Trade Group Seeks Additional Relief From Proposed RMD Regs

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: Proposed RMD Regulations (REG-105954-20)

Dear Sir or Madam:

On behalf of the Retirement Industry Trust Association (“RITA”), I am writing to provide comments on the Internal Revenue Service (“1RS”) proposal to amend the required minimum distribution (“RMD”) regulations. The proposed amendments reflect changes made by the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, as well as other legislative and regulatory changes that have occurred since the RMD regulations were last updated.

As discussed below, RITA is concerned with substantive interpretations included in the proposal and the proposed effective dates. Similarly, although we appreciate the guidance and relief that the 1RS has already provided on pre-approved IRA amendments, we believe that additional relief is also needed for all IRAs. Accordingly, through our comments below, RITA urges the 1RS to: (i) amend and eliminate substantive portions of the proposed regulations; (ii) delay the proposed effective dates; (iii) provide reasonable, good-faith relief until those delayed effective dates; and (iv) provide additional relief regarding the deadlines for amending the documents that govern IRAs.

RITA is a professional trade association dedicated to the expansion of opportunities for all Americans to save and invest for retirement. Founded in 1987, our association is comprised of regulated banks, trust companies and industry-related professionals. We exist to be the leading educator and advocate for the growth and best practices of the self-directed retirement plan industry by providing resources, information, communication, and support to both our members and investors.

A. Delay the Proposed Effective Dates & Expand Reasonable, Good-Faith Relief

Consistent with the requests made in the March 25, 2022 joint trades letter signed by RITA, we are urging the 1RS to promptly issue guidance that would delay the effective date for the proposed regulations until the first calendar year beginning at least nine months after final regulations are issued. Additionally, until the final regulations become effective, the 1RS should provide relief for reasonable, good-faith interpretations of the SECURE Act's changes.

Unless the IRS provides additional relief, the proposed changes to the RMD rules will become effective for the 2022 calendar year and the proposed changes to the rollover rules will become effective retroactively as of January 1, 2022. These effective dates are far too early given that we do not expect the IRS to issue final regulations until, at the very earliest, midway through 2023. Thus, the relevant effective dates cannot precede the publication of the final rules and must give affected custodians and IRA owners adequate time to review the final rules, design compliance approaches, and implement all of the changes. Furthermore, as noted above, until these complex changes can be implemented, the IRS should provide relief for reasonable, good-faith interpretations of the SECURE Act's changes.

B. IRA Amendment Deadlines

Many of RITA's members provide services to IRAs that are governed by a prototype or model IRA document — e.g., Form 5305-A (Traditional Individual Retirement Custodial Account). In this regard, RITA appreciates the recent IRS guidance indicating that adopters of prototype and model IRAs may, until future guidance is issued, continue relying on the opinion letters previously issued for prototype IRAs and the model forms previously published by the IRS.¹ This timely announcement has greatly helped to reduce the uncertainty surrounding all of the IRA changes that need to be made in response to the SECURE Act.

Although this recent guidance has been very helpful for our members who provide services to IRAs that are governed by prototype and model IRA documents, we are also requesting that the IRS promptly issue additional guidance indicating that the statutory deadline described in Section 601(b)(1)(B) of the SECURE Act for amending all IRAs, including pre-approved IRAs, is extended to one lull calendar year from the later of: (1) the effective date of the final RMD regulations; (2) the date the IRS publishes Listings of Required Modifications (“LRMs”) for IRAs; or (3) in the case of model IRAs, the date on which the IRS publishes a revised model. This additional relief will be needed to ensure that IRA owners and the service providers that support them have adequate time to understand all of the final changes and take the steps necessary to update their relevant documentation.

C. SECURE Act Changes to After-Death RMD Rules

RITA is concerned with how the proposal would interpret the SECURE Act's after-death RMD changes, especially how it would interpret the new 10-year rule. RITA is concerned because of the surprising way in which the proposal departs from existing regulations that interpret nearly identical provisions of the Internal Revenue Code (“Code”) and the way in which the proposal reflects positions that are contrary to a plain reading of the SECURE Act's provisions. We strongly encourage the IRS to reconsider these surprising positions and, at the very least, expressly clarify that IRA owners who have taken positions contrary to the final regulations will quality for reasonable, good-faith relief.

RITA's concerns with the proposed interpretations of the SECURE Act's after-death RMD rules generally relate to two interpretive issues:

• First, unlike the longstanding regulatory interpretations of the existing 5-year rule that can apply after an IRA owner's death, the proposed interpretation of the new 10-year rule contemplates scenarios in which designated beneficiaries would be required to receive annual distributions during the 10-year period when the 10-year rule applies. This departs from the longstanding IRS interpretation of the existing 5-year rule that treats a beneficiary as satisfying the 5-year rule as long as a deceased IRA owner's entire interest is distributed by the end of the calendar year that includes the fifth anniversary of the IRA owner's death.² The proposal's surprising interpretation is most apparent in the case of a designated beneficiary, other than an eligible designated beneficiary (“EDB”), who inherits an IRA from an owner who dies on or after the required beginning date. In that case, the proposed regulations would apply the new 10-year rule as a 10-year cap, in addition to the at-least-as- rapidly rule that requires annual distributions. This surprising new interpretation also has unexpected consequences for the beneficiaries of EDBs who receive annual life expectancy payments, as well as minor children who are EDBs and must distribute their entire interest within 10 years of reaching the age of majority.

  Congress was aware of the longstanding regulatory interpretation of the 5-year rule when it passed the SECURE Act and chose to base its new after-death RMD rules on that rule, substituting a new 10-year period for the existing 5-year period. The IRS should not be changing that longstanding interpretation in an effort to accelerate the distribution requirements set by statute.

• Second, the proposed regulations would force EDBs who inherit an IRA from an owner who died on or after the required beginning date to receive annual life expectancy payments for every year following the year in which the IRA owner died.³ This is a very surprising interpretation given the fact that the SECURE Act indicates that, in the case of designated beneficiaries, the new 10-year rule “shall apply whether or not distributions of the employee's interests have begun [on or after the required beginning date].”⁴ Based on this statutory language, it is difficult to understand how the proposed regulations could eliminate the application of the 10-year for any designated beneficiary.

Because of these surprising positions, RITA believes that the IRS proposal has misinterpreted the new 10-year rule imposed by the SECURE Act in various circumstances. Accordingly, we request that the IRS issue final regulations indicating that: (A) the new 10-year rule is available to all designated beneficiaries, regardless of whether the IRA owner died before, on, or after the required beginning date; (B) the 10-year rule will be satisfied if a designated beneficiary distributes the deceased IRA owner's entire remaining interest by the end of the calendar year that includes the tenth anniversary of the IRA owner's death; (C) this interpretation of the 10-year rule applies to all 10-year periods referenced in the SECURE Act's amendments to the after-death RMD rules;⁵ and (D) as an alternative to satisfying the 10-year rule, EDBs who inherit an interest from an IRA owner may also elect to receive payments over their lifetime or life expectancy.

Regardless of whether the IRS adopts the above-described interpretations in its final regulations, the IRS should expressly clarify that an interpretation of the SECURE Act amendments reflecting these positions will be eligible for reasonable, good-faith relief. Also, to the extent that beneficiaries have adopted one of these reasonable, good-faith interpretations, the IRS should not penalize them in any way. That is, beneficiaries should not be subject to the excise tax that applies to missed RMDs, they should not be required to make up RMDs for past calendar years, and they should not be required to unwind any rollovers completed in reliance on the above-described interpretation of the new 10-year rule.

D. New Deadline for Spousal Elections & Hypothetical RMDs

The RMD changes that were included as part of the SECURE Act are complex and far-reaching. They will require significant system changes, educational campaigns for retirement savers, and in some cases, updated estate and tax planning. Given the significant impact of the legislative changes that are required by the SECURE Act, RITA is concerned with how the proposed regulations would also add significant complexity to aspects of the RMD rules that were not addressed by the SECURE Act.

The two changes that are most relevant to these concerns are: (1) the newly proposed deadline for surviving spouse beneficiaries to elect to treat a deceased spouse's IRA as their own; and (2) the proposed requirement to calculate a “hypothetical RMD” amount that is not eligible for rollover when, after attaining age 72, a surviving spouse rolls over an inherited account to a plan or IRA for which the surviving spouse is not treated as the beneficiary.⁶ The apparent intent of both of these proposed changes is to limit the ability of surviving spouses to avoid the lifetime RMD rules that would apply to them if they were not treated as a beneficiary during a period in which spousal beneficiaries are permitted to receive RMDs in accordance with the rules that apply to them as beneficiaries.

The existing IRS regulations have long permitted spousal beneficiaries to take RMDs in accordance with the strategy that would be limited by the proposed changes, and the Code provisions supporting this approach were not affected by the SECURE Act. Had Congress wanted to eliminate this strategy for satisfying the RMD rules, it could have done so. It did not, however, include any language in the SECURE Act suggesting that it wanted to limit this approach for spouses. Thus, the IRS should not be changing its well-settled positions on this issue absent congressional direction.

These proposed changes would also add significant complexity to the RMD rules, create unnecessary traps for spousal beneficiaries, and only apply in a very narrow set of circumstances. RITA does not believe that the limited acceleration of distributions for certain spouses that would be achieved by the addition of these two rules is worth the system-wide costs that will be incurred in implementing them and the mistakes that are likely to occur as a result of their adoption. Accordingly, RITA requests that the IRS remove: (1) the proposed deadline for spousal IRA beneficiaries to elect to treat an IRA as their own; and (2) the rule that would require spousal beneficiaries who have attained age 72 to calculate a hypothetical RMD amount when seeking to roll over an inherited account to a plan or IRA for which they will not be treated as a beneficiary.

E. Clarify Proposed Documentation Requirements

RITA requests clarification in the final rule that, for purposes of the proposed documentation requirements for disabled and chronically ill EDBs, IRA trustees, custodians, and issuers are not required to collect documentation regarding a beneficiary's disability or chronic illness.

According to the proposal, in order for a beneficiary to be treated as an EDB by reason of disability or chronic illness, the beneficiary must provide documentation of the disability or chronic illness to the plan administrator no later than October 31 of the calendar year following the calendar year of the employee's death.⁷ When read together with the provision of the proposed regulations indicating that IRA trustees, custodians, and issuers are treated as the plan administrator for purposes of applying the RMD rules,⁸ there is a concern that the proposal would impose new documentation requirements upon IRA trustees, custodians, and issuers. If this is correct, the proposed documentation requirement would reflect a substantial shift in the responsibilities that are imposed on IRA trustees, custodians, and issuers by the Code and IRS guidance.

Unlike qualified retirement plans, which require oversight by a plan administrator to ensure that the plan is satisfying all of the Code's qualification requirements, including the RMD rules, IRA trustees, custodians, and issuers do not typically assume responsibility for ensuring that the RMD rules have been satisfied. Instead, IRA owners and beneficiaries are solely responsible for ensuring that they receive the correct RMDs from an IRA. To the extent that the RMD rules are violated, the Code imposes an excise tax on the amount that the IRA owner or beneficiary fails to receive. A failure to distribute RMDs from an IRA would not, for example, result in a “disqualification” of the IRA.

Given the differences in how qualified plans and IRAs operate, it is not necessary or appropriate to impose additional documentation requirements upon IRA trustees, custodians, and issuers. More generally, we do not think there is a circumstance under which an IRA trustee, custodian or issuer would need to determine of verify if a beneficiary is an eligible designated beneficiary. While these parties may have obligations under the Code and IRS guidance to help IRA owners and beneficiaries understand their RMDs obligations, IRA owners and beneficiaries are solely responsible for ensuring that those rules are satisfied and should likewise be solely responsible for determining whether a beneficiary is an eligible designated beneficiary by reason of disability or chronic illness.

F. Deemed Distributions Should Satisfy RMD Obligations

According to Code section 408(e), if an individual retirement account owner or beneficiary engages in a prohibited transaction, the account ceases to be an individual retirement account as of the first day of the taxable year and the entire account is treated as being distributed to the individual retirement account owner on such first day. Proposed Treasury Regulation section 1.408-8(g)(2)(iv) indicates that these deemed distributed amounts are not taken into account in determining whether the RMD with respect to the IRA for the calendar year has been made.

RITA disagrees with this proposed regulatory interpretation because it would unnecessarily add an additional penalty to the disqualification already described in Code section 408(e). For example, if an IRA owner engages in a prohibited transaction and the entire account is deemed distributed to the owner in accordance with Code section 408(e), it would be impossible for the IRA owner to also avoid the 50% excise tax imposed by Code section 4974 on excess accumulations, even though the entire account has been distributed to the owner in that year. Even in the case of an IRA owner who has engaged in prohibited transaction, this is an unnecessarily harsh result that is not required by the statute. Accordingly, RITA requests that the IRS amend the proposal to clarify that these deemed distributions are taken into account in determining whether an RMD with respect to an IRA has been made.

Sincerely

Mary L. Mohr
Executive Director
The Retirement Industry Trust Association