Practitioner Urges Waiver Of 30-Day Notice Requirement.
Practitioner Urges Waiver Of 30-Day Notice Requirement.
- AuthorsMcCauley, Patricia A.
- Institutional AuthorsT. Rowe Price Associates, Inc.
- Cross-ReferenceEE-43-92
- Code Sections
- Subject Area/Tax Topics
- Index Termspension plan distributions, benefits, tax treatmentannuities, employee
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-192
- Tax Analysts Electronic Citation93 TNT 4-42
Patricia A. McCauley of T. Rowe Price Associates, Inc., Baltimore, has commented on the temporary and proposed regulations implementing the Unemployment Compensation Amendments of 1992. McCauley asserts that the responsibility to provide the section 402(f) notice should be that of the plan administrator and should shift to the payer only if the section 403(b) arrangement has no plan administrator. She further urges that the regulations be revised to permit all participants to waive the minimum 30-day time period as long as the participants are under no pressure to make a decision in less than 30 days.
McCauley also argues that in any distribution, the amount of withholding must be limited to the amount of cash and the fair market value of other property that otherwise would have been distributed to the participant. In contrast, she notes, some commentators have suggested that if a loan is distributed to a participant on termination, withholding must be effected by invading the participant's remaining plan balance.
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December 24, 1992
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attn.: CC:CORP:T:R (EE-43-92)
Washington, DC 20044
Re: Temporary and Proposed Regulations Under the Unemployment
Compensation Amendments of 1992
Dear Ladies and Gentlemen:
We are pleased to have this opportunity to comment on the temporary and proposed regulations published in the October 22, 1992, Federal Register concerning the Unemployment Compensation Amendments of 1992 ("UCA").
T. Rowe Price Associates, Inc. ("Price Associates") is a registered investment adviser which, together with certain of its affiliates, has assets under management of approximately $40 billion, including approximately $4.5 billion in the assets of qualified retirement plans and Code Section 403(b) arrangements. In addition, certain affiliates of Price Associates provide recordkeeping and other ancillary services to these types of retirement plans. Finally, T. Rowe Price Trust Company acts as custodian of approximately $4.3 billion of individual retirement account ("IRA") assets. Thus, Price Associates and its affiliates have a keen interest in the proposed and temporary regulations.
In general, we enthusiastically support the comments of the Investment Company Institute ("ICI") in its letter to you of on or about December 22, 1992. We also have a few additional comments. Therefore, we would like to separately present our views on the proposed and temporary regulations.
1. SECTION 402(f) NOTICE
a. Safe Harbor Explanation (IRS Notice 92-48)
We are very pleased with the safe harbor explanation prepared by the Internal Revenue Service. We feel that, in both content and format, it is an exceptionally "user-friendly" explanation of complex concepts. We suggest, however, that the Service make the following minor technical additions to the safe harbor explanation:
o In the last sentence of the paragraph under "I. PAYMENTS THAT
CAN AND CANNOT BE ROLLED OVER", insert the phrase "are the
most common types of payments that" between the words
"payments" and "CANNOT."
o In the third bulletted phrase under the heading "Payments
Spread Over Long Periods", insert the word "specified" before
the phrase "period of ten years or more."
o In the next to the last sentence of the paragraph titled
"Special Tax Treatment", insert the phrase "before the year in
which you receive the payment" immediately before the period.
o In the first sentence of the paragraph titled "Five-Year
Averaging", insert the phrase "or if you were born before
January 1, 1936," after the comma.
b. Responsibility for Providing the Notice.
The proposed and temporary regulations provide that the Section 402(f) notice must be provided by the payor under all Code Section 403(b) arrangements. We feel that assigning this responsibility to the payor is not appropriate if the Section 403(b) arrangement is administered by the employer. Therefore, we strongly urge that responsibility to provide the Section 402(f) notice should be that of the plan administrator and should shift to the payor only if the Section 403(b) arrangement has no plan administrator.
c. Timing of the Section 402(f) Notice.
We strongly urge the Service to adopt the ICI's suggestion that the regulations be revised to permit ALL participants to waive the minimum 30-day time period as long as the participants are under no pressure to make a decision in less than 30 days. The reasons for our STRONG support for the ICI proposal are set forth below:
o Many plan participants consider their distribution options
well before they receive the notice. This is especially true
in the instance of a participant requesting a hardship
withdrawal.
o The 30-day period exposes a participant who makes a prompt
decision to unnecessary (and unwanted) market risk. This is
especially true for plans which are valued daily, a more
common practice than in the past.
o Imposing a 30-day wait in the context of a hardship withdrawal
imposes an additional hardship on the participant.
Participants who qualify for hardship withdrawals should not
be forced to wait 30 days for their funds.
o Why should some participants be prohibited from getting an
immediate distribution of their benefits solely because the
amount to be distributed is greater than $3,500 or because the
benefits are "immediately distributable"? Temp. Treas. Reg.
section 1.402(c)-2T, Q&As 12 & 13, Treas. Reg. section
1.411(a)-11(c). The purpose of all of these notice
requirements is to give the participant a reasonable time to
make a decision. As long as the participant is not forced to
make a decision quickly, he should be able to get his benefits
quickly if he wants.
o As proposed, the regulation may encourage participants to take
multiple distributions of $3,500 or less so they may get
prompt access to their benefits. (These distributions
generally still are subject to the direct rollover and
withholding rules, so the exception to the 30-day rule does
not thwart the purposes of UCA.)
ALL Section 403(b) arrangement participants should be able to waive the "reasonable time" requirement for many of the same reasons discussed above. (This approach also would avoid special compliance issues for Section 403(b) arrangements subject to the 7-day redemption rule of Section 22(e) of the Investment Company Act of 1940.)
2. WITHHOLDING ON ELIGIBLE ROLLOVER DISTRIBUTIONS
a. Plan Loans
The proposed and temporary regulations provide that if a loan is distributed to a participant on termination of employment, the loan qualifies as an eligible rollover distribution and therefore is subject to mandatory withholding. Some commentators have suggested that if only the loan is distributed to the participant, withholding must be effected by invading the participant's remaining plan balance (or the amount of the direct rollover, if the participant elected a direct rollover of his remaining plan balance). We STRONGLY disagree with this analysis for the following reasons:
o Under Code Section 3405(c)(2) (as redesignated by UCA),
mandatory withholding does NOT apply to the amount of any
direct rollover. In addition, Temp. Treas. Reg. section
1.3405(c)-1T, Q&A 5 provides that mandatory withholding
applies only to the portion of the eligible rollover
distribution that the participant receives.
o Under Code Section 401(a)(31) and the proposed and temporary
regulations, a participant has the right to elect a direct
rollover of all or any part of an eligible rollover
distribution. In the instance of a participant who has
elected a direct rollover of his remaining plan balance, if
only part of what the participant has elected as a direct
rollover is in fact rolled over, his rights under Section
401(a)(31) have been defeated. In the instance of a
participant who has elected to delay payment of his remaining
plan balance, withholding taken from this amount would be
deemed to be distribution, Temp. Treas. Reg. section 1.402(c)-
2T, Q&A 9, and the participant must be able to elect a direct
rollover of that amount. In either instance, if the direct
rollover were not effected (or if the benefits were forced-out
to the participant), the plan could be disqualified.
o In determining the amount to be withheld from any
distribution, Code Section 3405(e)(8) (as redesignated by
UCA) provides that the amount is limited to "the sum of the
amount of money and the fair market value of other
property . . . received in the distribution." In the case of a
distribution consisting solely of a loan, the loan has no fair
market value. Thus, no withholding would be required.
o Finally, the TEFRA "Blue Book", page 238 says that withholding
on a loan is not required if the loan is distributed after the
loan is made.
Based on the foregoing, we believe that in ANY distribution the amount of withholding must be limited to the amount of cash and the fair market value of other property (excluding qualified employer securities) that otherwise would have been distributed to the participant.
b. Small Distributions
Both Treas. Reg. section 35.3405-1, Q&A F-6 and proposed and temporary Treas. Reg. section 3405(c)-1T, Q&A 10, provide that, if at the time a first distribution of less than $200 is made, the payor or plan administrator does not know distributions to the participant for the year will exceed $200, no withholding is required.
Unfortunately, neither of these regulations addresses the payor's or plan administrator's withholding obligations when a second (or later) distribution is made during the year when the payor or plan administrator does not know of any subsequent distributions and the second (or later) distribution, when added to the prior distribution, exceeds $200. We recommend that the Service clarify that, in these circumstances, the payor or the plan administrator needs to determine its withholding obligations based solely on the amount of the second (or later) distribution.
3. MEANS OF EFFECTING DIRECT ROLLOVERS
We support the use of the notation "direct rollover" on direct rollover checks for the following reasons:
o A "recipient" IRA custodian/trustee may more easily
distinguish direct rollovers, which require Forms 5498, from
direct transfers, which do not require Forms 5498.
o The plan administrator of a "recipient" qualified plan may
more easily distinguish a plan-to-plan transfer, which is
subject to the protected benefit (and possibly the spousal
consent) rules, from a direct rollover, which is not subject
to such rules.
4. MINIMUM REQUIRED DISTRIBUTIONS
The proposed and temporary regulations provide that if a minimum required distribution ("MRD") under Section 401(a)(9) is required for a year, the MRD (which does not qualify as an eligible rollover distribution) is treated as if it is the first distribution for the year. In this regard we have the following comments:
o The Service should clarify that it is the plan administrator's
responsibility to tell the payor of the amount of any minimum
required distribution from a qualified plan.
o The Service should clarify that the payor of any distribution
from any Section 403(b) arrangement may presume that no part
of the distribution is a minimum required distribution because
the minimum required distribution requirements of Code Section
403(b)(10) do not apply separately to each such arrangement.
IRS Notice 88-39.
o This rule may present operational problems for many plan
administrators. In many plans, participants may elect to
receive benefits in the form of monthly (or other) periodic
payments that qualify as eligible rollover distributions. (For
example, payments in an equal dollar amount qualify as
eligible rollover distributions because they are not made over
a specified period of time.) /*/ If payments are made early
each month, the plan administrator may be unable to calculate
the MRDs before the first distributions of the year are made.
For instance, assume a calendar year plan makes periodic payments on the first business day of each month. In order for the plan administrator to calculate participants' MRDs for 1993, the plan administrator must have the December 31, 1992, value of the participants' account balances. Even in plans which are valued daily, the December 31, 1992 valuation is not available until the first business day of 1993 -- the same day the plan makes periodic distributions. Thus, the plan administrator cannot calculate the MRD by the time of the first 1993 payment. (Many participants -- especially those on fixed incomes -- may be unduly harmed if payments must be delayed until the calculations can be performed.)
Perhaps this problem can be addressed by adopting a special MRD "catch-up" rule similar to that described in the special transition rule of Temp. Treas. Reg. section 31.3405(c)-1T, Q&A 1(c)(2). The special MRD catch-up rule could provide that during the first 60 days of each year, distributions made to participants subject to Section 401(a)(9) shall be deemed to be MRDs (or the plan administrator could make a reasonable estimate of the MRD) and the "optional" withholding rules would apply to the MRD portion. The plan administrator must, as soon as administratively feasible but no later than the end of the 60-day period, calculate the MRD portion of each payment made in the period and inform the participant of the exact MRD no later than the end of the 60-day period. (This would enable the participant to effect a "traditional" rollover of any portion of the payments that qualify as eligible rollover distributions.) The plan administrator would then withhold from subsequent payments amounts that would have been withheld if the exact MRD had been known at the time of the payments.
5. DELAYED EFFECTIVE DATE FOR CERTAIN SECTION 403(b) ARRANGEMENTS
Payors under Section 403(b) arrangements do not know whether any particular arrangement qualifies for the delayed effective date under UCA. Therefore, we suggest that these payors should be allowed to treat all Section 403(b) arrangements as if they are subject to the general effective date of UCA.
We appreciate the opportunity to comment on the proposed and temporary regulations and the safe harbor notice. If we can provide any further information or assistance, please do not hesitate to contact us.
Sincerely yours,
Patricia A. McCauley
Vice President and Associate
Legal Counsel
T. Rowe Price
Baltimore, Maryland
FOOTNOTE
/*/ Some commentators have argued that if it appears that such payments, using reasonable interest assumptions, will last for more than ten years, such payments should be treated as if they do not qualify as eligible rollover distributions. We strongly urge the Service to reject that position.
END OF FOOTNOTE
- AuthorsMcCauley, Patricia A.
- Institutional AuthorsT. Rowe Price Associates, Inc.
- Cross-ReferenceEE-43-92
- Code Sections
- Subject Area/Tax Topics
- Index Termspension plan distributions, benefits, tax treatmentannuities, employee
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-192
- Tax Analysts Electronic Citation93 TNT 4-42