The American Retirement Association (ARA) in a May 25 comment letter has made recommendations to the IRS concerning the proposed required minimum distributions (RMD) regulations issued in February 2022, including that the IRS delay the effective date of the regulations when they are in final form.
The ARA makes the following recommendations:
Delay the effective date of the regulation to a date at least 18 months after publication of the final rule.
The ARA recommends that the IRS provide that the final regulation not take effect until the first day of the plan year that begins at least 18 months after the date the final regulations are published. “Nearly all plan sponsors rely on service providers to monitor and calculate RMDs. These service providers will need to process the final regulations and then program their recordkeeping systems to account for the final regulations,” says the letter. “Providing adequate time to ensure proper implementation will promote tax compliance and sound administration,” it argues.
Clarify what is meant by “employment with the employer maintaining the plan” for purposes of distributions during an employee’s lifetime.
The ARA recommends that the IRS add examples to the regulation to clarify how “employment with the employer maintaining the plan” applies in two common situations: reemployment and when a plan is part of a multiple employer plan.
Do not require RMDs during the 10-year period regardless of whether death occurs before the RBD or on or after the RBD.
The ARA recommends that the IRS apply the 10-year rule consistently, regardless of whether death occurs before the required beginning date (RBD) or on or after the RBD. “The Proposed Rule provides that if death occurs before the RBD then full distribution must be taken by the end of the 10-year period with no RMDs required during that 10-year period, but if death occurs on or after the RBD then full distribution must be taken by the end of the 10-year period and RMDs must be taken during that 10-year period, calculated based on the life expectancy rule,” notes the ARA, continuing that while the ARA understands this interpretation, “based on the natural reading of the statue and the related committee report, ARA believes Congress intended this provision to apply the same, single rule regardless of when the participant’s death occurs. Therefore, ARA recommends the position in the final rule be revised to not require distributions during the 10-year period regardless of whether death occurred before RBD.”
The letter also says that the ARA “strongly believes that imposing excise taxes or penalties in this situation would be inappropriate as taxpayers were operating under a good-faith interpretation of the statute.” It continues: “If the final regulation adopts the proposed rule’s position that distributions are required during the 10-year period in some instances, then ARA recommends the Service clarify that RMDs during the 10-year period are not required for calendar years prior to the first calendar year that begins after the effective date of the final regulation, so that no excise taxes or penalties are owed.” It continues that the ARA “further recommends the IRS provide guidance on whether individuals who did not take RMDs prior to the effective date of the final regulation are required to take an additional ‘catch-up’ RMD in the year after the regulations become effective.”
Provide a uniform rule concerning the treatment of an individual as having predeceased an employee in a simultaneous death situation.
The ARA recommends the IRS adopt standard default determinations on which plan sponsors can rely regarding simultaneous death situations. The proposed rule, it argues, indicates the plan sponsor would have to determine whether a beneficiary predeceased the participant or another beneficiary according to state law, and that would impose “a significant burden on plan sponsors, particularly small plan sponsors and their service providers” and further imposes uncertainty in beneficiary determinations, which it says will delay ultimate distributions.
The letter further recommends providing a consistent rule on which plan sponsors can rely. “A uniform rule will promote plan and tax code compliance and ensure distributions can be timely made to beneficiaries,” says the ARA.
Extend the features permitted for insurance company annuity contracts to annuity payments made directly by defined benefit pension plans.
The ARA recommends that the IRS permit the same features in all annuity payments, not just from insurance company annuity contracts. The letter notes that the proposed rule allows certain accelerations or increases in payment streams when those payments are provided by an annuity contract that the plan has purchased from an insurance company. “The same options should be available when annuity payments are made directly from a plan’s trust,” says the ARA.
Provide additional flexibility for when a see-through trust (or a list of beneficiaries) must be provided to the plan administrator during the employee’s lifetime.
The ARA recommends that the IRS revise the proposed rule to provide additional flexibility regarding when a see-through trust (or a list of beneficiaries) must be provided to the plan administrator during the employee’s lifetime. It notes that the proposed rule requires that the trust (or list) be provided before the first day of the distribution calendar year, and if changes are made to the trust, the changes must be provided within a reasonable period. The letter says that the ARA suggests that the provision be revised to provide that the trust or a list of beneficiaries must be provided by the deadline the administrator sets, which can be no earlier than the last day of the calendar year before the distribution calendar year. “This,” argues the ARA, “will provide the administrative convenience of obtaining information before the distribution year, but permit reasonable flexibility to aid in administration.”
Permit use of Special Needs Trusts.
The ARA recommends that the regulations under Treas. Reg. §1.401(a)(9)-4 be amended to include the availability of the creation of a third-party Special Needs Trust (SNT) as a designated beneficiary whereby any remainder beneficiaries will be disregarded when determining the applicable distribution period for a disabled eligible designated beneficiary (EDB). “The result should be,” says the ARA, “that the disabled EDB will retain: (1) the ability to receive lifetime payouts; and (2) maintain public benefits.” The ARA further suggests removing the reference to IRAs from the special rules related to eligible rollover distributions that include property.
Retain the current rules for RMDs made from 403(b) plans.
The ARA recommends that the IRS retain the current rules for RMDs made from 403(b) plans. While the ARA agrees that having a single set of RMD rules that apply to both qualified plans and 403(b) plans offers several advantages, it says that it does not believe that the RMD rules under Internal Revenue Code Section 401(a) should be applied to 403(b) plans.
“Imposing RMD rules on 403(b) plans that are more like the RMD rules for qualified plans is impractical and likely to be administratively burdensome,” argues the ARA. “In addition, all 403(b) annuity contracts would need to be submitted to states for approval of any such change,” it adds, noting that this change would require insurance companies to seek the approval of 50 state insurance commissioners to unilaterally amend those insurance contracts. It is unclear whether all states would approve such a unilateral amendment—and the result of that could be insurance companies maintaining different versions of the contracts on a state-by-state basis, which the ARA warns, “would add significant burdens and complexity and could negatively impact participants.”
And, says the ARA, “regardless of the nature of a 403(b) plan’s underlying investment vehicles, if the plan sponsor of a non-ERISA 403(b) plan (under the DOL safe harbor) is required to exercise discretion in making distributions, this might cause the plan to become subject to ERISA.”
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