I recently came across a couple of articles discussing some problems with the rules for non-spouse beneficiary rollovers provided in IRS Notice 2007-07:

What Is The IRS Thinking?

IRS Puts a Stingy Spin on Pension Protection Act

Here is a brief summary of the old rules, the rules according to the Pension Protection Act of 2006 (PPA), and the new rules per IRS Notice 2007-07:

Old Rules – A surviving spouse was the only type of beneficiary that could roll over an inherited 401(k) to an IRA and defer taxation.  A new IRA would be created in the name of the spouse.  All other beneficiaries (children, siblings, etc.) were NOT allowed to roll it over and were generally required to receive a distribution within 5 years of the death of the 401(k) owner.

PPA– The PPA provides that non-spouse beneficiaries would also be able to roll over an inherited 401(k) into an IRA for distributions taken after 12/31/06.  A new IRA would be in the 401(k) owner’s name for the benefit of (FBO) the beneficiary.

New Rules per IRS Notice 2007-07 – The rules per IRS Notice 2007-07 were generally the same as provided by the PPA.  However, some of the details may not have been the same as intended.  The articles discuss the frustrations that some have experienced because the non-spouse rollover provision is not required and the rules are not effective unless the plan document has been amended.  Another problem discussed was the transition rules for accounts inherited prior to 2006.  Legislation to correct PPA-related mistakes will likely address these issues.

The articles also provided the following suggestions:

• “And if you've got an old 401(k) sitting at an ex-employer, do your heirs a favor and roll it into an IRA before you die, to avoid any complications.”
• “What should you do if your dad died last year and you were the beneficiary of his 403(B) account? If the plan requires you to close the account within 2 years, should you wait and withdraw the money at that time or roll it to an inherited IRA?  Choate’s recommendation is to “do the transfer to the IRA. We’ll assume the IRS will fix this. If they don’t you’re no worse off.”

In addition to the links provided in the following posts, here is another summary of Notice 2007-07 that includes more details on the nonspouse beneficiary rollover provisions:

Miscellaneous Pension Protection Act Changes

Update on 409(p) Final Regulations and Notice 2007-07

ERISA Compliance Calendar/PPA/Notice 2007-07