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Firm Presses for Guidance to Help Benefits Practitioners

APR. 24, 2020

Firm Presses for Guidance to Help Benefits Practitioners

DATED APR. 24, 2020
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April 24 2020

Internal Revenue Service
CC:PA:LPD:PR
Room 5203
P.O. Box 7604, Ben Franklin Station
Washington, D.C. 20044

Re: SECURE Act — Recommended Guidance Priorities and Transition Relief

Dear Sir or Madam:

This letter provides comments on the Further Consolidated Appropriations Act of 2020 (the “Act”), and most specifically the SECURE Act therein. With over twenty provisions impacting qualified plans and IRAs under the Act, and with most of the Internal Revenue Code (“Code”) provisions already effective as of January 1, 2020, it is imperative that the Internal Revenue Service (“IRS”) and Department of Treasury (“Treasury”) provide expansive transition relief and critical guidance on the scope and operation of these new provisions (including sample/model amendments).

Our firm represents a large number of plan sponsors that provide qualified retirement plans to their employees, along with IRA providers, and third party service providers that provide recordkeeping and reporting services for qualified plans. The entire benefits community is working very hard to implement these new rules, which is a very tall order without IRS/Treasury guidance. Therefore, as more fully described below, we respectfully request formal (and where feasible, informal) guidance on the scope of the SECURE Act changes as soon as possible. We also request a reasonable good faith compliance standard (or a nonenforcement position) in the interim.

We understand that the IRS has limited resources, that there are still a large number of outstanding projects on the guidance plan, and that issues surrounding COVID-19 are likely to dominate the guidance agenda in the near term. Nevertheless, we respectfully recommend that the IRS make it a priority to address these initial concerns to help facilitate compliance with the SECURE Act — and encourage enhanced qualified plan (and IRA) participation as Congress intended. And preceding any guidance, honor a good faith compliance standard as noted above.

Recommended Areas for Immediate Guidance —

1. In-Service Distribution Penalty Relief For Child Birth and Adoptions (Section 113)

The scope of this new provision should be clarified as soon as possible for plan sponsors and service providers to provide that (1) it is optional for a plan sponsor to add a special distribution right; (2) if the provision is not added to the plan, the participant can still elect the 10% additional tax relief on Form 5329, but there is no obligation to change the standard reporting and withholding (e.g., payor may still provide a 402(f) notice and withhold at 20%, and participant will not be liable for the annual 6% excise tax if rolled to an IRA); and (3) there is no obligation to accept these rollover repayments for distributions made from other plans.

Of course, if a plan sponsor elects to provide a special in-service withdrawal provision, additional information will be necessary regarding:

  • what documentation is required to validate the plan distribution (and confirmation that a summary/employee certification (without collecting the documentation) will be sufficient, similar to the new streamlined hardship provisions);

  • confirmation that the $5,000 limitation is per each eligible child born or adopted and that restrictions can be imposed on the available sources;

  • the (presumably mandatory) repayment right to the plan and how the repayment should be sourced (e.g., as an in-direct rollover contribution (with no 60 day limit or 1 per 12 month rule for IRAs) with no basis tracking (other than Roth amounts) that is distributable at any time, and without regard to when the amount is returned);

  • the timeframe for repayment (e.g., at any time after receiving the distribution or if a plan sponsor can add a timing restriction), and whether plans/IRAs that otherwise allow rollovers can refuse these amounts via an amendment;

  • the impact of plan and corporate M&A transactions on this (presumably mandatory) repayment right;

  • the tax implications to a participant that has repaid the amount in subsequent years (like Form 8915-B); and

  • the ability to amend the plan to eliminate the feature.

An updated model 402(f) notice should also be provided as soon as possible, and transition/penalty relief provided for 2020 distributions that were made without an updated 402(f) notice.

Lastly, for IRA providers, it would be helpful to have confirmation that the only requirement is to report on Code 1 in box 7 of Form 1099-R (Code J for Roth IRAs), and to report repayments to an IRA on Form 5498.

2. Minimum Required Distributions (Sections 114 and 401)

The IRS took the first step in providing MRD relief in Notice 2020-6, and recognized the need for additional relief. We urge the IRS to go beyond this initial relief in light of the lack of lead time on this provision, and the complexity of maintaining two sets of rules depending on the date of birth of the individual or the type of plan. As explained below, we strongly recommend broad transition relief for any errors in making minimum required distributions (“MRDs”) to participants and beneficiaries, at least during a reasonable transition period following IRS guidance.

For lifetime payments, the change in the required beginning date for only certain employees and IRA owners will invariably result in errors being made — (1) distribution not made because mistakenly think the new rules apply when they do not (underpayments), or (2) distribution made for MRD amounts that are no longer required (overpayments). Inadvertent errors in these areas should not raise qualification issues for plan sponsors nor excise tax issues for participants and beneficiaries. Nor should the plan sponsor (or service provider) be liable for:

  • any underwithholding of federal income taxes (10% voluntary withholding vs. 20% mandatory withholding if not an MRD),

  • failure to provide a 402(f) rollover notice due to the error, or

  • any related reporting or withholding penalties as a result of the error.

Moreover, the individual should be permitted to restore an overpayment back to the plan (or IRA) pursuant to Rev. Proc. 2016-47 (if the plan otherwise accepts rollover contributions, and for IRA owners, without regard to the 1-per-12 month indirect rollover limit that would normally apply).

For post-death distributions, the MRD changes impact defined contribution plans (and IRAs), and will require extensive review of the existing regulations (and ideally revised sample/model amendments), and updates on the appropriate plan default rules. But, as these changes are effective now, plan sponsors, IRA providers and third party service providers must make system changes based on the statute and limited legislative history, which support:

  • elimination of the “at least as rapidly rule” for all designated beneficiaries (consistent with the right of eligible designated beneficiaries to elect a life annuity without regard to such rule);

  • retention of the broad “look-though” trust rules (and explanation of how they may be changed, including whether 'an applicable multi-beneficiary trust' must also meet the broad “look through” trust rules);

  • retention of the September 30 period for identifying designated beneficiaries, and indicating whether to look at all designated beneficiaries for determining the required distribution period for eligible designated beneficiaries;

  • uniform definition of minor child and age of majority (and explanation of the scope of the meaning of “completed a specified course of education” under the existing MRD Regulations, and guidance that this added complexity can be eliminated by plan/IRA design);

  • providing new plan defaults if the plan document is silent;

  • confirmation that an eligible designated beneficiary can elect the 10-year rule or the life expectancy rule (or the document can designate which option applies), and the deadline for making that decision for deaths on or after the required beginning date;

  • definition of “collective bargaining agreement” for purposes of the delayed effective date (with either the historic definition or the definition under the hybrid regulations being permissible);

  • allowing changes to a plan's definition of required beginning date without cutback concerns where it is solely based on age of the participant (and not the later of their age or retirement);

  • what documentation, if any, is the plan administrator required to obtain in order to validate that a designated beneficiary is an eligible designated beneficiary or certain type of trust (e,g., disabled, chronically ill).

As you know, the MRD calculations also impact rollover calculations (i.e., the amount is generally rollover eligible to the extent the payment is not an MRD). Therefore, post-death MRD errors, largely due to the absence of early guidance, may result in:

  • plan disqualification for a plan sponsor,

  • 50% excise taxes for a beneficiary,

  • an annual 6% excise tax for improper IRA contributions, and

  • potential reporting and withholding penalties and interest costs for the plan sponsor/service provider.

None of these outcomes should be triggered and generous transition relief should be provided while regulations are being developed.

3. Safe Harbor 401(k) Plan Changes (Sections 102 and 103)

Although the QACA change under the SECURE Act is effective for plan years beginning after December 31, 2019, there is real hesitation to implement this change without IRS clarification that adding the provision does not raise concerns with Notice 2016-16 for a midyear change (particularly if a match is involved), and does not violate the uniform percentage requirement (where, inevitably, participants eligible for the new 15% cap will have different years of service, and employers may want to roll-out an annual 1% increase from 10-15% or just go from 10% to 15% immediately).

Similarly, the scope of the annual notice relief for non-elective employer contribution safe harbor plans should be clarified: (1) ACP notice relief only appears to apply to QACA plans (based on the existing cross-references in the statute), which should not be the result (and perhaps a technical correction is needed); and (2) confirmation that the notice relief is still available if the plan also includes a non-safe harbor match.

Therefore, we recommend the IRS and Treasury provide guidance on the options available to plan sponsors in these areas (including mid-year changes and the impact on safe harbor notices, etc.).

4. Plan Amendment Issues

For qualified plans, there appears to be no special amendment-timing rule for the change to the age 62 in-service distribution provision for pension plans (including the age 70-1/2 change for governmental 457(b) plans) (which was not included under the SECURE Act portion of the Act). If this change is subject to the standard year-end discretionary amendment timing rules, it is critical to know that as soon as possible. However, we would strongly urge consistent plan amendment relief for this change and the SECURE Act changes.

The IRS model IRA documents have not yet been updated for the SECURE Act changes. Without updated LRMs, it would be premature for IRA providers to file for new opinion letters on prototype documents. Therefore, we recommend the IRS announce to IRA providers that (1) no amendments to the IRA agreement/disclosure statement are needed for the Act until IRS guidance is issued (similar to the approach taken with EGTRRA, where submissions and updated model documents were required under Rev. Proc. 2002-10), or (2) no amendments are required, as under PPA, where submissions and updated model documents were optional under Rev. Proc. 2010-48, and (3) good faith operational compliance efforts are sufficient until IRS guidance is issued on the various changes.

Moreover, we urge the IRS to provide sample plan amendments/LRM language as soon as possible, in light of the fact that terminating plans need to be amended for the SECURE Act prior to termination, and the inability to receive a determination letter (or opinion letter) on these changes. And, in the absence of timely model amendments, we believe these changes justify opening the determination letter program. In the interim, we ask that a good faith compliance standard be applied.

* * *

We thank you in advance for your consideration, and please let us know if you need any additional details on these very important provisions.

Respectfully submitted,

Louis T. Mazawey

Elizabeth Thomas Dold

Groom Law Group
Washington, DC

Cc:
Stephen Tackney
Carol Weiser

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