Here's the scenario: Paticipant deceased 2004 age 51 at time of demise. No benefits payments were ever commenced.

Two sisters are the designated beneficiaries. Ages 60 & 45

Option one: As non-spousal beneficiaries can they leave the assets in the plan until the 31th Day of 2009 and excerise the 5 year option?

Option two: Or - as non-spousal beneficiaries were they required to start taking benefits out at the end of 2005?

Under PPA 2006 - If they can use option one....and if they wait until 2007, then they can do a non-spousal IRA rollover?

Plan allows for participant/beneficary choice between the two options.

You note that the plan offers both options...by not taking a distribution by 12/31/05, they have effectively elected the 5 year payout and can no longer go to systematic distributions.

I think that guidance is needed as to whether someone in this situation can (in 2007):

-roll to a non-spousal IRA, and then have to take it all out by 12/31/09, thereby leaving them in the same RMD position (possible, but requires continued tracking of the 5 year period by the successor custodian and that seems unlikely), or

-roll to a non-spousal/inherited IRA, and then be allowed to take systematic distributions, thereby giving them an advantage they didn't have before (seems unlikely), or

-not be allowed to roll at all because the intent of the law was to allow systematic distributions from a non-spousal IRA, not mess around with the 5 year rule because that would be difficult or impossible to track (most likely...I think).

RMD REGS HERE Here is an excerpt from the preamble to the final regulations.

Default Rule for Post-death Distributions
These regulations, as did the 2001 proposed regulations, provide that, if an employee dies before the employee's required beginning date and the employee has a designated beneficiary, then the life expectancy rule in section 401(a)(9)(B)(iii) (rather than the 5-year rule in section 401(a)(9)(B)(ii)) is the default distribution rule. Thus, absent a plan provision or election of the 5-year rule, the life expectancy rule applies in all cases in which the employee has a designated beneficiary, and the 5-year rule applies if the employee does not have a designated beneficiary [and dies prior to the RBD]. This is a change from the position in the 1987 proposed regulations that provided the 5-year rule as the default unless the spouse was the sole beneficiary. Commentators pointed out that, as a result of the default rule under the 1987 regulations, some beneficiaries did not commence distributions under the life expectancy rules. In response to those comments, these final regulations provide a transition rule that permits beneficiaries subject to the 5-year rule under the 1987 proposed regulations to switch to the life expectancy rule, provided that all amounts that would have been required to be distributed under an application of the life expectancy rule are distributed by the earlier of December 31, 2003 or the end of the 5-year period following the year of the employee's death.

It would appear that the beneficiaries might still have the option for the life expectancy payout but would be subject to the 50% penalty for the amounts not previously taken. It woould depend on the numbers as to which choice is most advantageous.

Here are Noel Ice's annotated regs. See above Messed placement of URL.

Also

Single Life expectancy at age 60 = 25.2 (Age of oldest beneficiary in year of death) or 27 yrs at age 58 ( unclear if age 60 is now ) subtract one year each year thereafter, determine RMD and 50% penalty. THe numbers may work out better to take L.E. payout and pay penalty. Also the IRS has the authority to waive the penalty on a facts and circumstances basis. (Tear stained letter).