Sign Up for email alerts



Domestic Partner Benefits: Rollover Option for Retirement Plans

The Pension Protection Act of 2006 changed the way that retirement plan benefits may be paid after a participant passes away. The law now permits nonspouse beneficiaries, including employees' domestic partners, to roll their inherited retirement benefits directly to an individual retirement account or annuity (an "IRA"), as long as the employee's retirement plan specifically includes the nonspouse rollover option. Below is an explanation of this change in the law and how employers can implement the nonspouse rollover option.

The information in this document does not constitute legal advice. For assistance with legal questions specific to your situation, please consult an attorney.

How did the law change?

  • Before 2007, inherited retirement plan benefits could not be rolled over to an IRA on a tax-free basis if the deceased participant's beneficiary was anyone other than a spouse.
  • Today, if the plan permits, any nonspouse beneficiary, including a domestic partner, parent or sibling, can roll over inherited retirement benefits to an IRA on a tax-free basis. These inherited retirement benefits must be rolled over directly from the plan to the IRA. They cannot be paid out to the beneficiary first.

What employer-sponsored retirement plans are covered by the new rules?

  • The new law applies to tax-qualified retirement plans — including defined benefit plans (pensions), 401(k) plans, employee stock ownership plans (ESOPs), profit-sharing plans and money purchase plans — as well as 403(b) plans and governmental 457(b) plans.

What must an employer do to make the nonspouse rollover option available?

  • An employer needs to decide to offer the nonspouse rollover as a plan option. If a plan does not, a plan beneficiary other than a spouse cannot roll their inherited retirement benefits to an IRA.

Why is the nonspouse rollover option valued by plan participants and beneficiaries?

  • A nonspouse rollover allows beneficiaries to defer taxation. Without a nonspouse rollover, inherited benefits are often paid out by the plan shortly after the participant's death, with the beneficiary paying substantial taxes on the inherited amount. The amount of the benefit payout can push the beneficiary into a higher tax bracket further increasing the tax due.
  • A nonspouse rollover allows beneficiaries to control how they want to invest and receive the retirement benefits that have been left to them.
  • A nonspouse rollover can also allow beneficiaries to select how they want to satisfy the "minimum distribution" requirements under federal tax law, including by stretching the payments out over life expectancy. Depending on the circumstances, this opportunity may be lost if a nonspouse rollover is not made before the end of the year following the year in which the participant died.

Is there any reason for an employer not to offer the new nonspouse rollover option?

  • No. Virtually all recordkeepers are equipped to administer the option without additional cost to the plan or employer.

What does an employer have to do to implement the nonspouse rollover option?

  • For the vast majority of employers, all that is required to adopt the option is to notify the plan's recordkeeper.
  • An amendment to the retirement plan document will be required at some point but this is not needed to begin offering the rollover option. The Pension Protection Act (PPA) provides that plan amendments implementing operational adoption of the PPA provisions need only be adopted before the end of 2009 (for calendar year plans).

What other steps do employers usually take?

  • Many employers notify participants when they decide to offer the nonspouse rollover option.
  • The plan's recordkeeper will typically provide notices to plan beneficiaries that will inform them of their rollover right after the death of a participant.

What if an employer wants to amend their plan now?

  • Some employers may choose to pursue a formal plan amendment to memorialize adoption of the nonspouse rollover option even though this is not legally required until later. The following is an example of such an amendment:
      "Effective for distributions after [insert date], the Plan permits nonspouse rollovers described in section 402(c)(11) of the Internal Revenue Code of 1986, as amended."

Recommended Implementation Steps for Employers:

  1. Notify Plan Recordkeeper. Notify your retirement plan recordkeeper that you wish to adopt the Pension Protection Act's nonspouse rollover option.
  2. Determine and Confirm Implementation Date. Determine by what date the recordkeeper can implement the option and confirm that this takes place.
  3. Notify Employees. Notify the participants in the relevant retirement plan of this new rollover option and that the rollover must be made directly from the plan to the IRA. Employers will likely want to make a special effort to notify employees currently enrolled in domestic partner benefit plans as well as do targeted outreach to any employee resource group for gay, lesbian, bisexual and transgender employees.
  4. Follow Implementation with Later Plan Amendment. Ensure that a formal plan amendment on the nonspouse rollover is adopted consistent with the Pension Protection Act's requirements (no later than the end of 2009 for calendar year plans).

Updated: February 13, 2008
Published: January 15, 2008