Delay Effective Date for RMD Regs, Group Says

May 25, 2022

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

Re: Notice of Proposed Rulemaking — Required Minimum Distributions

Dear Sir or Madam:

Thank you for the opportunity to provide comment on the proposed rulemaking for required minimum distributions (Proposed Rule). Empower administers approximately $1.4 trillion¹ in assets for more than 17 million retirement plan participants and is the nation's second-largest retirement plan provider by total participants. Empower serves all segments of the employer-sponsored retirement plan market: government 457 plans; small, mid-size and large corporate 401(k) clients; nonprofit 403(b) entities; private-label recordkeeping clients; and IRA customers. We are also a leading provider of annuity products to these retirement plans.

We applaud the Treasury Department and the Internal Revenue Service (together “Department”) efforts to provide guidance on Sections 114 and 401 of the SECURE Act related to the required beginning date of age 72 and post-death RMDs for designated beneficiaries. We strongly support the Department's goal to create updated, comprehensive and clear rules for plan sponsors, participants, IRA accountholders and service providers. In particular, we strongly support the Proposed Rule establishing the age of majority at 21. We believe this is a common sense, uniform and clear rule that will help the retirement community consistently administer required minimum distributions (RMDs).

We do, however, have significant concerns related to some aspects of the Proposed Rule that will be detailed in this letter.

EXECUTIVE SUMMARY

Empower's comments and recommendations are as follows:

• The effective date for the final rule should be no earlier than the later of January 1, 2024, or the first calendar year commencing 12 months after the final rule is published in the Federal Register. In addition, the Department should establish a good faith interpretation standard for all distributions in calendar years prior to the effective date.

• The Department should reverse its interpretation of the “at-least-as-rapidly” rule for deaths after the required beginning date.

• Required minimum distribution rules for 403(b) plans should be updated, but only through a separate proposal and comment period.

• The final rule should clarify that the 10-year rule applies to non-governmental deferred compensation plans.

I. The effective date for the final rule should be no earlier than the later of January 1, 2024, or the first calendar year commencing 12 months after the final rule is published in the Federal Register. In addition, the Department should establish a good faith interpretation standard for all distributions in calendar years prior to the effective date.

The Department proposes to establish the effective date for the regulations on January 1, 2022. We applaud the Department's urgency in providing guidance as soon as possible to create interpretive uniformity among the retirement community. However, we are concerned that the lack of a reasonable implementation period will create chaos. As with the implementation of any complex rule, retirement plan providers, custodians, third-party administrators and other service providers will have to go through the resource-intensive process of creating, testing and refining programs required for the effective administration of the final RMD regulations.

Based on the timing of the comment period and the complexity of the subject matter, we anticipate the final rule in the last six months of the year. Assuming that timing, it puts the retirement community in the difficult position of establishing system builds and education tools using Proposed Rule guidance that may change or, separately, build to the final rule in a compressed period of time. In either case, these builds can result in increased costs that, in many instances, are borne by participants and IRA beneficiaries in the form of increased administration expenses; costs that can easily be mitigated by affording reasonable periods for implementation.

For illustrative purposes, we would like to call to your attention to a sampling of provisions in the Proposed Rule that will require significant system builds.

a. Full Distribution Required in Certain Circumstances

The Proposed Rule requires the individual or entity calculating the required minimum distribution to conduct a four-point analysis to comply with Section 401(a)(9)(B)(ii).² The fourth part of the calculation states that the “applicable denominator would have been less than or equal to one if it were determined using the beneficiary's remaining life expectancy, if the employee's designated beneficiary is an eligible designated beneficiary, and if the applicable denominator is determined using the employee's remaining life expectancy.”

The Department clarifies this provision using the following example:

As another example, if an employee died at age 75 after the required beginning date and the employee's nonspouse eligible designated beneficiary was age 80 at the time of the employee's death, the applicable denominator would be determined using the employee's remaining life expectancy. However, these proposed regulations require a full distribution of the employee's remaining interest in the plan in the calendar year in which the applicable denominator would have been less than or equal to one if it were determined using the beneficiary's remaining life expectancy (even though the applicable denominator for determining the required minimum distribution is based on the remaining life expectancy of the employee). In this case, based on the beneficiary's life expectancy of 11.2 in the year of the employee's death, a full distribution would be required in the year the beneficiary reaches age 91 (because in the 11th calendar year after the employee's death the beneficiary's life expectancy would be less than or equal to one).

This effectively requires the administrator to create two separate life expectancy calculations per year, one for the participant and one for the designated beneficiary. As a matter of context, Empower has spent close to 10,000 hours of system builds to implement the SECURE Act RMD changes. This hypothetical calculation will significantly increase that number. Overlaying the system updates are the necessary communications to plans, participants and IRA owners that describe this complex calculation. This would include changes to forms, websites, disclosures, marketing materials and contracts.

b. Special Rule for Certain Distributions to Surviving Spouses

The Proposed Rule establishes special rules for certain distributions to surviving spouses who wish to roll over funds during an applicable 5-year or 10-year period. We understand the Department's desire to avoid circumstances where a spouse attempts to defer distributions beyond the standard required beginning date by using the 5- and 10-year rules. The Proposed Rule states:

“Under the special rule, the portion of the distribution that is treated as a required minimum distribution is the cumulative total, over a span of years, of the hypothetical required minimum distribution for each year had the life expectancy rule applied . . .”

It goes on to say that:

“In calculating the hypothetical required minimum distributions from a defined contribution plan for a calendar year under this special rule, the proposed regulations provide that an adjusted account balance is used. The adjusted account balance for a calendar year is determined by reducing the account balance that normally would be used to determine the required minimum distribution for that year by the excess (if any) of (1) The sum of the hypothetical required minimum distributions beginning with the first applicable year and ending with the calendar year preceding the calendar year of the determination, over (2) the distributions actually made to the surviving spouse during those calendar years.”

The administration of this provision would be very difficult to automate because required minimum distributions are not required during the 5- and 10-year periods for spousal beneficiaries. This would potentially require manual intervention to appropriately calculate the hypothetical RMD amount. This issue is compounded by system limitations of different recordkeeping systems. For example, if a separate account is created for a beneficiary, the December 31 balance in many cases is often not transferred from the prior account. If a plan subsequently changes recordkeepers, it may become extremely challenging to establish the data necessary to timely, and accurately, make this calculation. Consequently, plan sponsors (either through their own procedure or through an administrator) would be in an untenable position of capturing information after the spouse rolls out of the plan.

Both of the provisions described above do not appear to be mandated under the SECURE Act. Consequently, the Department should carefully evaluate the necessity of these provisions given the cumbersome and costly systems required to implement them.

To the extent the final rule contains these provisions, we recommend the Department establish the effective date of the final rule no earlier than the later of January 1, 2024, or the first calendar year commencing 12 months after a final rule is published in the Federal Register. In addition, the good faith interpretation relief for Sections 114 and 401³ should be extended for all distributions in calendar years prior to the effective date.

II. The Department should reverse its interpretation of the “at-least-as-rapidly” rule for deaths after the required beginning date.

The Department states in the Proposed Rule that the “at-least-as-rapidly” rule of Internal Revenue Code (Code) Section 401(a)(9)(B)(i) applies in addition to the new 10-year rule of Code section 401(a)(9)(H)(i). Under this interpretation, non-eligible designated beneficiaries are therefore required to take required minimum distributions over the 10 years after the employee's death. We believe this interpretation is inconsistent with historical IRS and Treasury interpretation of the 5-year rule and will cause significant administrative issues if the interpretation is not reversed.

Prior to the SECURE Act's passage, both Sections 401(a)(9)(B)(i) and (ii) were in effect. The practical application of these two provisions was to establish a general rule in 401(a)(9)(B)(i) that required amounts to be distributed over the life of an employee and a designated beneficiary where an employee dies before the entire interest is distributed. 401(a)(9)(B)(ii) establishes a separate rule stating “that if an employee dies before the distribution of the employee's interest has begun . . . the entire interest of the employee will be distributed within 5 years after the death of such employee.”

Our experience is that the retirement community has traditionally interpreted, and the Department has accepted, that 401(a)(9)(B)(ii) does not require distributions during the 5-year period after the

employee's death because 401(a)(9)(B)(ii) was intended as a mutually exclusive rule of 401(a)(9)(B)(i). By the SECURE Act adding 401(a)(9)(H)(i)(I) to substitute “10 years” for “5 years” and making no affirmative or cross-reference to the “at-least-as-rapidly” rule of 401(a)(9)(B)(i), we believe it is incorrect to conclude that the “at-least-as-rapidly” rule applies to the 10-year period before, on or after the required beginning date.

This conclusion is reinforced through Congressional intent of Section 401 of the SECURE Act. The Ways and Means Committee SECURE Act report states the following:

“Under the provision, the five-year rule is expanded to become a 10-year period instead of five years ('10-year rule'), such that the 10-year rule is the general rule for distributions to designated beneficiaries after death (regardless of whether the employee (or IRA owner) dies before, on, or after the required beginning date) unless the designated beneficiary is an eligible beneficiary as defined in the provision. Thus, in the case of an ineligible beneficiary, distribution of the employee (or IRA owner's) entire benefit is required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner's death.” (emphasis added)

Taken together, both the Congressional intent and the Department's traditional interpretation of the “at-least-as-rapidly” rule have led many to reasonably interpret that beneficiaries are not required to take required minimum distributions until the end of the tenth year.

If the interpretation established in the Proposed Rule is finalized, it will have substantial impacts. Because the “at-least-as-rapidly” rule has not traditionally applied to the 5-year rule, systems will have to be created to facilitate this changed process to apply to the 10-year rule. To address this interpretive shift, service providers, custodians, participants and IRA accountholders will need to conduct a comprehensive audit of all accounts that should have distributed RMDs in 2021 and 2022. Each account will need to be reviewed and evaluated for distribution activity plus an earnings calculation. Earnings are calculated from the date the RMD is considered missed to the date it is removed from the account. The calculation is based on a personal rate of return, which is beginning year balance, ending year balance, and contributions and distributions for each year. Personal rate of return is not based on the participant's investments. Providers will then need to communicate these correction procedures to the beneficiaries. For those individuals with missed RMD payments who rolled over their account from one institution to another during 2021 and 2022, multiple financial institutions will need to reconstruct account balances in order to calculate missed RMD payments.

We are concerned that many of these retroactive adjustments will cause administrative upheaval among retirement providers and significant disruption to the lives of many beneficiaries.

If the interpretation is not changed and the effective date of the final rule is not applied prospectively, relief is needed for years ending prior to the effective date of final rule (or some other reasonable period) by allowing plan sponsors, participants and IRA accountholders to distribute payments under the “at-least-as-rapidly” rule during the 10-year period by a fixed date without threat of plan disqualification or assessment of the excise tax.

Annuities compound the problem. Many individual and group annuity contracts contain period certain and life contingent annuity payout options. Due to the historical interpretation of the 5-year rule, annuities would typically not be structured to account for the “at-least-as-rapidly” rule applying on or after the required beginning date since amounts would be distributed at the conclusion of the 5-year period in a lump sum. To the extent the interpretation is not reversed, period certain and life contingent annuity payouts that have already been issued would not have the commutation features to facilitate a payout to comply with the “at-least-as-rapidly” rule.

To illustrate the problem, assume that a plan sponsor's group annuity contract allows employees to purchase a single life annuity with a 15-year period certain, which provides guaranteed annuity payments to an employee for the employee's life. Additionally, in the event the employee dies before the end of the 15-year period certain, then annuity payments will be paid to the beneficiary until the end of the 15-year period certain. The annuity contract does not contemplate commutation (e.g., acceleration) of unpaid period certain payments to a beneficiary.

The employee then purchased a single life annuity with a 15-year period certain, named a non-eligible designated beneficiary, and died during year 3. Under the Proposed Rule, the beneficiary would have an RMD due in the year of death and then must receive the entire benefit within 10 years (as opposed to the current rules permitting the beneficiary to continue receiving the annuity payments over the remaining 12-year period certain).

The problem with the proposed rule as it applies to annuities is that many of these annuity contracts and/or certificates simply do not contain the proper actuarial commutation language (i.e., interest and expense assumptions) to legally commute the annuity benefit. Annuity commutation features require actuarial factors (interest rate and expenses) to calculate a commutation benefit, which may vary by client, time of contract issuance, time of employee's annuity purchase and state of contract issuance.

To include the proper assumptions, all applicable contracts and certificates (for existing and future owners) would have to be amended, which is a considerable undertaking. These annuity contract and certificate amendments would require approval with each state's insurance department. Additionally, commutation benefits are not substantively governed the same way under state insurance law, which can often create a patchwork of commutation benefit features across the country. For example, the New York Department of Financial Services establishes extensive requirements for commutation benefits that may not exist in every state.⁴ Because of varied insurance laws, universally implementing one commutation benefit is unlikely and could take years between filing and receiving approval in all applicable state jurisdictions.

Furthermore, amending existing contracts and certificates may prove to be extremely difficult because it may not be feasible for the insurer to unilaterally amend the policies without the contract owner's and/or certificate owner's consent. While many contracts and insurance departments recognize the ability to unilaterally amend annuity contracts for legislative and regulatory changes, such as a change in the RMD age that may be referenced in the annuity contract), that unilateral right may not apply in this case because the amendment may be deemed to substantively amend a previously issued benefit. In situations where the commutation benefits require policyholder and/or certificate holder consent, the implementation timeline would be significantly increased.

Under the Proposed Rule's “at-least-as-rapidly” rule interpretation, in-force contractual amendments are a certainty because in-force annuity contracts are only grandfathered if an employee makes an irrevocable election of annuity before December 20, 2019.⁵ If the Department does not change its interpretation, we strongly recommend that either the final rule extend the annuity grandfathering to January 1, 2025, or the effective date of the final rule be delayed as described earlier in this letter.

III. Required minimum distribution rules for 403(b) plans should be updated, but only through a separate proposal and comment period.

We appreciate the Department's interest in receiving comments around the applicability of RMDs and 403(b) plans. As the Department acknowledges in the preamble to the Proposed Rule, Section 1.403(b)-6(e) of the Treasury regulations currently apply IRA required minimum distribution rules to 403(b) plans.⁶ The application of the IRA rules instead of the qualified plan rules is largely due to the unique characteristics of 403(b) plans.

While many aspects of the 403(b) market have grown to resemble qualified retirement plan and eligible deferred compensation markets, there are still significant differences. The first notable difference is the structure of 403(b) plans versus other retirement plans. Qualified plans, like 401(a) and 401(k) plans, are generally structured with a plan sponsor making key plan decisions and a trustee holding plan assets.

While governmental 457(b) plans are not considered qualified plans, this structure is generally replicated with governmental 457(b) plans. For non-government deferred compensation plans, the employer controls plan decision-making because plan assets are composed of the employer's general assets. These plan structures vest practically all rights to the employer and plan sponsor, which allows plan sponsors to force out RMDs.

403(b) plans are a completely unique retirement plan structure.

While 403(b) plans are required to have plan documents, this traditional plan design feature is overlayed with key terms and conditions found in third-party contractual documents, specifically 403(b)(1) annuity contracts and 403(b)(7) custodial agreements (together 403(b) contracts). In many cases, the terms of the 403(b) contracts preceded updates to the 403(b) regulations in 2009. Many 403(b) contracts issued after the 2009 regulations grant plan sponsors more rights than contracts issued before the regulations. However, the 403(b) regulations did not grant retroactive contractual rights to plan sponsors for contracts that were issued prior to the 2009 regulations. Consequently, the 403(b) market is composed of a patchwork of contractual provisions ultimately leading to a 'wild west' of plan arrangements.

Even if more recent contracts grant 403(b) plan sponsors power like those granted to other retirement plan sponsors, it is unclear whether this power extends to forcing out RMDs. For example, current 403(b) regulations explicitly state that 403(b) plans are subject to the required minimum distribution rules of IRAs:

(2) Treatment as IRAs. For purposes of applying the distribution rules of section 401(a)(9) to section 403(b) contracts, the minimum distribution rules applicable to individual retirement annuities described in section 408(b) and individual retirement accounts described in section 408(a) apply to section 403(b) contracts. Consequently, except as otherwise provided in this paragraph (e), the distribution rules in section 401(a)(9) are applied to section 403(b) contracts in accordance with the provisions in § 1.408-8 for purposes of determining required minimum distributions.⁷

Consequently, many 403(b) contracts would logically be written from the standpoint that the participant is solely responsible for their required minimum distributions.

There are also additional legal limitations to consider. Should the Department change the application of the RMD rules to mimic other retirement plans (meaning 403(b) plan sponsors are required to distribute required minimum distributions), it could jeopardize the status of non-profit 403(b) plan sponsors availing themselves of the safe harbor found in 29 C.F.R. § 2510.3-2(f).

Plan sponsors using this safe harbor can avoid ERISA application by taking very limited actions with respect to a 403(b) plan.⁸ Key among the safe harbor requirements is 29 C.F.R. § 2510.3-2(f)(2), which states: “All rights under the annuity contract or custodial account are enforceable solely by the employee, by a beneficiary of such employee, or by any authorized representative of such employee or beneficiary.” If 403(b) plan sponsors are required to force out required minimum distributions, it would conflict with this part of the ERISA safe harbor.

Based on the contractual limitations of old 403(b) contracts and the ERISA safe harbor described above, many 403(b) plan sponsors simply cannot consolidate assets into one provider to easily administer a required minimum distribution force-out. This multi-provider environment does not easily comport with completely shifting the required minimum distribution responsibility to the plan sponsor.

Empower recommends the Department issue a separate, comprehensive regulatory proposal. This proposal should request information from the industry on vendors that hold 403(b) assets, the number of plans that rely on the ERISA safe harbor and samples of existing contractual provisions (including modification provisions).

IV. The final rule should clarify that the 10-year rule applies to non-governmental deferred compensation plans.

Code Section 401(a)(9)(H)(vi) states: “For the purposes of applying the provisions of this subparagraph in determining amounts required to be distributed pursuant to this paragraph, all eligible retirement plans (as defined in Section 402(c)(8)(B)) other than a defined benefit plan described in clause (iv) or (v) thereof or a qualified trust which is a part of a defined benefit plan shall be treated as a defined compensation plan.” The reference to Section 402(c)(8)(B) suggests that non-governmental 457(b) plans are not subject to 401(a)(9)(H)(vi) because they would not be defined contribution plans.

Code Section 457(d)(2) states: “A plan meets the minimum distribution requirements of this paragraph if such plan meets the requirements of Section 401(a)(9).” § 1.401(a)(9)-1 of the Proposed Rule explicitly cites Section 457(d): “Under section 457(d)(2), eligible deferred compensation plans described in section 457(b) for employees of tax-exempt organizations or employees of State and local governments are subject to required minimum distribution rules.” (emphasis added) This understanding is restated in § 1.457-6(d). Therefore, it stands to reason that the Department should clarify in the final rule that the reference to Section 402(c)(8)(B) was intended to encompass 457(b) plans sponsored by both 457(e)(1)(A) and 457(e)(1)(B) employers.

We appreciate the opportunity to provide our thoughts and comments, and we would welcome any opportunity to discuss our comments.

Sincerely,

Edmund F. Murphy, III
President & CEO
Empower
Greenwood Village, CO