Surviving spouse may roll estate-paid plan distribution into IRA

Plain-English summary

A governmental deferred compensation plan paid a deceased participant's account to his estate because he had not named a beneficiary. His surviving spouse was both executor and sole beneficiary of the estate. She promptly distributed the net proceeds to herself and deposited that amount, plus the taxes withheld by the plan, into her own IRA within 60 days. The IRS treated her as receiving the plan distribution directly from her spouse for rollover purposes. The rollover was permitted under Section 402(c)(9), and the full amount was excluded from her gross income for the year.

Ruling snapshot

• Question: Could a surviving spouse roll a plan distribution into her own IRA when the plan first paid the distribution to the deceased participant's estate?
• Outcome: Approved; the spouse was treated as receiving the distribution and the timely rollover was not included in income.
• Key authorities: IRC §§ 402(c)(9) and 457(e)(16)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201821008                                             Third Party Communication: None
Release Date: 5/25/2018                                       Date of Communication: Not Applicable
Index Number: 402.00-00, 402.01-00,
              402.08-05                                       Person To Contact:
                                                              -------------------, ID No. ------------------
                                                              Telephone Number:
--------------------------------                              ----------------------
-------------------------                                     Refer Reply To:
----------------------------------                            CC:TEGE:EB:QP3
                                                              PLR-127040-17
                                                              Date:
In Re: ---------------------------                            February 22, 2018




Legend

Decedent          =    ---------------------------

Plan              =    -----------------------------------------------------------------

State             =    --------------

Amount A          =    ------------------

IRA X            = -----------------------------------------------------------------------------------------------
                    ---------------------------------------------

Taxpayer          =    ---------------------------

Dear ------------------:

This letter responds to your authorized representative’s letter dated September 5, 2017,
requesting a ruling concerning your ability to roll over a distribution of your deceased spouse’s
account in the Plan into your individual retirement account, even though the distribution was
first paid to his estate.

The following facts and representations have been submitted under penalties of perjury in
support of your request:

Decedent was a participant in the Plan, and died before reaching age 70-1/2. You have
submitted a letter from the Plan stating that the Plan was established by State under § 457(b)
of the Internal Revenue Code. Because Decedent did not designate a beneficiary under the
Plan, Decedent’s estate was the beneficiary of his account. Following Decedent’s death, the

Plan distributed Decedent’s account to his estate in a lump sum. The distribution from the
Plan totaled Amount A, from which the Plan withheld federal and state taxes before paying the
remainder to Decedent’s estate.

Taxpayer is Decedent’s surviving spouse and is the executor and sole beneficiary of his
estate. As executor, she promptly distributed the net amount the estate received from the Plan
to herself as sole beneficiary. Taxpayer then deposited this amount, plus an amount equal to
the taxes that were withheld by the Plan, into IRA X, an individual retirement account
established in her name. The amount deposited into IRA X equaled Amount A, which was
deposited within 60 days of the date Amount A was distributed from the Plan.

You request the following rulings:

1. Taxpayer, the surviving spouse of Decedent, will be treated as having acquired the
   distribution from the Plan directly from Decedent, and not from Decedent’s estate.

2. Taxpayer was eligible to roll over the distribution from the Plan to IRA X, which was
   established and maintained in her own name, pursuant to § 402(c)(9).

3. Taxpayer will not be required to include Amount A in her gross income for federal
   income tax purposes for the calendar year in which the distribution and rollover
   occurred.

Section 457(b) defines an eligible deferred compensation plan as a plan established and
maintained by an eligible employer that meets the requirements specified in such section.

Section 457(e)(1)(A) defines the term “eligible employer” as (A) a state, political subdivision of
a state, and any agency or instrumentality of a state or political subdivision of a state, and (B)
any other organization (other than a governmental unit) exempt from tax under this subtitle.

Section 457(e)(16)(A) provides that in the case of an eligible deferred compensation plan
established and maintained by an employer described in subsection (e)(1)(A), if any portion of
the balance to the credit of an employee in such plan is paid to such employee in an eligible
rollover distribution (within the meaning of § 402(c)(4)), the employee transfers any portion of
the property such employee receives in such distribution to an eligible retirement plan
described in § 402(c)(8)(B), and in the case of a distribution of property other than money, the
amount so transferred consists of the property distributed, then such distribution (to the extent
so transferred) shall not be includible in gross income for the taxable year in which paid.

Section 457(e)(16)(B) provides that the rules of paragraphs (2) through (7), (9), and (11) of
§ 402(c) and § 402(f) shall apply for purposes of subparagraph (A).

Section 402(c)(2) provides that the maximum amount of an eligible rollover distribution shall
not exceed the portion of such distribution which is otherwise includible in gross income,

provided that such limitation does not apply to (1) amounts transferred in a direct trustee-to-
trustee transfer to a qualified trust or an annuity contract described in § 403(b) that meets
certain conditions; or (2) amounts transferred to an eligible retirement plan described in clause
(i) or (ii) of § 402(c)(8)(B).

Section 402(c)(3) provides that the exclusion from gross income shall not apply to any transfer
of a distribution made after the 60th day following the day on which the distributee received the
property distributed.

Section 402(c)(4) defines “eligible rollover distribution” as any distribution to an employee of all
or a portion of the balance to the credit of an employee in a qualified trust; except that the
terms shall not include-

(A) any distribution which is one of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancies or the joint life
expectancies) of the employee and the employee’s designated beneficiary, or for a
period of 10 years or more, and
(B) any distribution to the extent the distribution is required under § 401(a)(9); and
(C) any distribution which is made upon hardship of the employee.

Section 402(c)(8)(B) defines eligible retirement plan as (i) an individual retirement account
described in § 408(a), (ii) an individual retirement annuity described in § 408(a), (ii) an
individual retirement annuity described in § 408(b) (other than an endowment contract), (iii) a
§ 401(a) qualified retirement plan, (iv) an annuity plan described in § 403(a), (v) an eligible
deferred compensation plan described in § 457(b) which is maintained by an eligible employer
described in § 457(e)(1)(A), and (vi) an annuity contract described in § 403(b).

Section 402(c)(9) provides that if a distribution attributable to an employee is paid to the
spouse of the employee after the employee’s death, § 402(c) will apply to such distribution in
the same manner as if the spouse were the employee.

In this case, Decedent’s estate is the beneficiary of his account in the Plan, and his account
was paid by the Plan to the estate in a lump sum (net of taxes withheld on the distribution).
Taxpayer, Decedent’s surviving spouse, is the executor and sole beneficiary of Decedent’s
estate, and promptly distributed the amount received from the Plan to herself. Taxpayer then
deposited the amount distributed from the Plan (including both the net amount the estate
received from the Plan and an amount equal to the taxes withheld on such distribution) into
IRA X within 60 days of the date such amount was distributed from the Plan. Under these
circumstances, Decedent’s account under the Plan may be treated as paid from the Plan to
Decedent’s spouse for purposes of § 402(c).

Accordingly, we conclude that:

     1. Taxpayer may be treated as having received the distribution of Amount A from the
        Plan for purposes of § 402(c);
     2. Taxpayer A was eligible to roll over Amount A to IRA X, which was established and
        maintained in her own name; and
     3. Taxpayer will not be required to include Amount A in her gross income for federal
        income tax purposes for the calendar year in which the distribution and rollover
        occurred.

The rulings contained in this letter are based upon information and representations submitted
by the taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party, as specified in Rev. Proc. 2018-1, 2018-1 I.R.B. 1, § 7.01(16)(b). This office
has not verified any of the material submitted in support of the request for ruling, and such
material is subject to verification on examination. The Associate office will revoke or modify a
letter ruling and apply the revocation retroactively if there has been a misstatement or omission
of controlling facts; the facts at the time of the transaction are materially different from the
controlling facts on which the ruling was based; or, in the case of a transaction involving a
continuing action or series of actions, the controlling facts change during the course of the
transaction. See Rev. Proc. 2018-1, § 11.05.

This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being
sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the letter
ruling.

                                   Sincerely,



                                   John T. Ricotta
                                   Chief, Qualified Plans Branch 3
                                   Office of Associate Chief Counsel
                                   (Tax Exempt and Government Entities)

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