Rollover Exception Permitted for Spouse of Deceased EmployeeRollover Exception Permitted for Spouse of Deceased Employee

In Private Letter Ruling 201821008 (released May 25, 2018), the taxpayer requested a ruling for a rollover of a state employee’s deferred compensation plan to her individual retirement account pursuant to Internal Revenue Code Section 457(e)(16)(A), which was initially distributed to the estate of the taxpayer’s deceased spouse. 

Deferred Compensation Plan

The decedent participated in a deferred compensation plan established by a state pursuant to IRC Section 457(b) (the “Plan”) and died before reaching age 70.5.  The decedent didn’t designate a beneficiary of the Plan, and by default, his estate was the beneficiary.  The Plan distributed a lump sum (less federal and state tax withholdings) to the decedent’s estate.

Distribution and Transfer

The taxpayer, who’s the surviving spouse, executor and sole beneficiary of the estate, distributed the lump sum from the estate to herself and then transferred this amount plus the amount of the taxes withheld (presumably from other funds from the estate) to an IRA in her name.  This all occurred within 60 days of the date the lump sum was distributed to the estate.

Typically, any amount of the deferred compensation paid to an employee is includible in the employee’s gross income in the year received.  However, an employee is permitted to rollover any payments from a Plan to eligible retirement plans, which include IRAs, and not include such payments in gross income in the year received.  This must be done within 60 days of the employee receiving the deferred compensation. 

Additionally, if the deferred compensation is paid to the spouse of the employee after the employee’s death, the spouse will be deemed to be in the shoes of the employee, and this rollover exception will be available to the spouse.

Rollover Allowed

The Internal Revenue Service held that, based on the facts, it would treat the distribution from the Plan as being paid directly to the taxpayer and therefore allow the rollover, excluding the deferred compensation from the taxpayer’s gross income in the year in which the distribution from the Plan and rollover occurred.  However, it is unclear from the PLR which facts, if removed, would result in an adverse ruling, specifically, if the taxpayer wasn’t the executor or, more importantly, not the sole beneficiary.

Andrew S. Katzenberg is senior counsel at Kleinberg, Kaplan, Wolff & Cohen, P.C. in the Trusts and Estates group, where his practice focuses on wealth preservation, estate and trust administration, nonprofit and tax exempt organizations and charitable giving.