Interesting article in this month’s Forbes:  What Is The IRS Thinking?, by Ashlea Ebeling:

Last August, Congress fixed an inequity in retirement plan rules–or so it seemed. Before then, only a surviving spouse could roll over an inherited 401(k) into his or her own individual retirement account. That rollover allows an inheritor to stretch out distributions over his or her life expectancy, thus gaining potentially decades of additional tax deferral. But other folks who inherited 401(k)s — including children, siblings and unmarried live-ins — were typically required to take the money out within five years of the death of the 401(k) owner, thus ending deferral and taking a big tax hit. So as part of the massive pension reform passed last year, Congress decreed that non-spouses could also roll an inherited 401(k) into an IRA. The new law was effective for distributions taken after Dec. 31, 2006, which seemed to allow rollovers by anyone who had inherited an account before the effective date and hadn’t depleted the account by that date

But last month, the IRS got into the act, issuing guidance detailing how the new provision works, which appears to unnecessarily limit its benefits. …  There are two main gotchas.

The first is that the IRS said the non-spouse rollover 401(k) provision is discretionary, not mandatory. So a company plan is not required to offer the rollover option to non-spouses. …

There’s another gotcha in the IRS guidance for non-spouses who inherited a 401(k) account before 2006. The wording of the new law led planners to believe, reasonably, that non-spouses who had inherited a 401(k) before Jan. 1, 2006, would be allowed to roll over any money left in the account after Jan. 1 and stretch out the payments. But the IRS saw things differently.