4087 / How is the designated beneficiary of a tax sheltered annuity determined after the participant's death?

To be a designated beneficiary, an individual must be a beneficiary on the date of the participant’s death. The determination of the existence and identity of a designated beneficiary for purposes of minimum distributions is made as of the date of the participant’s death for tax years beginning in 2020 and thereafter. Pre-SECURE Act, the determination was made on September 30 of the calendar year following the year of the participant’s death.¹ Exceptions may apply if the account is payable as an annuity, or if a surviving spouse beneficiary dies after the participant but before distributions have begun. Pre-2020, the September 30 deadline was imposed so that a distribution may be calculated and made by the deadline of December 31 following the year of the participant’s death. Consequently, an individual who was a beneficiary as of the date of the participant’s death, but was not a beneficiary as of September 30 of the following year, such as because he or she disclaims entitlement to the benefit or because he or she receives the entire benefit to which he or she is entitled before that date, was not taken into account for purposes of determining the distribution period for required minimum distributions after the participant’s death.²

Note that the SECURE Act did not change the definition of designated beneficiary. Instead, the Act created a new class of beneficiaries called eligible designated beneficiaries. Post-SECURE Act, only an eligible designated beneficiary is entitled to rely upon the life expectancy method of distribution. Non-eligible designated beneficiaries must empty the account under the new ten-year rule. See Q 3902 and Q 3903 for details.

Under the 2002 regulations, special rules apply if more than one beneficiary is designated as of the date on which the determination is made. Generally, the beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the distribution period.³

If a surviving spouse beneficiary dies after the participant, but before distributions to the spouse have begun, the 10 year rule, the five year rule and the life expectancy rule described above for surviving spouses will be applied as though the surviving spouse were the participant.⁴ This provision will not allow a new spouse of the deceased participant’s surviving spouse to delay distributions under the surviving spouse rules of IRC Section 401(a)(9)(B)(iv).⁵

The 2007 regulations provide that the special rule allowing a surviving spouse to treat an IRA interest as the spouse’s own⁶ does not apply to a Section 403(b) contract, even if the spouse is the sole beneficiary.⁷

If a beneficiary is not an individual or a permitted trust ( Q 3904), the participant will be treated as having no beneficiary. A participant’s estate may not be a designated beneficiary.⁸