Small Business Group Offers Suggestions on Proposed RMD Regs

May 18, 2022

Internal Revenue Service
U.S. Department of the Treasury
C:PA:LPD:PR (REG-105954-20)
Room 5203
P.O. Box 7604
Ben Franklin Station, Washington, DC 20044

Re: Required Minimum Distribution Comments
(REG-105954-20) RIN 1545-BP82

To Whom It May Concern:

The Small Business Council of America (SBCA) appreciates this opportunity to comment on the above referenced proposed regulations published by the Internal Revenue Service (IRS).

About the SBCA

The SBCA is a national nonprofit organization that has represented the interests of privately-held and family-owned businesses on federal tax, health care and employee benefit matters since 1979. The SBCA, through its members, represents well over 100,000 enterprises in retail, manufacturing and service industries.

Comments

The SBCA appreciates that the drafting of the proposed regulations relating to Required Minimum Distributions from qualified plans (the “Proposed Regulations”) was a massive undertaking. The Proposed Regulations provide many improvements from the prior regulations. However, as set forth below, the SBCA would urge the IRS to reconsider its interpretation of one of the provisions of the Secure Act and requests that the IRS consider additional changes that would greatly simplify the administration of Required Minimum Distributions(RMDs) in the future. Finally, the SBCA would also request an extension to the deadlines for amending plans to comply with the new regulations and to the effective date of the new regulations once they are finalized.

As established by the SECURE Act, Section 401(a)(9)(H) provides a special RMD rule for certain defined contribution plans and IRAs of plan owners who die after December 31, 2019. This is not an additional rule but a replacement rule for certain defined contribution plans.

The special rule applies to RMDs for eligible designated beneficiaries who are: the employee's spouse; the employee's child who has not yet reached the age of majority; a disabled beneficiary; a chronically ill beneficiary; or a beneficiary who is not more than 10 years younger than he employee.

As stated in the House Ways and Means Committee Report on the SECURE Act (H. Rep. No.116-65, part 1), “[u]nder 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 distribution 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 ineligible 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.”

Section 401(a)(9)(H) provides in part “except in the case with a beneficiary who is not a designated beneficiary, subparagraph (B)(ii) . . . (II) shall apply whether or not distributions of the employee's interest have begun in accordance with subparagraph (A).” This is clearly stating that the new 10-year rule applies whether or not distributions of the employee's interest have begun in accordance with subparagraph (A). Going back to 401(a)(9)(B), the structure is (i) relates to where distributions have begun and (ii) is for all other cases. H is clearly overriding (i) when it states that (ii) applies whether or not distributions have begun.

This section of the SECURE Act is a complete elimination of the life expectancy for distributions to designated beneficiaries after death. This clearly does not state that 401(a)(9)(B)(i) continues to apply and then (H) is added on top of that. It says that (H) replaces this provision with a ten-year rule that is simply a replacement to the old five-year rule. The old five-year rule did not require minimum distributions during the five-year term, it simply required that the entire account needed to be distributed within five years after the death of the employee. It takes a totally strained and distorted reading of 401(a)(9)(H) to treat the 10-year rule as an additional rule rather than the only rule relating to the required distributions for certain defined contribution plans, and it adds significant complexity to the administration of retirement accounts after the death of the employee.

Under the pre-Secure Act rules, it was very important to determine whether there was no designated beneficiary, and if there was a designated beneficiary, what the age of the oldest designated beneficiary was. If there was no designated beneficiary, and the employee died before the required beginning date, the benefits were required to be paid out under the five-year rule. If the employee died after the required beginning date, the distribution was paid over the life expectancy of the oldest designated beneficiary, or if there was no designated beneficiary, the employee's life expectancy. The determination of whether there was a designated beneficiary and who was the oldest designated beneficiary could have a huge impact on the distribution period. If the employee designated her five-year-old grandchild, the distribution period would be 79.8 years versus 5 years if there was no designated beneficiary.

Under the Secure Act, the determination of whether there is a designated beneficiary, and the age of the oldest designated beneficiary is of little consequence. If there is no designated beneficiary, the five-year rule applies, and if there is a designated beneficiary, regardless of age, the ten-year rule applies. There is, of course, a special rule for eligible designated beneficiaries layered on top of this. Under the pre-Secure Act, designating a five-year-old designated beneficiary was the difference between a five-year rule and a 79.8 distribution. Under the Secure Act the difference is 5 years or 10 years.

With this relatively minor difference between no designated beneficiary and a designated beneficiary, the IRS has the opportunity to greatly simplify the regulations under the Secure Act just as it did in 2002. The 2002 final regulations added bold rules such as the uniform lifetime table and the September 30^th of the year after death rule for determining beneficiaries to simplify the administration of retirement plan distributions. Once again, the IRS has the opportunity to afford the 45 million households that have IRAs with a median value of $147,000 with an average balance of under $140,000 a simple way to determine the distribution rules, but the proposed regulations have failed to do so.

There are two major concepts that could be added to the regulations that would greatly simplify the application of the regulations for the average IRA beneficiary.

The IRS should adopt a wait and see approach for making all of the determinations of who the beneficiaries of the trust are and not simply limiting the wait and see approach to powers of appointment. The determination of beneficiary in a trust should look at the current beneficiaries without regard to whether the trust is a conduit trust or an accumulation trust. Under current tax rules, an accumulation trust reaches the 37% income tax bracket at $13,451 of income. A single individual reaches the 37% income tax bracket at $523,601 of income. The choice of an accumulation trust brings with it a very high tax bracket and should not be penalized under Section 401(a)(9) for accumulating income that may at some time in the future after the entire retirement account has been distributed and has been subject to income tax at a very compressed tax rate be payable to a non-designated beneficiary. As provided in the proposed rules for powers of appointment if during the distribution period a non-designated beneficiary is added as a current beneficiary the determination of whether there is no designated beneficiary would be made at that time. This would eliminate almost all of the complexities of determining whether there is a designated beneficiary when a trust is the beneficiary. In light of the very compressed tax brackets for trusts and the relatively short period that distributions after the death of the employee must be made under the Secure Act, the complicated rules related to conduit trusts and accumulation trusts are no longer necessary.

An even more important change is how estates are treated. For most employees, the simplest beneficiary designation is to name the spouse as the primary beneficiary and the contingent beneficiary being the employee's estate. However, under the pre-Secure Act rules and the proposed regulations, the designation of an estate is a no-beneficiary designation. This is because the regulations do not look through the estate even though the estate is a temporary beneficiary. There is no logical reason for not treating an estate like a see-through trust. This change would be a significant advantage for small IRA holders who can't afford, or need, sophisticated estate planning.

There is an issue that is not addressed in the regulations that has required many individuals to seek PLRs to achieve valid estate planning goals with regard to IRAs. Every one of these PLRs has been favorable and the need for requesting these PLRs would be eliminated if this issue was specifically addressed in the regulations. The situation is where the employee has named a trust as the beneficiary, the trust qualifies as a see-through trust, and under the terms of the trust, the remainder of the trust assets after the death of the employee is divided into shares. See, for example, PLR 2015 03024. Under the facts of the PLR, the custodian sought to establish five separate IRAs, one for each of the five children of the employee, the IRAs would be funded through trustee-to-trustee transfers. The PLR concludes that five beneficiary IRAs created by means of trustee-to-trustee transfers will be inherited IRAs within the meaning of Section 408(d)(3)(C) and that the trustee-to-trustee transfers will not constitute taxable distributions or payments, nor will they be considered attempted rollovers, and the trustee-to-trustee transfers will not cause the IRAs to lose their qualified status under 408(a) of the Code. It would be extremely helpful if these concepts were included in the regulations so that IRA beneficiaries would not have to seek PLRs to do post-death divisions of IRAs to permit trustee-to-trustee transfers to the separate IRAs for the separate beneficiaries established under a trust.

Finally, the deadline for dealing with the regulations implementing the Secure Act should be delayed. Amending plans and IRAs for the Secure Act should be delayed for at least one year from when the IRS publishes a list of Required Modifications for the Secure Act. The RMD regulations should not be effective until the first calendar year, beginning nine months after the final regulations are issued and good faith interpretations should apply until then. These proposed regulations are massive and plan administrators and beneficiaries need time to familiarize themselves with these changes.

On behalf of our members, we appreciate this opportunity to comment and look forward to working with the IRS to reach final regulations that are consistent with the SECURE Act and simplify RMDs going forward.

Sincerely,

Paula Calimafde, Chair
301-951-9325
calimafd@paleyrothman.com

Marc Feinberg, Board of Directors
301-951-1500
mfeinberg@wflaw.com

Small Business Council Of America