Actuarial Consultant Comments on Proposed RMD Regs

May 20, 2022

CC:PA:LPD:PR (REG — 105954-20)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: [REG-105954-20) RIN 1545-BP82: Notice of Proposed Rulemaking: Required Minimum Distributions

To Whom It May Concern:

On behalf of Cheiron, Inc., I am submitting these comments upon the proposed regulations under section 401(a)(9) of the Internal Revenue Code (Code) (REG-105954-20) that were published in the Federal Register on February 24, 2022. Cheiron, Inc. is a full-service pension and health actuarial consulting firm that provides actuarial services to over 200 defined benefit plans covering more than 6.5 million participants. As will be discussed below, the proposed regulations present issues for a number of the defined benefit plans that will need to be resolved if the final regulations are not changed from the proposed regulations.

We understand that the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued the proposed regulations to address the amendments to § 401(a)(9) made by Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). We also understand that the Treasury and IRS were required to re-issue the entire set of regulations under § 401(a)(9) in the traditional format and appreciate that comments are requested on all aspects of the proposed regulations.

Our comments primarily address three issues related to the changes made by the SECURE Act to the required beginning date as they impact defined benefit plans. In short, our primary comments, which will be discussed below, are:

Background

Prior Law and Current Regulations

Prior to the passage of the SECURE Act, § 401(a)(9) provided that the required beginning date was generally the April 1 of the calendar year following the later of the calendar year in which the employee attains age 70 ½, or the calendar year in which the employee retires. An exception was provided with respect to 5-percent owners (as defined in § 416) so that such employees had a required beginning date of the April 1 of the calendar year following the calendar year of attainment of age 70 ½. The current regulations under § 401(a)(9) provide that “a plan is permitted to provide that the required beginning date for purposes of section 401(a)(9) for all employees is April 1 of the calendar year following the calendar year in which an employee attains age 70 ½ regardless of whether the employee is a 5-percent owner.” (See § 1.401(a)(9)-2, Q&A-2(e).)

Section 401(a)(9)(C)(iii) provided that in the case of an employee who was not a 5-percent owner, the employee's accrued benefit shall be actuarially increased to take into account the period after age 70 ½ in which the employee was not receiving any benefits under the plan (the “actuarial increase requirement”). Section 401(a)(9)(C)(iv) provides that the actuarial increase requirement does not apply to a governmental plan or a church plan (as defined).

The current regulations address the minimum required distributions for defined benefit plans in § 1.401(a)(9)-6. Q&A-5(a) provides that, in the case of annuity distributions, if additional benefits accrue in a calendar year after the first distribution calendar year, distribution of the amount that accrues in the calendar year must commence in accordance with Q&A-1 beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues.

Q&A-6 provides that, in the case of annuity distributions, if any portion of the employee's accrued benefit is not vested as of December 31 of a distribution calendar year, the portion that is not vested as of such date will be treated as not having accrued for purposes of determining the required minimum distribution for that calendar year. Under Q&A-6, when an additional portion of the employee's benefit becomes vested, such portion will be treated as an additional accrual.

The current regulations address the actuarial increase requirement in several questions and answers in § 1.401(a)(9)-6. Q&A-7(a) provides that the actuarial increase starting date is the April 1 of the calendar year following the calendar year in which the employee attains age 70 ½, or January 1, 1997, if later.¹ Q&A-7(b) provides that the actuarial increase ending date is the date on which benefits commence after retirement in an amount sufficient to satisfy § 401(a)(9). Q&A-7(c) provides that no actuarial increase is required under § 401(a)(9)(C)(iii) if a plan provides that the required beginning date for purposes of § 401(a)(9) for all employees is April 1 of the calendar year in which the employee attains age 70 ½ (regardless of whether the employee is a 5-percent owner) and the plan makes distributions in an amount sufficient to satisfy § 401(a)(9) using that required beginning date.

Q&A-8 addresses the amount of the actuarial increase required under § 401(a)(9)(C)(iii). Q&A-8 generally provides that the retirement benefit payable as of the end of the period for actuarial increases must be no less than the actuarial equivalent of the employee's retirement benefit that would have been payable as of the date actuarial increases must commence if benefits had commenced on that date, plus the actuarial equivalent of any additional benefits accrued after that date, reduced by the actuarial equivalent of any distributions made with respect to the employee's retirement benefits after that date. Actuarial equivalence is determined using the plan's assumptions for determining actuarial equivalence for purposes of satisfying § 411.

Q&A-10 provides rules that apply when distributions commence to an employee prior to the required beginning date. Q&A-10 generally provides that if the distribution is over a period permitted by § 401(a)(9)(A)(i) and the distribution form is an annuity under which distributions are made in accordance with the provisions of Q&A-1, the annuity starting date will be treated as the required beginning date for purposes of applying the rules of “this section” (that is, § 1.401(a)(9)-6) and § 1.401(a)(9)-2).

Section 411(a) requires that a plan provide that a participant's right to his or her normal retirement benefit is nonforfeitable upon the attainment of normal retirement age as defined in § 411(a)(8), and, in addition, satisfies § 411(a)(2) and other specified requirements. Section 411(a)(2) provides two alternative vesting schedules for a defined benefit plan, one of which is 100 percent vesting after five years of service. Section 411(a)(13) of the Code and § 1.411(a)(13)-1 of the regulations provide that a plan containing a statutory hybrid benefit formula must provide 100 percent vesting for all benefits after three years of service.

Section 411(a)(8) provides that the normal retirement age is the earlier of (A) the time a plan participant attains normal retirement age under the plan, or (B) the later of (i) the time a plan participant attains age 65, or (ii) the 5^th anniversary of the time a plan participant commenced participation in the plan. Thus, a plan can provide that the normal retirement age is the later of age 65 or the 5^th anniversary of the commencement of participation in the plan.

Section 411(d)(6) generally provides that accrued benefits may not be reduced by a plan amendment. Section 1.411(d)-4, Q&A-2(b)(2)(i), of the regulations provides that a plan may be amended to eliminate or reduce a section 411(d)(6) protected benefit if the following three requirements are met: the amendment constitutes timely compliance with a change in law affecting plan qualification, there is an exercise of section 7805(b) relief by the Commissioner, and the elimination or reduction is made only to the extent necessary to enable the plan to continue to satisfy the requirements for qualified plans.

SECURE Act Changes and Proposed Regulations

Section 114 of the SECURE Act amended section 401(a)(9)(C) to define the required beginning date for an employee (other than a 5-percent owner or IRA owner) as of April 1 of the calendar year following the later of the calendar year in which the employee attains age 72 or the calendar year in which the employee retires. For a 5-percent owner or an IRA owner, the required beginning date is April 1 of the calendar year in which the employee attains age 72, even if the individual has not retired. Section 401(a)(9)(C)(iii) provides that certain employees who commence benefits after the year in which they attain age 70 ½ must receive an actuarial increase (which was the same as before the amendment). Section 114(d) of the SECURE Act provides that the amendments made by section 114 shall apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after such date.

Section 601 of the SECURE Act sets forth provisions relating to plan amendments. Section 601(a) provides that if § 601 applies to any retirement plan amendment (1) such retirement plan shall be treated as being operated in accordance with the terms of the plan during the period described in § 601(b)(2)(A), and (2) except as provided by the Secretary of the Treasury (or the Secretary's delegate), such retirement plan shall not fail to meet the requirements of § 411(d)(6) by reason of such amendment.

Section 601(b)(1) provides that § 601 applies to any amendment which is made (A) pursuant to any amendment made by the SECURE Act or pursuant to any regulation issued by the Secretary of the Treasury or the Secretary of Labor (or a delegate of either such Secretary) under the Act, and (B) on or before the last day of the first plan year beginning on or after January 1, 2022, or such later date as the Secretary of the Treasury may prescribe. In the case of an applicable collectively bargained plan (or a governmental plan), the time-period is on or before the last day of the first plan year beginning on or after January 1, 2024, or such later date as the Secretary of the Treasury may prescribe. An applicable collectively bargained plan means a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers ratified before the date of enactment of the SECURE Act.

The proposed regulations are written in the traditional format as opposed to the question and answer format of the current regulations. Proposed § 1.401(a)(9)-2(b) addresses the determination of the required beginning date. Proposed § 1.401(a)(9)-2(b)(1) provides that, except as otherwise provided in paragraph (b), the employee's required beginning date is April 1 of the calendar year following the later of (i) the calendar year in which the employee attains age 72; and (ii) the calendar year in which the employee retires from employment with the employer maintaining the plan.

Proposed § 1.401(a)(9)-2(b)(2)(i) provides with respect to an employee who was born before July 1, 1949, that, except as otherwise provided in paragraph (b), the employee's required beginning date is April 1 of the calendar year following the later of (A) the calendar year in which the employee attains age 70 1/2; and (B) the calendar year in which the employee retires from employment with the employer maintaining the plan.

Proposed § 1.401(a)(9)-2(b)(3)(i) provides that in the case of a 5-percent owner who was born on or after July 1, 1949, the required beginning date is April 1 of the calendar year following the calendar year described in paragraph (b)(1)(i) (that is, the April 1 following the calendar year of attainment of age 72). Proposed § 1.401(a)(9)-2(b)(3)(i) also provides that in the case of a 5-percent owner who was born before July 1, 1949, the required beginning date is April 1 of the calendar year following the calendar described in paragraph (b)(2)(i)(A) (that is, the April 1 following the calendar year of attainment of age 70 ½).

Proposed § 1.401(a)(9)-2(b)(4) states that a plan is permitted to provide that the required beginning date for all employees is April 1 of the calendar year following the calendar year described in paragraphs (b)(1)(i) or (b)(2)(i)(A) (whichever applies to the employee), without regard to whether the employee is a 5-percent owner.

Proposed § 1.401(a)(9)-6(e) provides for the treatment of additional accruals and is substantially the same as the current regulations. Proposed § 1.401(a)(9)-6(f) provides for the treatment of nonvested benefits and is also substantially the same as the current regulations.

Proposed § 1.401(a)(9)-6(g) provides for the requirement for actuarial increases. Under proposed § 1.401(a)(9)-6(g)(1)(ii), the start date for the actuarial increase is April 1 of the calendar year following the calendar year in which the employee attains age 70 ½. Under proposed § 1.401(a)(9)-6(g)(1)(iii), the end date for the actuarial increase is the date on which benefits commence after retirement in a form that satisfies paragraphs (a) and (h) of § 1.401(a)(9)-6. Under proposed § 1.401(a)(9)-6(g)(2), the actuarial increase requirement does not apply to 5-percent owners with respect to the plan year ending in the calendar year in which the employee attains age 72.

Proposed § 1.401(a)(9)-6(h) provides for the amount of actuarial increases. Under proposed § 1.401(a)(9)-6(h)(1), the retirement benefits payable as of the end of the period for which actuarial increases must be provided must be no less than (i) the actuarial equivalent of the employee's retirement benefits that would have been payable as of the start date described in paragraph (g)(1)(ii) if benefits had commenced on that date; plus (ii) the actuarial equivalent of any additional benefits accrued after that date; reduced by (iii) the actuarial equivalent of any distributions made with respect to the employee's retirement benefits after that date. Under proposed § 1.401(a)(9)-6(h)(2), actuarial equivalence is determined using the plan's assumptions for determining actuarial equivalence for purposes of satisfying section 411.

Proposed § 1.401(a)(9)-6(k) provides for the treatment of early commencement of benefits prior to the required beginning date. Under the proposed regulation, like the current regulations, if distributions start prior to the required beginning date in a distribution form that is an annuity under which distributions are made in accordance with the provisions of § 1.401(a)(9)-6(a) and are made over a period permitted by § 401(a)(9)(A)(ii), then (except as provided by the rules of § 1.401(a)(9)-6(k)(2) relating to failure to satisfy the MDIB requirement) the annuity starting date is treated the required beginning date for all purposes.

Comments

1. Allow Plans to Provide That the Required Beginning Date is the April 1 Following the Calendar Year of Attainment of Age 70 ½ for All Employees

Under the proposed regulations, a plan sponsor would be precluded from providing a uniform required beginning date for all employees; rather, the plan would have to provide two required beginning dates not one. The required beginning date that would apply to an employee would depend upon whether the employee's date of birth was before July 1, 1949. Those employees born before July 1, 1949, would have the April 1 of the calendar year following the calendar year of attainment of age 70 ½. Those employees born on or after July 1, 1949, (who are not 5-percent owners) would have a required beginning date of the April 1 of the calendar year following the calendar year of attainment of age 72. There would not be a uniformity of treatment between the two groups of employees, and the plan sponsor could not have a single uniform required beginning date. At a minimum, the plan would have to be amended and the plan's administrative procedures would have to change.

The change in administrative procedures is not insignificant. Many plans tell employees that benefits must commence at their required beginning date, but they can receive their pension and continue to work if they want to. If the required beginning dates differ, then the result is that some employees will have to wait for up to two years for benefits to commence² as a result of the change. Participants may perceive this result as inequitable. Plans would need to communicate and explain this difference to participants and make corresponding changes to their administrative systems.

Aside from the lack of uniformity, under the proposed regulations, a plan sponsor would be unable to design a plan that avoided the need to make an actuarial adjustment to the benefits. A plan will have to provide an actuarial adjustment for those participants with a required beginning date of the April 1 of the calendar year following the calendar year of attainment of age 72 for the period from April 1 of the calendar year following the calendar year of attainment of age 70 ½ to the April 1 of the calendar year following the calendar year of attainment of age 72.³ This is not a uniform period but will depend upon when the employee attained age 70 ½ (and then age 72).

Under prior law and the current regulations, the plan could have a uniform required beginning date of April 1 following the calendar year of attainment of age 70 ½ and avoid the need for actuarial increases, and the associated administrative burden. The avoidance of the actuarial increase requirement also meant that a plan did not have to address issues where the required beginning date was prior to the plan's normal retirement age. (This issue is discussed below.) Accordingly, we request that the final regulations allow a plan to provide that the required beginning date for all employees is the April 1 of the calendar year following the calendar year of attainment of age 70 ½.

Alternatively, if the Treasury and IRS conclude that there is not sufficient authority to allow a plan to provide one uniform required beginning date, we ask that, notwithstanding the definition of required beginning date, the final regulations clarify that defined benefit plans can require that benefits commence not later than the April 1 of the calendar year following the calendar year of attainment of age 70 ½ for all employees. For those employees who were born on or after July 1, 1949, we suggest that the regulations clarify that the rules of § 1.401(a)(9)-6(k) apply only if the benefit is distributed in the form of an annuity.

2. No Actuarial Adjustment Should Be Required Until After the Later of April 1 of the Calendar Year Following the Calendar Year of Attainment of Age 70 ½ or Normal Retirement Age

Under § 411(a)(8), a plan can provide that the normal retirement age for a participant is the later of age 65 or the 5^th anniversary of commencement of participation in the plan. In the case of an employee who was hired later in life (for example, at age 68) the 5^th anniversary of the commencement of participation will be after the April 1 following the calendar year of attainment of age 70 ½, which is the starting date for the actuarial increase. That fact presents an issue of whether (or how) any actuarial increase required by § 401(a)(9)(C) applies for the period after the starting date for the actuarial increase.

One possibility is that the benefit is treated as nonvested, and thus has not accrued. If the plan requires five years of service before a participant becomes vested, the treatment of the benefit as nonvested can avoid the issue in many situations. However, five years of service is not the same as the 5^th anniversary of the commencement of participation.⁴ Furthermore, if a plan contains a statutory hybrid formula, vesting must take place after three years of service rather than five years of service. Moreover, the treatment of a benefit as nonvested applies “for purposes of determining the required distribution for that distribution calendar year.” It is not clear that the treatment of the benefit as nonvested extends to the actuarial increase requirement. For these reasons, the treatment of the benefit is as nonvested has its limits under the proposed regulations.

Another possibility, which would apply for a vested benefit, is that the benefit that is actuarially increased is the benefit payable at an “early retirement age” as that is the “benefit that would have been payable” at the start date for the actuarial increase. If a plan has no early retirement benefit (or if the participant has not yet qualified for early retirement), then the benefit payable at the actuarial increase start date is arguably zero and there is no actuarial increase except for additional accruals. However, that leaves the question of what additional accruals get increased. Is it the accrual of the normal retirement benefit or the accrual of the benefit payable at the early age, which may be zero?

If the plan does provide an actuarially equivalent early retirement benefit at the actuarial increase start date, then increasing the early retirement benefit back to normal retirement age, can simply result in the amount being the accrued benefit at normal retirement age. The result depends on whether the actuarial reduction for early retirement is the same as the actuarial increase for purposes of § 401(a)(9)(C). The issue becomes even more confused if the plan provides any sort of subsidy for the early retirement benefit.

If a plan provides a subsidized early retirement benefit, any actuarial increase will likely produce a benefit at normal retirement age that exceeds the accrued benefit payable at normal retirement age. That will result in uneven treatment between participants who attain normal retirement age after the start date for actuarial increases and those who attain normal retirement age prior to that date. The uneven treatment is not desirable for a plan design. It is also not desirable (and likely unlawful) to provide a subsidized early retirement benefit only for those participants who have a normal retirement age prior to the start date for the actuarial increase.

A related issue is how the plan administrator is reporting the accrued benefit under § 105 of title I of the Employee Retirement Income Security Act of 1974 (ERISA), as amended. ERISA § 105(b)(2) provides, in relevant part, that a pension benefit statement should include the total accrued benefit. The accrued benefit is usually the benefit payable at normal retirement for a participant who has not yet attained his or her normal retirement age. However, if the requirements of § 401(a)(9)(C) require that the accrued benefit be actuarially increased after the April 1 of the calendar year following the calendar year of attainment of age 70 ½, then the issue becomes whether the pension benefit statement may have to include that increase.

While the incidence of late hires was, perhaps, not that prevalent when the regulations under § 401(a)(9)(C) were first issued, we believe there is a greater incidence of late hires today. In some cases, if an employer needs skilled labor, the answer is to hire a retiree from another company.⁵ Therefore, the need to address the issue has been increasing. We ask that the final regulations provide that, where the normal retirement age is later than the April 1 of the calendar year following the calendar year of attainment of age 70 ½ (the starting date for the actuarial increase) no actuarial increase is needed for the period prior to attainment of normal retirement age.

3. Allow Plan Amendments Later Than December 31, 2022, Without Violating § 411(d)(6)

Section 601 of the SECURE Act provides relief from the “anti-cutback” rules of § 411(d)(6) for amendments to a plan pursuant to the changes made to § 401(a)(9). For plans other than collectively bargained plans (as defined in the law), such plan amendments must be made not later than December 31, 2022, for a plan with a calendar plan year.

We understand that a plan amendment to change the required beginning date from the April 1 of the calendar following the calendar year of attainment of age 70 ½ to the April 1 of the calendar following the calendar year of attainment of age 72 is a reduction in accrued benefits that would ordinarily be prohibited by § 411(d)(6). Therefore, such an amendment would need to be made within the period allowed by § 601 of the Act. We also understand that the Treasury and IRS have received a number of comments on various provisions of the proposed regulations.

Plan sponsors that would like to keep the required beginning date of April 1 of the calendar year following the calendar year of attainment of age 70 ½ for all participants may not make any changes to their plans until final regulations are issued. Because of the need to address all comments and resolve issues, it is possible that the Treasury and IRS will not issue final regulations that provide sufficient time for plan sponsors to review the final regulations, decide upon their options, and make any required plan changes before the end of the time-period allowed by § 601 of the Act. It appears that § 601(b)(1)(B) of the Act allows the Treasury and IRS to extend the December 31, 2022, date. We ask that the Treasury and IRS extend that for amendments required by the changes to § 401(a)(9). Even if the Treasury and IRS do not believe that § 601(b)(1)(B) of the Act provides authority to extend the December 31, 2022, date, we believe that it would be an appropriate exercise of the authority under § 1.411(d)-4, Q&A-2(b)(2)(i) of the regulations to allow a plan to be amended after the December 31, 2022, date.

If you have any questions about this letter, please do not hesitate to contact me. Sincerely,

James E. Holland, Jr.
Chief Research Actuary
Cheiron, Inc.