Bankers Group Addresses Proposed RMD Regs

May 25, 2022

Commissioner Rettig
Internal Revenue Service
1101 Constitution Avenue, NW
Washington, DC 20044

Re: Required Minimum Distributions, Notice of Proposed Rulemaking, REG-105954-20, 87 Fed. Reg. 10504 (February 24, 2022).

Dear Commissioner Rettig:

The American Bankers Association¹ (ABA) appreciates the opportunity to comment on the Internal Revenue Service (IRS) proposed amendments to required minimum distributions (RMD) rules in the Internal Revenue Code (IRC). The IRS initiated this rulemaking to promulgate changes made in the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). The SECURE Act made a number of significant amendments to retirement account regulations, including an increase in the required beginning date (RBD) age from age 70½ to 72 after 2019, a limitation on “stretch” individual retirement accounts (IRA) for non-eligible designated beneficiaries, among other matters.

ABA members provide a variety of services to qualified retirement plans and individual retirement accounts, including acting as trustee, custodian, insured depository, recordkeeper, and investment manager. Some of the proposed changes are helpful to the industry and the clients they serve, in particular the clarifying rules for conduit trusts making them easier to administer, as well as the changes for 403(b) plans to conform their regulations to those of other retirement plans. However, other aspects of the proposed amendments would present compliance and other challenges. With that in mind, we provide the following comments to improve the administration of these accounts and to clarify to individual participants, owners, and beneficiaries the new requirements for distributions.

10-Year Rule Should Operate in the Same Manner as Long-Standing 5-Year Rule

The SECURE Act modified section 401 of the Internal Revenue Code (Code) to require complete distributions within ten years from inherited IRAs belonging to non-eligible designated beneficiaries. Specifically, the new provision in 401(a)(9)(h)(i)states that for non-eligible beneficiaries, the 5-year rule in (B)(ii) “shall be applied by substituting '10 years' for '5 years', and . . . shall apply whether or not distributions of the employee's interests have begun in accordance with subparagraph (A).” [Emphasis added]

In the interim between enactment and the proposal, the broader retirement industry, its counsel, and the public made a reasonable interpretation of amended section 401(a)(9)(H) for non-eligible designated beneficiaries under the 10-year rule. Under this interpretation, non-eligible beneficiaries of inherited IRAs were not required to take RMDs in years one through nine but only full distribution within ten years, regardless of whether the employee's distribution had begun. This understanding was supported by revisions to Publication 590-B that implied, through the examples provided, that the 10-year rule did not require RMDs in years one though nine, only full distribution within ten years. Based on that reasonable interpretation and implied support in IRS guidance, many service providers, IRA custodians and trustees, sent out notifications and other materials to clients and allowed beneficiaries to forego distributions in 2021.

Even the proposal acknowledges this reasonable interpretation, when it states: “For the 2021 distribution calendar year, taxpayers must apply the existing regulations, but taking into account a reasonable, good faith interpretation of the amendments made by sections 114 and 401 of the SECURE Act. Compliance with these proposed regulations will satisfy that requirement.” We believe the proper interpretation of the amended language is what was implied in earlier guidance and what the industry reasonably concluded. We, therefore, urge the IRS to adopt in the final rule an interpretation requiring a complete distribution of the account within ten years, regardless of whether the employee's interest had begun. Such an interpretation would improve administration and compliance for trustees and custodians that have processes in place to administer the 10-year rule similar to the existing 5-year rule.

IRS Should Extend Effective Date until 12 to 18 Months after Final Rule Issued

The release retroactively establishes the effective date for the proposed provisions as January 1, 2022, allowing for reasonable, good faith interpretations for 2021, although it is unclear what the final rules will entail nor when the IRS will finalize them. With respect to documentation, it would be difficult for administrators to come into compliance with necessary plan amendments by the end of 2022. In particular, the lack of revised IRA model language that incorporates the SECURE Act and other relevant changes, would present a challenge for many that use this document as the basis for their client agreements. In addition, for those trustees and custodians seeking to use prototype IRAs, Announcement 2022-6 has put that program on hold while the IRS drafts a revenue procedure describing how to request an opinion letter. The IRS has not announced the expected timing for either the revised model language or the re-opening of the prototype program, making it difficult for administrators to determine whether the effective date for documentation can be met.

For administrative ease, we urge the IRS to provide transition relief that is 12 to 18 months from publication of a final rule. Such relief would provide trustees, custodians, and others reasonable time to modify, as needed, documents, recordkeeping, and other systems necessary to administer these accounts, as well notify and educate the clients of the changes. This extension of compliance time should be stated contemporaneously with the final rule and allow for the use of negative consent and notification through a website portal or other electronic means to affected parties of those changes as allowed under existing contractual arrangements.

IRA Custodians and Trustees Should Not Be Required to Vet or Maintain Confidential Client Information

Under the proposal, certain beneficiaries of plans may elect to take required distributions over the beneficiary's lifetime. These eligible designated beneficiaries include the surviving spouse, minor children until the age of 21 years, or individuals who are disabled or chronically ill. The regulations provide that “with respect to a beneficiary who is disabled or chronically ill as of the date of the employee's death, documentation of the disability or chronic illness must be provided to the plan administrator no later than October 31 of the calendar year following the calendar year of the employee's death.” In the case of a chronically ill beneficiary, this documentation must include a certification by a licensed health care practitioner. Proposed rule 1.408-8(a)(3) loops IRA trustees, custodians, and issuers into the RMD rules, including documentation requirements for eligible beneficiaries who are chronically ill or disabled.

Due to concerns about the vetting and confidentiality of beneficiaries' private healthcare information, we urge the IRS to allow custodians, trustees, and other administrators to receive a certification from the beneficiary that they meet the requirements and have available for the IRS the documentation needed. Banks do not want to have the obligation to verify that the documentation meets the requirements of the IRC, in particular that the party making the certification is in fact a “licensed health care practitioner.” In addition, banks do not want to be responsible for maintaining or protecting private health care information that is not necessary for them to fulfill their role as custodian or trustee.

More Relief Needed from Excise Tax on Accumulations in Qualified Plans

The release states that the amended excise tax on accumulations is applicable for taxable years on or after January 1, 2022. While it is helpful to have a waiver from the tax for any previous accumulations as defined under the proposed rule, additional relief is necessary in the interest of fairness and improved administration. As the IRS has not yet finalized the proposal and may amend further based on public comments, we believe the IRS should extend the applicability date for excise tax relief until at least 12 to 18 months after the rule is finalized. This extension would provide reasonable time for distributions to be made under the final rules, in particular if those final rules codify the proposed language without further amendment as urged in this letter. We also ask that taxpayers not be required to file Form 5329 to take advantage of an extended applicability date of the excise tax.

Conclusion

ABA appreciates this opportunity to provide comments to the IRS on its proposed rule implementing the SECURE Act of 2019. Some of the proposed changes are helpful, for example the clarifying rules for conduit trusts, as well as the changes for 403(b) plans to conform their regulations to those of other retirement plans. However, we have concerns from an administrative and compliance perspective on aspects of the proposal, in particular as the interpretation of the 10-year rule when the employee has started taking distributions, the proposed effective date, waivers of RMD accumulations, and access to confidential client information. We urge the IRS to extend the effective date until 12 to 18 months after the final rule is issued and to provide other reasonable relief.

Sincerely,

Phoebe A. Papageorgiou
Vice President, Trust Policy
American Bankers Association