Retirement Group Asks for Transition Relief in RMD Regs

May 24, 2022

Internal Revenue Service
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 2004

RE: Notice of Proposed Rulemaking and Notice of Public Hearing Required Minimum Distributions (RIN 1545-BP82) (IRS and REG-105954-20)

Dear Sir or Madam:

Teachers Insurance and Annuity Association of America (“TIAA”) appreciates the opportunity to respond to the Department of Treasury/Internal Revenue Service's (the “Treasury”) request for public comment on proposed regulations relating to required minimum distributions (“RMDs”) published on February 24, 2022 in the Federal Register.¹

TIAA appreciates Treasury providing proposed regulations to help plan sponsors, participants, beneficiaries and plan service providers ensure compliance with amendments made to section 401(a)(9) by the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”). Our comments detailed below suggest changes to the proposed regulations to further ensure compliance with the RMD rules.

Summary of Comments

1. Provide an extended period of transition and relief for plan sponsors, participants, beneficiaries and plan service providers to comply with and operationalize the final RMD regulations.

2. Maintain existing RMD rules for 403(b) plans. If Treasury desires to receive comments on potential changes to RMD rules for 403(b) plans, Treasury should issue a separate proposal with specific proposed changes for the public to review and comment.

3. Permit annuity payments to be adjusted as detailed below in the case of a distribution strategy in which a participant simulates annuitization for a period of time by taking a series of withdrawals, which can be terminated at any point prior to the scheduled annuity purchase date.

4. Provide flexibility in making disability determinations, especially for beneficiaries under age 18.

5. Confirm a plan administrator may rely on the trustee's certification regarding eligible designated beneficiary status of each trust beneficiary, including disability or chronic illness status of trust beneficiaries.

6. TIAA supports the position that the mandatory 20-percent income tax withholding does not apply to non-spousal beneficiaries.

7. Make stylistic changes to the proposed regulations to ensure the regulations are written in a manner that is reasonably expected to be understood by the average plan participant and beneficiary.

About TIAA

Founded in 1918, TIAA is the leading provider of retirement services for those in academic, research, medical, and cultural fields. Over our century-long history, TIAA's mission has always been to aid and strengthen the institutions, retirement plan participants, and retail customers we serve and provide financial products that meet their needs. To carry out this mission, we have evolved to include a range of financial services, including asset management and banking services. TIAA has $1.4 trillion in assets under management, and our investment model and long-term approach aim to benefit the 5 million retirement plan participants we serve across more than 15,000 institutions.² As a leading plan provider in the 403(b) market³, TIAA administers RMD rules on behalf of the plan sponsors, plan administrators and participants and beneficiaries we serve. In addition, TIAA offers individual retirement accounts (“IRA”) accounts and IRA annuities and provides IRA services to approximately 515,000 IRA holders. As such, TIAA is keenly interested in ensuring the final RMD regulations provide plan sponsors, participants and plan service providers with the time and guidance necessary to ensure compliance with RMD rules.

1. Provide an extended period of transition and relief for plan sponsors, participants and plan service providers to comply with and operationalize the final regulations.

TIAA believes that the delay between the enactment of the SECURE Act in December 2019 and the release of the proposed regulations in February 2022 has led plan sponsors, participants, beneficiaries and plan service providers to apply varied, good faith interpretations of the RMD rules enacted by the SECURE Act. Furthermore, the proposed regulations are complex given the nature of the RMD rules and are still under consideration by the public to determine the impact.

As such, TIAA believes an extended period of transition and relief for plan sponsors, participants, beneficiaries and plan service providers is needed to comply with and operationalize the final RMD regulations. Specifically, TIAA requests a delay in the effective date of the final RMD regulations until the first calendar year that begins at least nine months after final regulations are issued. Such a delay, would give plan sponsors, participants, beneficiaries and plan service providers the necessary time to operationalize the final RMD regulations.

2. Maintain existing RMD rules for 403(b) plans. If Treasury desires to receive comments on potential changes to RMD rules for 403(b) plans, Treasury should issue a separate proposal with specific proposed changes for the public to review and comment.

Treasury requested comments on possible changes to the RMD rules for 403(b) plans, so that they more closely follow the required minimum distribution rules for qualified plans, including requiring each 403(b) plan to make RMDs calculated with respect to that plan, rather than rely on the employee to request distributions from another plan in an amount that satisfies the requirement.

Such possible changes to the RMD rules for 403(b) plans would be significant in nature. In order to comply with 5 U.S.C. § 553, Treasury is required to provide the public with adequate notice of the terms or substance of the proposed rule and to allot a reasonable amount of time to provide meaningful comments on the rule's content in an effort to ensure public participation in the informal rulemaking process.

In this case, Treasury has not provided the public with any terms, substance or content of a proposed rule. Instead, Treasury has provided one sentence in the preamble to the proposed regulations vaguely describing a concept without detail. As such, TIAA believes Treasury should issue a separate proposal with specific proposed changes for the public to review and comment to ensure public participation in the informal rulemaking process. Thus, TIAA opposes the concept set forth in the single sentence in the preamble.

Despite the number of differences between 403(b) plans and qualified plans decreasing in recent years, meaningful differences remain. For example, 403(b) plans are generally limited to investing in annuity contracts and mutual funds held in custodial arrangements only. In this regard, annuity contracts held in 403(b) plans are often participant-owned in which the plan sponsor is not a party and has no contractual authority to force a distribution from the contract.

Another example of a difference between 403(b) plans and qualified plans is with regard to pre-1987 account balances. The proposed regulations retain special timing rules for distribution of benefits accruing before 1987 which are not subject to the general RMD rules (subject to certain conditions). Specifically, these rules provide separate treatment for each 403(b) contract for which records of the pre-1987 account balance are maintained.

Yet another example of the differences between 403(b) plans and qualified plans is the multi-vendor arrangement that is common for 403(b) plans. Most 403(b) plans have multiple plan service providers. Coordination among providers would be required to successfully administer the concept set forth in the preamble. As witnessed in the years between the proposed 403(b) regulations in 2004 and implementation of the 2007 final 403(b) regulations, plan sponsors and plan service providers need time to establish coordination protocols. Paramount in establishing coordination between plan service providers is having specific details on the terms and conditions of a proposed rule. A one-sentence summary of a concept in the preamble does not provide plan sponsors and plan service providers with adequate information to form comments to respond to the service in a meaningful way or develop coordination protocols.

TIAA also opposes the concept set forth in the preamble to the proposed regulation because the concept would be detrimental to 403(b) plan participants. The statutory requirement that section 403(b) plans generally may only invest in annuities and mutual funds (custodial accounts) has resulted in the majority of section 403(b) plans having annuities on the plan investment menu. Annuities are the only form of investment that can provide participants with guaranteed lifetime income. In addition, fixed annuities in section 403(b) plans often have attractive guaranteed minimum rates of interest. Current RMD rules for 403(b) plans provide participants with the ability to liquidate assets, including annuities, efficiently from one or multiple investment arrangements to maximize guaranteed minimum crediting rates, preserve access to guaranteed lifetime income, and minimize liquidity restrictions and/or surrender charges. The concept set forth in the preamble would severely limit a participant's ability to take RMDs in a prudent manner from their 403(b) plan investments and would potentially harm their retirement outcomes.

For these reasons, TIAA believes Treasury should issue a separate proposal with specific proposed changes for the public to review and comment to ensure public participation in the informal rulemaking process.

3. Permit annuity payments to be adjusted as detailed below in the case of a distribution strategy in which a participant simulates annuitization for a period of time by taking a series of withdrawals and then determines to annuitize.

The focus for defined contribution plans is increasingly transitioning from accumulation to retirement outcome. TIAA believes access to guaranteed lifetime income is crucial for securing successful retirement outcomes for participants. As more plans (including qualified plans) adopt annuities as an investment and form of payment, it provides participants with the ability to simulate retirement annuity payments before committing to annuitization, which is important.

One inventive way to simulate retirement annuity payments before irrevocably committing to scheduled annuitization is for a participant to take a series of withdrawals before a deferred annuity purchase date in amounts approximately equal to annuity payments. This distribution strategy gives participants the ability to determine if annuitization is the right choice for them. To facilitate improvement in the transition from a series of withdrawals to annuity payments clarification is needed as to the interaction between the individual account rules (Treas. Reg. §1.401(a)(9)-5) and the annuity rules (Treas. Reg. §1.401(a)(9)-6).

Specifically, TIAA proposes adding the following sentence to Treas. Reg. §1.401(a)(9)-6 Q&A 13(a) to permit annuity payments to be adjusted as of the next regularly scheduled date on which payment amounts would have been revalued under the accumulation contract in the absence of accelerated annuitization:

An adjustment of annuity payment amounts during the first contract year of a supplemental contract, to reflect actuarial experience of the underlying accumulation contract prior to the annuity starting date, shall not be considered a change in an annuity payment period.

Additionally, TIAA proposes adding the following sentence to Treas. Reg. §1.401(a)(9)-6 Q&A 14(e)(2) to permit annuity payments to be adjusted as of the next regularly scheduled date on which payment amounts would have been revalued under the accumulation contract absent accelerated annuitization:

Actuarial gains with respect to the first contract year of a supplemental contract shall include such amounts with respect to the underlying accumulation contract prior to the annuity starting date.

4. Provide flexibility in making disability determinations, especially for beneficiaries under age 18.

For individuals age 18 or older, the proposed regulations provide that a beneficiary is disabled if he or she is unable to engage in substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long-continued and indefinite duration determined as of the date of the employee's death.

For individuals under age 18, the proposed regulations apply a comparable standard that requires the beneficiary to have a medically determinable physical or mental impairment that results in marked and severe functional limitations, and that can be expected to result in death or to be of long-continued and indefinite duration determined as of the date of the employee's death.

The proposed regulations also provide a safe harbor for determining whether a beneficiary is disabled. Specifically, the beneficiary will be deemed to be disabled for purposes of RMD rules if the Commissioner of Social Security has determined that the beneficiary is disabled as of the date of the employee's death.

The proposed regulations further provide that documentation of the disability 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.

TIAA believes that the timeline required to demonstrate or prove disability as of the employee's death may be challenging to the beneficiary and their caregiver. Proof of disability may not be available for many reasons, especially for individuals under the age of 18 as disability of children may take time to manifest.⁴ Accordingly, the proposed regulation should provide greater flexibility for making disability determinations, with the goal of affording lifetime income to those who need it.

Specifically, TIAA believes the proposed regulations should be amended to allow for a disability determination to be provided at any time prior to the age of majority and still permit the child to continue taking life expectancy payments without interruption when they attain age 21. In this regard, TIAA believes the age of majority is more appropriate than age 18 to make a disability determination as caregivers may be delaying formal disability determination prior to the individual reaching the age of majority.

In addition, TIAA believes that the proposed regulation should be amended to allow self-certification (or caregiver certification) of disability, absent the plan administrator's actual knowledge to the contrary.

Finally, TIAA believes that the proposed regulations should be amended to delay any deadline for disability determination until the death is reported to the plan administrator. Reporting an employee's death to a plan administrator, especially to an administrator of a prior employer, is often a low priority for the employee's surviving family. A disabled individual should not be penalized if their caregiver does not timely report the employee's death to the plan administrator.

5. Confirm a plan administrator may rely on the trustee's certification regarding eligible designated beneficiary status of each trust beneficiary, including disability or chronic illness status of trust beneficiaries.

The proposed regulations allow a plan administrator to receive the following documentation in reliance on a trust as being a “see-through” trust: a) a final list of trust beneficiaries (including contingent beneficiaries) as of September 30 of the calendar year following the calendar year of the death with a description of the conditions on their entitlement sufficient to establish who are the beneficiaries, b) trustee certification that the see-through trust requirements are satisfied, and c) trustee agreement to provide a copy of the trust instrument upon request (or provide a copy of the actual trust instrument). There is no requirement in these documentation provisions that the trustee must certify whether a trust beneficiary is an eligible designated beneficiary.

TIAA believes that the proposed regulations should be revised to require the trustee to name and classify by type the eligible designated beneficiaries, including disabled and chronically ill individuals, as part of the final list of trust beneficiaries. TIAA believes that placing the duty to identify eligible designated beneficiaries on the trustee who has a fiduciary relationship with such beneficiaries, as opposed to the plan administrator with whom the trustee would normally interact regarding matters concerning the trust, would better align with the see-through trust RMD rules.

The proposed regulations should also remove the option of providing the trust instrument instead of the final list since the determination of whether an individual is an eligible designated beneficiary cannot be made from the trust instrument alone.

TIAA also recommends expanding the Trustee Certifications to include disability or chronic illness status of trust beneficiaries. Instead of providing Medical Certifications to the plan administrator, with whom they otherwise have no connection, trust beneficiaries would provide these items to the trustee. The trustee would then include a representation that these items have been received and certify the EDB status of the trust beneficiaries to the plan administrator as part of the usual Trustee Certification. Expanding the Trustee Certifications to include trust beneficiaries' disability or chronic illness status would enable the plan administrator to engage only with the named beneficiary.

6. TIAA supports the position that the mandatory 20-percent income tax withholding does not apply to non-spousal beneficiaries.

Section 3405(c) imposes a mandatory 20-percent income tax withholding with respect to eligible rollover distributions that are not directly rolled over to another eligible retirement plan.

The proposed regulations retain the existing rule that a distribution to a non-spousal beneficiary is not subject to the mandatory 20-percent income tax withholding because the non-spousal beneficiary cannot roll over the distribution.

As enacted by the SECURE Act, non-spousal beneficiaries are generally required to take RMDs in accordance with the 10-year rule.

Since a non-spousal beneficiary has to receive a full distribution from the inherited account without the option of rolling over amounts paid to save for their own retirement, the entire amount paid to a non-spousal beneficiary should be treated as functionally equivalent to RMD for withholding purposes. RMD amounts are subject to a voluntary 10-percent income tax withholding (or wage withholding, if periodic).

Accordingly, TIAA supports the position stated in the proposed regulation that the mandatory 20-percent income tax withholding requirement in section 3405(c) does not apply to a distribution from an eligible retirement plan to a non-spousal beneficiary.

7. Make stylistic changes to the proposed regulations to ensure the regulations are written in a manner that is reasonably expected to be understood by the average plan participant and beneficiary.

Once finalized, the RMD regulations will directly impact millions of participants and beneficiaries, most of whom are not retirement plan or tax experts. As such, the proposed regulations should be written in a manner that is reasonably expected to be understood by the average plan participant and beneficiary.

TIAA believes certain stylistic changes could be made to the proposed regulations to make them more easily understood by the average plan participant and beneficiary.

Specifically, TIAA recommends the following changes be made to the proposed regulations:

• Reorganize the regulations around subjects (e.g., rules related to trusts should be in a separate section, rather than interspersed with provisions discussing RMDs of individuals);

• Rules for death before the required beginning date (RBD) and rules for death on or after the RBD should each be in their own sections and generally not covered in other sections;

• Deploy additional practical examples that illustrate the application of RMD rules and principles throughout the regulations; and

• Provide additional detail as to cross-references, including stating the subject matter of numbered subsections.

Conclusion

TIAA appreciates Treasury's work on providing guidance to help plan sponsors, participants, beneficiaries and plan service providers navigate the RMD changes required by the SECURE Act. Treasury can help those impacted by the RMD changes by providing clear, simple and straight-forward guidance as well as by providing relief for those trying to manage RMDs in good faith through this transition period. We welcome the opportunity to engage further on any aspect of the foregoing.

Sincerely,

Wayne McClain III
Managing Director, Associate General Counsel

Landis Atkinson
Vice President, Associate General Counsel

Teachers Insurance and Annuity Association of America