the Notice must be distributed by Wednesday, November 27! (Clarification: The deadline is 30 days before January 1 (i.e., December 2) but it would be even better to beat the Holiday vacation and do it before Thanksgiving.) Generally, third-party administrators provide templates to their clients of a compliant safe harbor notice containing all the required disclosures to participants. In certain cases, “Maybe” Notices for Safe Harbor Plans may be more appropriate, as discussed in our previous blog. Although the IRS provides guidance for “Fixing Common Plan Mistakes – Failure to Provide a Safe Harbor 401(k) Plan Notice,” the suggested corrections generally involve making corrective contributions on behalf of employees that were negatively affected by the employer’s failure to distribute the safe harbor notice. Rather than going through the inconvenient and potentially costly process of executing a correction, employers should make sure that they take the steps necessary to BE a safe harbor plan, rather than wishing themselves safe.

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Posted by Maria T. Hurd, CPA

CPA firms that perform employee benefit audits can voluntarily join the American Institute of Certified Public Accountants’ EBPAQC (the Center). By joining the Center, member firms show their commitment to providing quality audit services to their clients. Membership indicates that the firm has complied with three important requirements:

a)     Minimum industry-specific training

b)     Documented industry-specific quality control procedures

c)     Self-monitoring through peer review and internal inspection

The EBPAQC requires the individual signing the audit opinion to have a minimum of 8 hours of Continuing Professional Education (CPE) that is specific to employee benefit plans every three years. For example, at BLS the designated audit shareholder who has firm-wide responsibility for the quality of the firm’s ERISA employee benefit plan audit practice completes all of the AICPA CPE requirements in topics related to retirement plans. She often exceeds the minimum tax and audit CPE hour requirements by attending both the American Society of Pension Professionals and Actuaries National conference and MidAtlantic Conference, and the AICPA National Conference. Additionally, a supervisor who specializes in retirement plan audits also exceeds the EBPAQC industry-specific training requirements by attending the AICPA National EBP conferences and nearly all of the webcasts offered by the Center and the firm’s PrimeGlobal Employee Benefit Plan Audit Group. The other 6 members of the audit department involved with retirement plan audits also exceed the Center’s minimum training requirement through attendance at the Center’s webcasts, self-study, and attendance at the various industry-specific conferences in the MidAtlantic region.

The Quality Control Partner, who is in charge of the firm’s annual internal inspection, ensures that his review includes audits of ERISA employee benefit plans representative of the firm’s practice by considering the number and types of plan audits. In our case, the engagements inspected include 401(k), 403(b), other DC plans, DB plans, health and welfare, multiemployer plans, multiple employer plans, state government plans, limited scope and full scope audits. The internal inspection reports specific to the ERISA engagements are made available to the firm’s peer reviewer. The BLS peer review is conducted by individuals employed by a Center member firm and the peer review report is publicly available on the AICPA’s website.

The selection of a retirement plan auditor is an important fiduciary responsibility. In determining whether a potential auditor’s engagements are consistently performed in accordance with professional standards, as well as regulatory and legal requirements, and that the audit team is appropriately trained, it behooves a plan sponsor to ask not just whether the prospective firm meets the requirements for membership in the EBPAQC, but also how much they exceed those requirements. After all, an auditor that exceeds expectations is the most likely to ensure a positive outcome in the case of an IRS or DOL audit.

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Posted by Maria T. Hurd, CPA

The 2014 plan limits were just released. Below is a chart that outlines the recently announced cost-of-living adjustments affecting retirement plans:

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Posted by Stacey Snyder

Inheriting a retirement account, whether in a qualified plan or an IRA, can lead to complicated decisions regarding the treatment of the account.  There are many different considerations that affect the beneficiary’s options. A spousal beneficiary has two options when it comes to an inherited retirement account: the spouse can either (1) keep the IRA under the deceased spouse’s name with the surviving spouse remaining as the beneficiary, or (2) make an affirmative election to treat the inherited account as his/her own.   The benefits of each option vary, so the beneficiary must choose the option which best fits his/her particular circumstances. A non-spousal beneficiary, however, does not have the option to treat the Inherited IRA as his or hers, but can treat it only as an Inherited IRA.

Spousal Beneficiary Option 1:

The first option a spouse has when inheriting a retirement account is to keep the account under the deceased spouse’s name and remain as the beneficiary. If the inherited account is an employer-sponsored plan account, the spousal beneficiary may choose to roll over the account into a separate IRA.  The terms of the plan may allow the spousal beneficiary to keep the funds in the plan and take lifetime distributions, but many plans require that the funds be distributed from the plan within 5 years following the year of the deceased spouse’s death.  Since the account is still considered to be the deceased spouse’s, contributions may not be made into the retirement account and required minimum distributions (RMD) will be required as they would if the spouse were alive. The RMD will begin when the deceased spouse would have reached the age of 70½ or will continue if they had already started, and may be received in two forms: either under the life expectancy rule or the five-year rule. The life expectancy rule results in an amount received monthly which is calculated using a single life expectancy figure for the surviving spouse’s age, which can be found on a life expectancy chart. The five-year rule requires that all funds in the account must be distributed before December 31 of the fifth year following death, and can be withdrawn at any time and in any amount. The five-year method is only applicable if the RMD has not already started, or in the case of an employer-sponsored plan, the option must be available as a plan feature. Neither form of distribution will be subject to the 10% penalty tax.

Spousal Beneficiary Option 2:

The second option available to spousal beneficiaries is to elect to treat the account as his/her own. The spousal beneficiary can do this by rolling over the account into an existing IRA, qualified plan, annuity plan, tax-sheltered annuity plan, or a governmental plan, or by creating a new IRA account.  Using this option, contributions can be made to increase the balance of the new account that has been set up, and the RMD will be delayed until the spousal beneficiary reaches the age of 70½. In this case, any withdrawals which are made prior to the age of 59½ will be subject to the 10% penalty tax unless they are rolled into another qualified plan within 60 days (or are made pursuant to one of the exceptions to the 10% excise tax). Under this option, the spousal beneficiary can designate a beneficiary and the RMD made under this option will be calculated based on the joint life expectancies of the spousal beneficiary and his or her beneficiary figure which creates a larger disbursement than with the single life expectancy figure.

Inherited IRA:

The inherited IRA is the only option for non-spousal beneficiaries, and is required for a spousal beneficiary if the retirement account passes through a third party before being distributed to the spouse. With an inherited IRA, only a “Trustee-to-Trustee” transfer (Direct Rollover) may be made from an employer-based plan to an IRA created under the name of the deceased with the designated beneficiary (although President Obama has proposed treating nonspousal inherited retirement accounts the same as spousal inherited retirement accounts for rollover purposes). The inherited IRA assets cannot be mixed with non-inherited assets and contributions may not be made. RMDs must be made using the life expectancy rule or the five-year rule, and are not subject to the 10% penalty tax. The life expectancy rule for an inherited IRA uses the single life expectancy figure based on the age of the beneficiary and must begin the year after the death of the original owner, otherwise, the five-year rule will be required. Qualified plans may permit non-spousal beneficiaries to take lifetime distributions from the plan but many require that the funds be distributed under the five year rule.  Qualified plans are required to permit non-spousal beneficiaries to roll over benefits to an inherited IRA.

Comparison Chart:

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