Insurers Seek Guidance on RMD Rules, Annuity Contracts

May 28, 2021

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2021-28) Room 5203
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Recommendations for 2021-22 Priority Guidance Plan

To whom it may concern:

We are writing on behalf of the Committee of Annuity Insurers (the “Committee”) in response to the invitation in Notice 2021-28¹ for public recommendations of items to include on the 2021-2022 Priority Guidance Plan. The Committee is a coalition of life insurance companies formed in 1981 to participate in the development of federal policy with respect to tax, securities, ERISA, and banking law issues affecting annuities. The Committee's current 31 member companies represent approximately 80% of the annuity business in the United States. A list of the Committee's member companies is attached as Exhibit A.

Annuities are crucial to the retirement security of millions of Americans. Other than Social Security and defined benefit plans, annuities are the only means that Americans have to guarantee they will not outlive their retirement income. The Committee respectfully recommends that the 2021-2022 Priority Guidance Plan include a number of items for much needed guidance on the treatment of annuity contracts that are issued as individual retirement annuities (“IRAs”) and to qualified retirement plans.²

As requested in Notice 2021-28, we have grouped our guidance recommendations by subject matter and, within each subject matter, we have ordered each item in terms of our assessment of high, medium, or low priority. Our recommendations fall into the following three categories:

Each of these the issues in these categories affects potentially millions of individual taxpayers who own IRAs or participate in qualified plans, as well as the issuers, sponsors, and administrators of those arrangements. Our guidance recommendations are not controversial and would reduce burdens on taxpayers to varying extents, such as by making it easier for individuals and service providers to understand how the RMD rules apply to the annuity products they use to foster retirement security. Our recommendations would provide guidance where no guidance currently exists or would simplify existing rules, providing bright lines that will be easy to administer by taxpayers and the IRS. In addition, the portion of our guidance request relating to long-standing RMD barriers to life annuities (item II. above) would modify and improve rules that are unnecessarily burdensome because they hamper retirement security without achieving a compelling policy goal. Finally, the portion of our guidance request relating to the SECURE Act would provide much-need guidance on recently-enacted legislation. All of these points are consistent with the standards that Notice 2021-28 indicates the Service will consider when selecting projects for the Priority Guidance Plan.

The remainder of this letter sets forth our specific recommendations for guidance.

I. SECURE ACT GUIDANCE ITEMS

A. RMDs: At-Least-As-Rapidly Rule — HIGH PRIORITY

Background and problem: Prior to the SECURE Act, if an employee-participant in a defined contribution plan died before their required beginning date (“RBD”), section 401(a)(9)(B)(ii) required their entire remaining interest to be distributed within 5 years of the death (the “5-year rule”).⁶ Exceptions to this rule applied under subparagraph (B)(iii) (the “stretch rule”) and (B)(iv) (the “spousal deferral rule”) in cases where the employee had a “designated beneficiary.” If the employee died on or after their RBD, section 401(a)(9)(B)(i) required that any remaining interest must be distributed at least as rapidly as under the method of distribution being used when the employee died (the “at-least-as-rapidly rule”). This at-least-as-rapidly rule applied whether or not the employee had a designated beneficiary.

The SECURE Act appears to eliminate the distinctions described above regarding death before the RBD and death on or after the RBD in any situation where the employee has a “designated beneficiary.”⁷ In such cases, and subject to an exception for any “eligible” designated beneficiary (“EDB”), new section 401(a)(9)(H)(i) provides that if an employee dies before their entire interest has been fully distributed:

The SECURE Act did not amend the at-least-as-rapidly rule of section 401(a)(9)(B)(i). As indicated above, prior to the SECURE Act the at-least-as-rapidly rule applied in situations where the employee died on or after the RBD and regardless of whether the employee had a designated beneficiary. But the SECURE Act eliminates the relevance of the RBD for purposes of the RMD rules that apply after death in any case involving a designated beneficiary, instead imposing the 10-year rule in all such cases. In effect, the new 10-year rule (including its exception for EDBs) supersedes the at-least-as-rapidly rule if the employee has a designated beneficiary. Thus, the at-least-as-rapidly rule remains applicable only in cases where an employee does not have a designated beneficiary, just as the 5-year rule continues to apply only in that circumstance (for example, where no beneficiary is named or the beneficiary is a charity or the decedent's estate).

Despite the foregoing, the Committee has heard questions about whether the at-least-as-rapidly rule continues to apply in addition to the 10-year rule in cases involving a designated beneficiary where the employee dies on or after their required beginning date. For example, assume that an employee dies after their RBD and has a designated beneficiary who is not an EDB. The new 10-year rule clearly applies in this situation. The question is whether the at-least-as-rapidly rule also applies, with the result that during the 10-year period the beneficiary must also continue receiving distributions at least as rapidly as they were being made before the employee died. We think the answer is clearly no.

As discussed above, the SECURE Act amendments to section 401(a)(9) provide that in any case involving a designated beneficiary (1) the 5-year rule applies but using a 10-year period rather than a 5-year period, and (2) this rule applies regardless of when the employee dies in relation to their RBD. This clearly eliminates the relevance of the RBD when determining the distribution period for RMDs to a designated beneficiary after the employee's death. Moreover, the 5-year rule has never required any distributions to be made before the end of the 5-year period. The fact that the SECURE Act substitutes 10 years for 5 years when applying this rule to a designated beneficiary does not change this.

Guidance request: The Committee requests guidance clarifying that in situations where the 10-year rule of section 401(a)(9)(ii) (as modified by section 401(a)(9)(H)(i)) applies to a beneficiary's interest in an IRA or plan, the at-least-as-rapidly rule of section 401(a)(9)(B)(i) does not also apply.

B. RMDs: Spousal Beneficiaries — HIGH PRIORITY

Background and problem: New section 401(a)(9)(E)(ii) (flush language) states that the determination of whether a designated beneficiary is an EDB is made as of the date of the employee's death. This could mean that a designated beneficiary who is the owner's former spouse is not an EDB. For example, if the joint annuitant under a joint and survivor annuity is the owner's spouse on the annuity starting date, but the couple later divorces, the former spouse may not be an EDB when the owner dies. In such case, unless the former spouse qualifies under another category of EDB at the time of the owner's death (such as being less than 10 years younger than the owner), the 10-year rule would apply when the owner dies. The remaining life-contingent payments based on the former spouse's life would not comply with the new rules.

In the case of qualified plans, the current regulations generally treat a former spouse as the owner's spouse for RMD purposes if a qualified domestic relations order (QDRO) provides the former spouse with rights to the benefits.⁸ This could mean that in such cases involving a QDRO, a former spouse is an EDB. However, QDROs relate only to qualified plans and not IRAs, and although the current regulations provide that IRAs are subject to the same RMD rules as qualified plans,⁹ it is unclear whether this provision is sufficient to extend the QDRO concept to IRAs for RMD purposes without further guidance.

Guidance request: The Committee requests guidance confirming that if annuity payments have begun over the joint lives of an IRA owner or plan participant and his or her spouse who is more than 10 years younger, the couple later divorces, and the owner or employee subsequently dies, the surviving ex-spouse may be treated as an EDB for purposes of section 401(a)(9). Absent such guidance, it may be difficult to ensure compliance with the RMD rules in any situation involving a joint and survivor annuity with a spousal joint annuitant. The Committee believes that such joint and survivor annuities should be encouraged, as they provide critical protections for spousal beneficiaries, even in situations involving divorce. The RMD rules should not discourage the election of such protections through lack of clarity or, worse, by deeming such annuity payouts non-compliant in the event of divorce.

C. RMDs: Required Accelerations of Annuity Payments — HIGH PRIORITY

Background and problem: The SECURE Act's changes to the post-death RMD rules present a number of challenges for annuitized forms of retirement benefits paid from IRAs and defined contribution plans. Two aspects of the new rules, in particular, contribute to those challenges:

• At-least-as-rapidly rule — Under prior law, if an IRA owner or plan participant died after annuitizing any portion of their account balance, the remaining annuity payments could continue as scheduled, pursuant to the at-least-as-rapidly rule in section 401(a)(9)(B)(i).¹⁰ Under the new law, all designated beneficiaries instead must receive their benefits in accordance with either the 10-year rule of section 401(a)(9)(ii) (as modified by section 401(a)(9)(H)(i)) or, if available, the stretch rule of section 401(a)(9)(B)(iii) (as modified by section 401(a)(9)(H)(ii)), regardless of when the owner dies in relation to their RBD.

• EDB status determined at death — The new SECURE Act rules also provide that a designated beneficiary's status as an EDB is determined as of the date of the owner's death. Thus, an IRA owner or plan participant could have an EDB when annuity payments commence but no longer have an EDB at their death.

In light of these aspects of the new rules, it will be more difficult to structure annuity payments during the owner's life that will always comply with the RMD rules after death. As a result, it may become necessary to modify annuity payments after the owner's death by accelerating them so they will be paid within the timeframe that the new rules require. Consider the following example:

Example: An IRA owner annuitizes in 2021 for his single life with a period certain of 25 years, which does not exceed the maximum permissible distribution period under the current regulations.¹¹ He names his spouse as the sole beneficiary and expects that she will “stretch” any benefits after his death because she will be an EDB and the remaining period certain will not exceed her life expectancy. However, the spouse dies five years after payments start to the owner, and the owner then names his adult son as the new beneficiary, who is not an EDB. The owner dies five years later, with 15 years remaining in the period certain. The at-least-as-rapidly rule is no longer available. In addition, because the son is not an EDB, he is subject to the new 10-year rule. The remaining 15-year term of the annuity will not comply with the RMD rules.

In the situation described above, the annuity payments after the owner's death will need to be paid out faster than the 15 years remaining in the period certain. This, in turn, will require some type of acceleration of the remaining payments, such as a commutation or a shortening of the payment period. Under the current RMD regulations, commutations and similar accelerations of annuity payments must satisfy the following requirements relating to the general rule that annuity payments be “nonincreasing:”¹²

• Minimum income threshold test (“MITT”): Any contract that provides the possibility of increasing payments (such as a commutation or shortening of the payment period) must pass a test in the regulations that has become known as the “minimum income threshold test,” or MITT, which applies as of the annuity starting date (and not as of the date of the acceleration).¹³

• Payment acceleration rule: A shortening of the payment period, or a full or partial commutation, is allowed only if a special test is satisfied at the time of the acceleration, in addition to the MITT being satisfied at the annuity starting date. Specifically, the change must cause the total future expected payments (including any lump sum received) to decrease, with the calculation being based on certain assumptions in the regulations.¹⁴

In light of the SECURE Act's changes to the RMD rules discussed above, it is very likely that more annuity payouts will need to be modified after they start in order to comply with the new rules. In addition, more insurers may decide to limit period certain features to 10 years in order to ensure compliance with the new rules. Some consumers may find such a guarantee period insufficient and instead elect a lump sum return of premium death benefit in lieu of a period certain, which is a type of benefit that triggers the MITT.¹⁵ This means that more contracts could become subject to the MITT and the payment acceleration rules discussed above. In many of those situations, the insurance company and the individual may not have contemplated the future need to modify the annuity payments, and therefore may not have anticipated a need to satisfy the MITT at the annuity starting date or may be unable to satisfy the payment acceleration rule at the time of the acceleration. Under prior law, an acceleration could be avoided if it did not satisfy the payment acceleration rule. In contrast, the new RMD rules may require the acceleration of annuity payments.

Guidance request: The Committee requests guidance providing that an acceleration of annuity payments required to comply with section 401(a)(9)(H) will not be treated as a prohibited increase in annuity payments irrespective of whether the acceleration satisfies the requirements of Treas. Reg. section 1.401(a)(9)-6, Q&A-14(c) and (e), which set forth the MITT and the payment acceleration rule, respectively. Without such relief, taxpayers may find themselves in situations where, despite their best planning and efforts to comply with the new RMD rules, they inadvertently violate those rules and become subject to the 50% excise tax under section 4974. In addition, any modifications to annuity payments that may be needed to comply with the SECURE Act's new requirements for post-death RMDs would result only in the acceleration of those payments, thereby accelerating the obligation to pay federal income tax and limiting (or eliminating) tax deferral under the IRA or plan.

D. IRA Annuity Policy Forms — HIGH PRIORITY

1. Publication of Updated Lists of Required Modifications

Background and problem: Many member companies of the Committee rely on the Lists of Required Modifications (“LRMs”) for traditional, Roth, and SIMPLE IRAs to create endorsements for the annuity contracts they issue as IRAs. These endorsements can then be submitted to the IRS for prototype approval with the expectation of a seamless approval process. In addition, those companies who choose not to obtain prototype approval can be comfortable their endorsements accurately reflect the IRS's views on the form requirements applicable to IRAs by incorporating the LRMs into their annuity endorsements.

Guidance request: The Committee requests prompt publication of updated LRMs for annuity contracts that are issued as traditional, Roth, and SIMPLE IRAs, reflecting the relevant SECURE Act changes. In that regard, we note that on August 12, 2020, we sent our own drafts of updated LRMs for traditional and Roth IRAs to the Treasury Department and IRS, which we hoped would be helpful in their drafting of the official updates. We have included those drafts as Exhibits C and D to this letter.

2. Publication of “Snap-on” Model IRA Amendments

Background and problem: Under current procedures, annuity issuers that have previously obtained prototype approval of their IRA endorsements and amend those endorsements to comply with changes in the law must resubmit the endorsements in order for the prototype approval to remain in place, even if the amendments use the language of the LRMs. The Committee believes that LRMs also could serve as pre-approved model language that could be added to prototype IRA annuity forms.¹⁶ Under this approach, the IRS would be able to control the form of prototype IRA annuity contracts, and provide a mechanism to assure that contracts are correctly updated to reflect the changes made by the SECURE Act, without having to review and approve again forms it has already approved. This approach would save time, money, and resources for both the IRS and insurance companies, as well as benefit IRA contract owners through more rapid reflection of the SECURE Act changes in their contracts.

Guidance request: The Committee requests prompt publication of pre-approved model amendments reflecting the SECURE Act amendments applicable to annuity contracts that are issued as traditional, Roth, and SIMPLE IRAs, which, if added to a previously-approved prototype IRA form, would allow the prototype approval to remain in effect without the need to re-apply for prototype approval.

3. Publication of Model IRA Annuity Endorsements

Background and problem: We expect the IRS will issue new model IRA forms for traditional, Roth, and SIMPLE IRA accounts. The IRS has issued only one model endorsement for individual retirement annuities, Form 5305-RB for Roth IRA annuities. The IRS announced in Rev. Proc. 2010-48 that it would issue two new model IRA forms for annuities, i.e., Form 5305-B (Individual Retirement Annuity Endorsement) and Form 5305-SB (SIMPLE Individual Retirement Annuity Endorsement), but those model forms have never been issued.

Guidance request: The Committee requests publication of an updated Form 5305-RB and issuance of a model Individual Retirement Annuity Endorsement and a model SIMPLE Individual Retirement Annuity Endorsement, all reflecting SECURE Act changes.

E. Transitional Implementation of the SECURE Act — MEDIUM PRIORITY

Background and problem: The SECURE Act became law on December 20, 2019, and made sweeping and complex changes to the RMD rules, most of which became effective less than two weeks later, on January 1, 2020. Shortly thereafter the COVID-19 crisis struck, requiring significant Treasury and IRS resources to be shifted to other priorities. As a result, although the Treasury Department and IRS have been able to issue some helpful guidance regarding the SECURE Act changes, the scope of that guidance has been very limited. For example, virtually no guidance has been provided on the SECURE Act changes to the post-death RMD rules.

Guidance request: The Committee requests that, as has been done in other situations where changes in the law have become effective shortly after enactment, the Treasury Department and IRS announce, as soon as possible, that taxpayers can rely on a reasonable, good faith interpretation of the provisions of the SECURE Act affecting IRAs and qualified plans.

F. RMDs: Disabled and Chronically Ill Beneficiaries — MEDIUM PRIORITY

Background and problem: The SECURE Act amended the RMD rules under section 401(a)(9) to provide that only an “eligible designated beneficiary” (EDB) can stretch their inherited benefits over life or a period not extending beyond their life expectancy.¹⁷ The new rules define an EDB as including any designated beneficiary who is (1) disabled within the meaning of section 72(m)(7),¹⁸ or (2) a chronically ill individual within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall be treated as met only if there is a certification that, as of “such date,” the period of inability described therein is an indefinite one that is reasonably expected to be lengthy in nature.¹⁹ The new rules provide that the determination of whether a designated beneficiary is an EDB “shall be made as of the date of death of the employee.”²⁰ Guidance is needed regarding what information IRA issuers and plan administrators need to obtain in order to confirm a beneficiary's status as disabled or chronically ill under the foregoing provisions.

Guidance request: The Committee requests guidance clarifying that:

With respect to item (3) above, we submit that it is very unlikely that an individual who satisfies the requirements to be treated as disabled or chronically ill as of the annuity starting date would recover from the relevant condition in a manner that would render them unable to satisfy those requirements as of the date of the owner or employee's death. As a result, the requested guidance likely would have little or no effect on the payment of RMDs. It would, however, provide a helpful clarification so that annuitants can be certain that any joint and survivor annuity payments they elect with a disabled or chronically ill beneficiary as the joint annuitant will remain RMD-compliant for the entire duration of the annuity payout, i.e., that after the employee's death any survivor annuity payments to such a joint annuitant will be permitted.

G. RMDs: Trusts Named as Beneficiaries — MEDIUM PRIORITY

Background and problem: For RMD purposes, a “designated beneficiary” is “any individual designated as a beneficiary by the employee.”²¹ Thus, a non-individual — such as a trust — generally cannot be a designated beneficiary for RMD purposes. However, the current regulations provide “see-through” treatment for trusts that meet certain requirements.²² If such treatment applies, the beneficiaries of the trust, rather than the trust itself, “will be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under Code § 401(a)(9).”²³

If a see-through trust is named as the IRA or plan beneficiary and the trust has multiple beneficiaries, the current regulations generally prohibit the trust from utilizing the “separate account” rules in the regulations that apply in other situations involving multiple beneficiaries.²⁴ Those separate account rules otherwise allow RMDs to be determined separately for each designated beneficiary.²⁵ Without the benefit of the separate account rules, if a see-through trust has multiple beneficiaries the required distribution period for all the trust beneficiaries is based on the trust beneficiary with the shortest life expectancy; the other (younger) trust beneficiaries are ignored for this purpose.²⁶

This treatment of see-through trusts with multiple beneficiaries presents a number of issues in light of the SECURE Act amendments to section 401(a)(9). Pursuant to those amendments, only EDBs can stretch their inherited benefits over life or life expectancy. Other types of designated beneficiaries are subject to a 10-year distribution rule. Prior to the SECURE Act, such distinctions between types of designated beneficiaries did not exist. Now that EDBs and non-EDBs are subject to different rules, the inability to apply separate accounting concepts to see-through trusts with multiple beneficiaries could lead to odd results, as illustrated in the following examples:

• Example 1: An IRA owner dies in 2021 at age 75 and a see-through trust is the named beneficiary. The owner's spouse and their two healthy (not disabled or chronically ill) adult children are the sole beneficiaries of the trust. Under the current regulations described above, the life expectancy of the spouse (who is an EDB) would be used to determine the required distribution period for all the trust beneficiaries, because she has the shortest life expectancy. Because the spouse is an EDB, the benefit for all three trust beneficiaries apparently could be stretched over the spouse's life expectancy, even though the adult children would have been subject to the 10-year rule if they had been named beneficiaries directly.

• Example 2: An IRA owner dies in 2021 at age 75 and a see-through trust is the named beneficiary. The owner's two healthy children, ages 10 and 30, are the sole beneficiaries of the trust. Under the current regulations described above, the life expectancy of the older beneficiary (who is not an EDB) would be used to determine the required distribution period for both beneficiaries. Thus, it appears that the new rules for non-EDBs apply to the entire interest, including that of the minor. If this is correct, the entire interest must be distributed by the end of 2030, and the minor loses the ability to stretch his benefit until he reaches majority and apply the 10-year rule thereafter.

These are just two examples of the results that could arise under the new SECURE Act rules based on how the current regulations treat see-through trusts. Some of those results could be viewed as inconsistent with the intent of the SECURE Act, such as facilitating the ability of a non-EDB to “stretch” inherited benefits for longer than 10 years. This, in turn, raises questions about the continued availability of the see-through trust rules in the current regulations.

Guidance request: The Committee requests guidance confirming that the see-through trust rules of Treas. Reg. section 1.401(a)(9)-4, Q&A-5, continue to apply after the SECURE Act. However, those rules should be amended to eliminate the current prohibition on the use of separate accounting by trust beneficiaries under A-2 of Treas. Reg. section 1.401(a)(9)-8.

Removing this prohibition would facilitate proper administration of the SECURE Act by ensuring that EDBs — and only EDBs — can “stretch” their inherited benefits. It also would be consistent with the rule the SECURE Act added to section 401(a)(9)(H)(iv) and (v), which applies similar separate accounting concepts to certain multi-beneficiary trusts benefitting disabled or chronically ill beneficiaries. In that regard, there is nothing in the Code, either before or after the SECURE Act, that would preclude separate accounting concepts from being applied more broadly to trust beneficiaries who are not disabled or chronically ill.

H. RMDs: Beneficiaries Who Are Minors — MEDIUM PRIORITY

Background and problem: Under new section 401(a)(9)(E)(ii)(II), the child of an employee or an IRA owner is an EDB if the child is a designated beneficiary and has not reached majority. A child who is an EDB under this rule ceases to be an EDB as of the date the child reaches majority and the remaining interest must be distributed under the 10-year rule.²⁷ The new provision cross-references section 401(a)(9)(F) for the meaning of “majority.” That section addresses the treatment of certain payments made to children but does not define “majority.” The regulations, however, provide that for purposes of section 401(a)(9)(F) “a child may be treated as having not reached the age of majority if the child has not completed a specified course of education and is under the age of 26.”²⁸ More generally, it appears that federal law, not state law, controls for purposes of the meaning of “majority.”²⁹

The IRS website states that for purposes of section 401(a)(9)(E)(ii)(II) a designated beneficiary who is a child of an employee shall be treated as having reached the age of majority when the child attains age 18.³⁰ While that posting is helpful, the website is not official IRS guidance on which taxpayers may rely. In addition, the website does not address whether a child may be treated as having not reached the age of majority if the child has not completed a specified course of education and is under the age of 26, as provided in the regulations under section 401(a)(9)(F), even though the new SECURE Act rule cross-references that section.

Guidance request: The Committee requests guidance that for purposes of section 401(a)(9)(E)(ii)(II) a designated beneficiary who is a child of an IRA owner or an employee (1) shall be treated as having reached the age of majority when the child attains age 18, and (2) may be treated as not having reached the age of majority if the child has not completed a specified course of education and is under the age of 26.

I. RMDs: Grandfathering Issues Affecting QLACs and DIAs — LOW PRIORITY

Background and problem: The SECURE Act provides that its amendments to the post-death RMD rules do not apply to a “qualified annuity” that meets certain requirements.³¹ As relevant here, one of those requirements is that if annuity payments did not start to the employee before December 20, 2019, the employee must have made an “irrevocable election” before that date as to the “method and amount” of the annuity payments to the employee or any designated beneficiaries.³² This rule facilitates grandfathering treatment for deferred income annuities (“DIAs”), including qualifying longevity annuity contracts (“QLACs”), that were purchased before the SECURE Act changed the law.

In general, a DIA is a deferred annuity contract that provides only for annuity payments commencing on a specified future date, with no cash benefits prior to that date. A QLAC is a type of DIA that satisfies certain requirements in the RMD regulations.³³ DIAs and QLACs will qualify for grandfathering treatment under the SECURE Act even if the annuity payments are scheduled to start on or after December 20, 2019, provided that, before such date, the owner made the irrevocable election described above. In that regard, DIAs and QLACs often provide the owner with the following rights that, if elected, can affect the future annuity payments:

• Additional premiums — DIAs and QLACs often allow for additional premiums to be paid after they are purchased. Such additional premiums increase the dollar amount of the annuity payments that are scheduled to start in the future. In other words, each additional premium purchases an additional “paid up” annuity benefit that is determined under the terms of the contract as originally issued, and the additional amount will be paid under the same terms as the original annuity benefits, starting on the same date and lasting for the same duration.

• Start date flexibility — Some DIAs and QLACs provide a limited right to change the annuity starting date, e.g., to accelerate it up to five years or defer it up to five years (subject to the requirements in the RMD regulations). For example, if a DIA provides for annuity payments to start on January 1, 2030, the contract may provide the owner with a one-time election to start the annuity payments as early as January 1, 2025, or as late as January 1, 2035. If the owner makes this election, the dollar amount of the annuity payments is adjusted up or down to reflect the different start date, with such adjustment being made pursuant to the terms of the contract as originally issued.

Because these product features can affect the amount and timing of the annuity payments thereunder, they present a question whether, and if so to what extent, they affect the availability of the SECURE Act's grandfathering rule. Guidance is needed to clarify how the grandfathering rule applies in these circumstances.

Guidance request: The Committee requests guidance clarifying the extent, if any, to which the payment of a premium on or after December 20, 2019, into a DIA or QLAC that is otherwise a “qualified annuity” under section 401(b)(4) of the SECURE Act causes the contract to fail to be treated as a “qualified annuity.” The Committee also requests guidance to clarify that a DIA or QLAC that allows the individual to accelerate or defer the starting date of the annuity payments by up to five years, and is otherwise a “qualified annuity” under section 401(b)(4) of the SECURE Act, will not cause the contract to fail to be treated as a “qualified annuity.”

J. Application of RMD Changes to Section 457(b) Plans — LOW PRIORITY

Background and problem: There is a question whether the new post-death RMD rules apply to a section 457(b) plan of a tax-exempt entity. Section 401(a)(9)(H), which contains the new rules, states that it applies “in the case of a defined contribution plan.” Section 401(a)(9)(H)(vi) then states that “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 contribution plan.”

Section 402(c)(8)(B) defines “eligible retirement plan” to include: (1) an individual retirement account described in section 408(a); (2) an individual retirement annuity described in section 408(b) (other than an endowment contract); (3) a qualified trust; (4) an annuity plan described in section 403(a); (5) an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A) (i.e., a governmental section 457(b) plan); and (6) an annuity contract described in section 403(b). The definition set forth in section 402(c)(8)(B) does not include a section 457(b) plan of a tax-exempt entity. Thus, there is some question as to whether such non-governmental section 457(b) plans are subject to the new post-death RMD rules.

It appears that section 401(a)(9)(H)(vi) was not intended to provide an exclusive list of defined contribution plans that are subject to the new post-death RMD rules. Rather, that section can be read as specifying certain plans that will be treated as defined contribution plans. For instance, by referencing section 402(c)(8)(B), section 401(a)(9)(H)(vi) has the effect of including IRAs, which otherwise would not be considered defined contribution plans as that term is defined in section 414(i). It seems that the new post-death RMD rules in section 401(a)(9)(H) similarly should apply to a 457(b) plan of a tax-exempt entity that is structured as a defined contribution plan (as most are in practice), but this is unclear.

Guidance request: The Committee requests guidance clarifying whether the new post-death RMD rules in section 401(a)(9)(H) apply to a section 457(b) plan of a tax-exempt entity that is structured as a defined contribution plan.

II. Longstanding RMD Barriers to Life Annuities

Certain aspects of the current RMD regulations discourage and, in some cases, effectively prohibit individuals from receiving their retirement benefits as a life annuity. This problem has persisted for years and guidance continues to be needed on three aspects of the current regulations that are at the core of the problem. The three issues on which the Committee requests guidance to remove these barriers to life annuities are summarized below. Attached as Exhibit B is a memorandum further discussing these issues and our recommended guidance.

A. Minimum Income Threshold Test — HIGH PRIORITY

Background and problem: Treas. Reg. section 1.401(a)(9), Q&A-14(c), requires commercial annuities to pass a minimum income threshold test (MITT) if they provide certain types of benefits that the regulations characterize as “increasing.” The MITT requires the use of a life expectancy table that does not comport with industry practices in pricing life annuity payouts, particularly for single life annuities. This, combined with a historically prolonged period of low interest rates, has caused traditional and common forms of life annuities, such as a level-pay life annuity with a refund benefit, to fail the MITT in irrational circumstances, rendering these annuities unavailable to many retirees seeking lifetime income. These problems have persisted for over 10 years with no relief.

Guidance requests: The Committee requests that the RMD regulations be amended as soon as possible to:

B. Qualifying Longevity Annuity Contracts — MEDIUM PRIORITY

Background and problem: Treas. Reg. section 1.401(a)(9)-6, Q&A-17, prescribes rules for qualifying longevity annuity contracts (QLACs). Such contracts generally are subject to the MITT. In addition, they are subject to contribution limits that differ between qualified plans and IRAs and to death benefit rules that differ between spouse and non-spouse beneficiaries.

Guidance request: Guidance is needed to: (a) clarify how the MITT applies to QLACs in light of their unique characteristics that were not contemplated when the MITT was created, (b) clarify the contribution limits when a QLAC is purchased via rollover from a qualified plan to an IRA, and (c) clarify the QLAC rules governing spousal death benefits in the event of divorce.

C. Timing of Annuity Payments — MEDIUM PRIORITY

Background and problem: It is important that retirees have the flexibility to receive short-term advances of some of their future annuity payments, such as an advance of three months' payments with monthly payments resuming thereafter. This flexibility encourages annuitization by addressing prospective policyholders' concerns over lost liquidity. It is not clear whether such short-term accelerations are permitted by the rules under Treas. Reg. section 1.401(a)(9)-6 limiting “increasing” payments (Q&A-14(c)(4) and (e)(4)) and requiring the interval between payments to be “uniform” (Q&A-1(a)).

Guidance request: The Committee requests guidance clarifying that a short-term advancement of annuity payments is not subject to the limitations on increasing annuity payments and will not result in a change in the interval between annuity payments for purposes of these rules.

III. Annuity Payments as SEPPs — HIGH PRIORITY

Background and problem: As noted at the outset of this letter, the preamble to the 2020 final regulations updating the life expectancy tables under section 401(a)(9) states that the Treasury Department and IRS anticipate also updating Rev. Rul. 2002-62 to reflect the final regulations. That revenue ruling describes safe harbor methods for calculating amounts that satisfy the exception in section 72(t)(2)(A)(iv) to the 10% penalty tax on premature distributions from qualified plans and IRAs for distributions which are part of a series of SEPPs for the employee's life or life expectancy (or for the joint lives or joint life expectancy of the employee and their designated beneficiary). The anticipated update would apply the life expectancy, distribution period, and mortality tables set forth in the final regulations for purposes of determining SEPPs once the regulations become effective. In Notice 2004-15³⁴ the IRS concluded that the guidance in Rev. Rul. 2002-62 also applies for purposes of the SEPP exception in section 72(q)(2)(D), regarding premature distributions from non-qualified annuities.

Prior to the issuance of a private letter ruling in 2011, life insurance companies and financial advisors widely believed that annuity payments that satisfy the RMD rules under Treas. Reg. section 1.401(a)(9)-6 also constitute SEPPs. This belief was based on Q&A-12 of Notice 89-25,³⁵ as modified by Rev. Rul. 2002-62. However, in PLR 201120011 (Feb. 11, 2011), the IRS took the position that the RMD method described in Q&A-12 of Notice 89-25 was superseded by the RMD method described in Rev. Rul. 2002-62.

The significance of the IRS's position in PLR 201120011 is that the RMD method described in Rev. Rul. 2002-62 is limited to contracts with an “account balance,” and thus does not encompass annuity payments because those payments typically are made under a contract without an account balance. Although PLR 201120011 involved the treatment of annuity payments under nonqualified annuities as SEPPs within the meaning of section 72(q)(2)(D), the conclusions and reasoning of the ruling extend to the treatment of annuity payments under annuity contracts used in connection with qualified retirement plans and IRAs as SEPPs within the meaning of section 72(t)(2)(A)(iv). The IRS's position that the RMD method of Rev. Rul. 2002-62 excludes annuity payments effectively means that there is no published guidance on when annuity payments (including life-contingent annuity payments) will constitute SEPPs.

Whether annuity payments constitute SEPPs is a very significant issue for owners (and prospective owners) of IRA annuity contracts, section 403(b) annuity contracts, and nonqualified annuity contracts, the insurance companies that issue those contracts, and employer plans that use commercial annuities to distribute benefits to employees.

Guidance request: The Committee requests guidance clarifying the circumstances in which annuity payments constitute SEPPs within the meaning of within the meaning of sections 72(t)(2)(A)(iv) and 72(q)(2)(D).³⁶

* * * * *

We appreciate your consideration of our request for guidance on these issues. If you have any questions or if we can be of any assistance, please contact either of the undersigned.

Sincerely,

Mark E. Griffin
(megriffin@davis-harman.com; 202-662-2268)

Bryan W. Keene
(bwkeene@davis-harman.com; 202-662-2273)

Counsel to the Committee of Annuity Insurers
www.annuity-insurers.org

The Committee of Annuity Insurers
Washington, DC

Attachments:
Exhibit A (list of member companies)
Exhibit B (memorandum on RMD barriers to life annuities)
Exhibit C (draft LRM updates for traditional individual retirement annuities)
Exhibit D (draft LRM updates for Roth individual retirement annuities)