Pension bill a boon for non-spouse heirs


WASHINGTON -- A little-noticed provision in a pension law signed yesterday by President Bush will for the first time allow anyone to inherit a 401(k) nest egg without immediately paying taxes on the windfall, a benefit that had been reserved for spouses.

Gay advocates and other observers described the measure as a significant shift in the way the government treats domestic partners who are not married, even though the provision was not written specifically for same-sex couples.

"With this change, Congress is acknowledging that improvements can be made to our laws that address financial inequities and impediments that same-sex couples face," said James M. Delaplane Jr., an attorney and specialist on pension benefits. "There's no doubt about it."

The legal change is an obscure element in a new 907-page law affecting pensions and workplace retirement accounts. Proponents hailed the overall package as a long-sought effort to stabilize a system of retirement benefits that has grown porous. Many traditional pension plans are teetering on a base of shaky funding, and many companies are cutting back on future commitments.

"Americans who spend a lifetime working hard should be confident that their pensions will be there when they retire," Bush said as he signed the Pension Protection Act of 2006.

The change also was supported by much of the financial industry, which is scrambling for a share of a lucrative market in retirement investments as the baby boom generation gets older.

Much of the new law sets out standards that companies must follow in funding their pensions. But it also covers an array of other matters, including the rules affecting the transfer of 401(k) accounts and other so-called defined-contribution plans, upon death.

A spouse could always inherit a 401(k) account and put the money into his or her retirement savings account without penalty. Anyone else - including children of the deceased - typically was required to withdraw all funds from the account and pay taxes on the income within a matter of months. The windfall also could force some survivors into a higher tax bracket, further increasing their tax burden.

Under the new provision, other heirs besides spouses will be able to roll an inherited 401(k) account into an individual retirement account and not pay taxes on the income immediately, and perhaps not for many years. For such non-spouses, the tax payment schedule will be tied to the age of the account's former owner.

Experts say the rule, which will take effect next year, could save many heirs tens of thousands of dollars in taxes.

People holding 401(k) accounts frequently designate non-spouses such as siblings, parents and children to receive the money in the accounts upon their death.

There is no precise count of the types of households and beneficiaries who would gain under the change, but more than 65 million Americans participate in 401(k) and similar workplace retirement plans, according to the Department of Labor.

For some, the new provision called to mind a rules change affecting the federal death benefits for survivors of safety officers killed in the line of duty, which was passed after the terrorist attacks of Sept. 11, 2001. That change allowed safety officers to name a broader group of beneficiaries, which included domestic partners, to receive the money.

The pension bill encompasses everyone, not just one occupation.

"I think it's incredibly significant, and I think it's historic," said Joe Solmonese, president of the Human Rights Campaign, a gay rights organization. "What we really are seeing here, I think, is a huge step toward leveling the field."

The step has occurred quietly and without controversy. In Congress, the idea of easing restrictions on the transfer of nest eggs has generally been described as a fairness issue for family members and not framed as a gay-rights issue.

"We see it as a family issue," said Michele Combs, spokeswoman for the Christian Coalition of America. "We like the fact that you can leave your pension to more heirs. ... We see the positive side of it."

The practical effect of the old rule was to shrink the amount that could be passed on to non-spouses, because of taxes, and to add uncertainty to financial planning

"It made our job harder," said David E. Ratcliffe, director of the Merrill Lynch Center for Philanthropy and Nonprofit Management. The change, he said, makes "an expanded market" for retirement planning.

Employers and benefits advisers also supported the change.

"It's something our members identified as an important improvement for defined contribution plans," said Jan Jacobson, director of retirement policy for the American Benefits Council. "We were gratified to see it in the final bill."

Experts said heirs would not be treated identically as spouses in all matters related to retirement accounts.

For example, non-spouses will have to draw down the accounts on a schedule determined by the age of the account's deceased former owner rather than their own age and retirement status, Jacobson said. Spouses make such withdrawals based on their own age or as they move into retirement.

Even with such fine print, the new law could make a huge difference for a household and could save survivors tens of thousands of dollars or more in taxes, said Ed Slott, a specialist in retirement planning.

"It's a great provision for all non-spouses," he said.

Jonathan Peterson writes for the Los Angeles Times

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