The American Association of Retired Persons (ARA) in a May 25 comment letter made recommendations to the IRS regarding proposed regulations on required minimum distributions (RMDs) issued in February 2022including that the IRS is delaying the effective date of the regulations when they are in their final form.
The ARA makes the following recommendations:
Extend the effective date of the rule to a date at least 18 months after the publication of the final rule.
The ARA recommends that the IRS provide that the final rule not become effective until the first day of the plan year that begins at least 18 months after the date of publication of the final rule. “Almost 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 filing systems to accommodate the final regulations,” the letter states. “Allowing enough time to ensure proper implementation will promote tax compliance and good administration,” he argues.
Clarify what is meant by “employment with the employer that administers the plan” for the purposes of distributions during an employee’s lifetime.
The ARA recommends that the IRS add examples to the regulations to clarify how “employment with the employer maintaining the plan” applies in two common situations: re-employment and when a plan is part of a plan. with multiple employers.
Do not require an RMD during the 10-year period, whether death occurs before the RBD or during or after the RBD.
The ARA recommends that the IRS apply the 10-year rule consistently whether death occurs before the Required Commencement Date (RBD) or during or after the RBD. “The proposed rule provides that if death occurs before the RBD, the full distribution must be made before the end of the 10-year period with no RMD required during that 10-year period, but if death occurs on or after the RBD , then the full distribution must be taken before the end of the 10-year period and the RMDs must be taken during this 10-year period, calculated on the basis of the rule of life expectancy”, 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 that Congress intended this provision to apply the same single rule, regardless of when where the participant’s death occurs. Therefore, ARA recommends that the position in the final rule be revised to not require distributions over the 10-year period, whether or not death occurred before RBD.
The letter also states that the ARA “firmly believes that the imposition of excise taxes or penalties in this situation would be inappropriate as the taxpayers were operating under a good faith interpretation of the law.” It continues: “If the final rule adopts the position of the proposed rule that distributions are required during the 10-year period in certain cases, then ARA recommends that 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 rule, so that no excise tax or penalty is payable. It continues that the ARA “further recommends that the IRS provide guidance on whether persons who have not taken an RMD prior to the effective date of the final rule are required to take an RMD. Additional “catch-up” RMD within one year of the regulations coming into force.”
Provide a uniform rule regarding the treatment of a person as having predeceased an employee in a situation of simultaneous deaths.
The ARA recommends that the IRS adopt standard default determinations that plan sponsors can rely on in cases of concurrent deaths. The proposed rule, he argues, says the plan sponsor would have to determine whether a beneficiary predeceased the participant or other beneficiary in accordance with state law, and that would place “a significant burden on plan sponsors, in particular to small plan sponsors and their service providers”. and further imposes uncertainty in the determination of beneficiaries, which it believes will delay final distributions.
The letter further recommends providing a consistent rule that plan sponsors can rely on. “A uniform rule will promote compliance with the tax regime and code and ensure that distributions can be made in a timely manner to beneficiaries,” the ARA says.
Extend the features allowed for insurance company annuity contracts to annuity payments made directly by defined benefit pension plans.
The ARA recommends that the IRS allow the same features in all annuity payments, not just insurance company annuity contracts. The letter notes that the proposed rule allows for 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,” the ARA says.
Provide additional flexibility where a transparent trust (or 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 transparent trust (or list of beneficiaries) must be provided to the plan administrator during the employee’s lifetime. He 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 time. The letter states that the ARA suggests that the provision be revised to provide that the trust or a list of beneficiaries must be provided within the time period set by the administrator, which cannot be earlier than the last day of the calendar year preceding the calendar year of distribution. . “This”, argues the ARA, “will provide the administrative convenience of obtaining information prior to the distribution year, but allow reasonable flexibility to facilitate administration”.
Allow the use of special needs trusts.
The ARA recommends that regulations under Treas. Reg. §1.401(a)(9)-4 be amended to include the availability of creation of a third party Special Needs Trust (SNT) as designated beneficiary, any remaining beneficiary will not be considered when determining the applicable distribution period for an eligible Designated Disabled Beneficiary (EDB). “The result should be,” says the ARA, “that the deactivated EDB will retain: (1) the ability to receive payments for life; and (2) maintain public benefits. The ARA further suggests removing the reference to IRAs special rules for eligible rollover distributions that include property.
Retain 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 provides several benefits, it says it doesn’t think the rules RMDs under Section 401(a) of the IRS should be applied to 403(b) plans.
“Imposing RMD rules on 403(b) plans that more closely resemble the RMD rules for qualified plans is impractical and likely to be administratively burdensome,” argues the ARA. “Furthermore, all 403(b) annuity contracts should be submitted to the states for approval of such a change,” he adds, noting that this change would require insurance companies to seek approval from 50 state insurance commissioners to unilaterally change these insurance contracts. It’s unclear whether all states would approve of such a unilateral amendment — and the result could be that insurance companies would maintain different versions of contracts state by state, which the ARA says would “add burdens and significant complexity and could have a negative impact on participants.
And, says the ARA, “regardless of the nature of the underlying investment vehicles of a 403(b) plan, if the plan sponsor of a non-ERISA 403(b) plan (under the sphere security DOL) is required to exercise its discretion in making distributions, this could make the plan subject to ERISA.
