ICI Seeks Final Regs on Notice for Retirement Plan Participants

June 15, 2018

David Kautter
Assistant Secretary for Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

RE: Priority Guidance Plan Recommendations on Retirement Security Issues

Dear Mr. Kautter and Mr. Paul:

The Investment Company Institute¹ is pleased to submit recommendations regarding retirement security issues for projects to be included on the 2018-2019 Priority Guidance Plan. A separate ICI submission will describe our recommendations regarding regulated investment companies.

I. Items from 2017-2018 Priority Guidance Plan

A. Regulations under Section 411(a)(11)

We request that the Service finalize the proposed regulations implementing section 1102 of the Pension Protection Act, which instructed the Secretary of the Treasury to modify the regulations under Internal Revenue Code section 411(a)(11) to require disclosure of the consequences of failing to defer receipt of a distribution from a defined contribution plan.² We strongly recommend that the Service finalize the requirements as proposed. As we stated in our comment letter,³ the proposal strikes the right balance by alerting the participant that the plan may have investments, or fee structures, different from those obtainable in an IRA, and alerting the participant that more information is available. This approach will not overwhelm the participant with information that obscures the key information while also assuring the participant has access to information consequential to the decision whether to take or defer a distribution from the plan.

B. Modifications to EPCRS

The 2017-2018 Priority Guidance Plan includes a revenue procedure modifying the Employee Plans Compliance Resolution System ("EPCRS") to provide guidance with regard to certain corrections. We urge the Service to continue making helpful changes to EPCRS, as it has recently with respect to overpayment failures and failures relating to automatic contribution arrangements,⁴ by making the following additional changes and expansions:

• Allow for self-correction of plan loan errors for which corrections are specified under the voluntary compliance program;⁵

• Allow self-correction, without an excise tax, of an inadvertently-missed required minimum distribution payment that is made within 180 days after the distribution was required to be made from the plan;

• Provide the same comprehensive program of correction for governmental 457(b) plans; and

• Expand EPCRS to allow custodians of IRAs to address inadvertent errors for which the individual owner was not at fault. Situations would include waiver of the excise tax for failure to make required minimum distributions where the distribution is corrected as described above for plans; and inadvertent rollovers, such as a rollover by a nonspouse beneficiary from an inherited IRA where the beneficiary had reason to believe that the distribution could be rolled over, or a rollover from a non-governmental 457 plan.

II. New Items for 2018-2019 Priority Guidance Plan

The Institute requests that the Service add the following retirement security matters to the 2018-2019 Priority Guidance Plan. We have recommended items B and C in previous letters to the Service on the Priority Guidance Plan.

A. Guidance Relating to Hardship Distributions

We request guidance implementing changes to the rules associated with taking hardship distributions from 401(k) plans enacted under the Bipartisan Budget Act of 2018. Sections 41113-41114 of the Budget Act include provisions (1) directing the Secretary of the Treasury to modify the regulations for hardship distributions to eliminate the safe harbor requirement that an employee be prohibited from making elective deferrals and employee contributions for six months after receiving a hardship distribution; (2) allowing 401(k) plans to permit hardship distributions of earnings and certain types of employer contributions; and (3) eliminating the requirement that participants obtain any available plan loans prior to taking a hardship distribution. Because these changes are effective for plan years beginning after December 31, 2018, we request guidance implementing them as soon as possible, including proposed amendments to Treasury Regulation § 1.401(k)-1(d)(3) to reflect the changes and interim guidance permitting good faith compliance for the period before final amended regulations become applicable.

Further, we request guidance on the application of the aforementioned hardship distribution changes to 403(b) plans. In particular, the Budget Act provisions relating to the availability of hardship distributions from earnings and employer contributions and elimination of the plan loan prerequisite both amend Code section 401(k). There is uncertainty over whether 403(b) plans, which generally are subject to the same hardship distribution rules as 401(k) plans, are impacted by these changes. Although the regulations under section 403(b) specifically refer to the hardship distribution rules and restrictions under Treasury Regulation § 1.401(k)-1(d)(3), Treasury Regulation § 1.403(b)-6(d)(2) also specifically limits hardship distributions to the aggregate dollar amount of the participant's section 403(b) elective deferrals and precludes hardship distribution of income on elective deferrals. In light of this uncertainty, we strongly urge the Service to provide clarifying guidance for 403(b) plans as soon as possible.

B. 403(b) Plan Termination

Pursuant to an item on the 2010-2011 Priority Guidance Plan, the IRS issued Revenue Ruling 2011-7, providing guidance on 403(b) plan terminations. While this Ruling addressed many open issues, it does not address a significant question regarding plans funded through individually-owned section 403(b)(7) custodial accounts.⁶ An effective plan termination depends on the ability to distribute all accumulated benefits within a reasonable period of time. Individual custodial accounts, however, typically do not provide for distribution without the consent of the participant. Therefore, any participant who fails to request a cash distribution or rollover of his or her 403(b) account could jeopardize the effectiveness of the termination for other participants or cause the employer to have to maintain a spun-off plan indefinitely. Guidance for this type of situation is essential.

Revenue Ruling 2011-7 and the regulations under section 403(b) permit the delivery of an individual annuity contract (or a certificate evidencing an interest in a group annuity) as a means of distributing accumulated benefits under a 403(b) plan termination. This ordinarily means that an annuity contract may continue as a tax-deferred vehicle after plan termination. The Ruling does not contemplate distribution of a 403(b)(7) custodial account, however. Given that section 403(b)(7)(A) provides that contributions to a custodial account shall be treated as contributions to an annuity contract, we request equal treatment for 403(b)(7) custodial accounts in connection with a plan termination. Distribution of a custodial account that retains its 403(b) character, like the distributed 403(b) annuity contract, may be the only option for some custodians attempting to carry out terminating distributions without the consent of the participant, particularly where the custodial agreement does not permit involuntary liquidation of the account or unilateral amendment of the agreement for this purpose. Without the ability to distribute the account itself, many custodians are left wondering how to carry out an time satisfying legal obligations to the individual account owner.

We also believe that guidance addressing a plan termination involving custodial accounts that do contemplate involuntary liquidation would be appropriate. Some have read Revenue Ruling 2011-7 to require affirmative participant consent to a distribution, which would suggest that the presence of a single unresponsive or uncooperative participant could taint and significantly delay a plan termination. To address this misunderstanding, guidance describing an involuntary distribution with an automatic rollover to an IRA after a specified period would be appropriate. Guidance in this regard will facilitate necessary amendments to custodial agreements to permit automatic rollovers to IRAs in connection being terminated. The Institute has strongly urged that this guidance be published as soon as possible, given that some employers have begun the process of terminating their 403(b) plans pursuant to the 2007 final regulations issued under section 403(b).⁷

C. Additional Guidance Clarifying the Application of the One-Per-Year Limit on IRA Rollovers

Pursuant to an item on the second quarter update to the 2014-2015 Priority Guidance Plan, the IRS issued Announcement 2014-32 which clarifies the impact a 2014 IRA rollover has on the one-rollover-per-year limitation contained in section 408(d)(3)(B) of the Internal Revenue Code. Announcement 2014-32 and previously issued Announcement 2014-15 were issued in response to Bobrow v. Commissioner,⁸ a January 2014 Tax Court opinion which held that the one-rollover-per-year limitation applies on a While Announcement 2014-32 addressed certain issues relating to the section 408(d)(3)(B) one-per-year-limitation on IRA rollovers, as is further discussed below, we request additional guidance permitting waivers of inadvertent violations of the one-per-year-limit on IRA rollovers in circumstances where the inadvertent violations are beyond the control of the IRA holder. For example, as discussed below, such inadvertent violations may arise as a result of trailing dividends or in circumstances where the IRA holder has not taken an affirmative action to initiate a distribution.

With respect to trailing dividends, in circumstances where an IRA holder initiates an indirect rollover after the dividend record date, but prior to the dividend payment date, the dividend payment will likely be issued directly to the IRA holder as a subsequent payment. In a circumstance where the IRA holder effectuates a rollover to another IRA within the 60-day period required by section 408(d)(3)(a)(i), an attempt to roll the trailing dividend payment into the new IRA may be seen as violating section 408(d)(3)(B)'s one-per-year-limitation on IRA rollovers.

Another example involves circumstances where the decision to initiate a distribution is due to circumstances beyond the control of the IRA holder. Such a situation may occur, for example, where an investment product undergoes a structural change (such as a reorganization, merger, or closure) and as a result of the structural change, in the investment product is liquidated and payment issued directly to the IRA holder. In the event that payment is issued to the IRA holder during a 12-month period in which he or she has previously made an indirect rollover, he or she will be precluded from making another indirect rollover with the funds received as a result of the investment product structural change.

In light of these possible situations, it may be appropriate for the IRS to have a process for waiving inadvertent violations of the one-per-limit limit on IRA rollovers, similar to the waiver process contained in section 408(d)(3)(I) for violations of the 60-day rule for indirect rollovers.

* * *

If we can provide you with any additional information regarding these issues, please do not hesitate to contact David Abbey at 202/326-5920 (david.abbey@ici.org) or Elena Chism at 202/326-5821 (elena.chism@ici.org).

Sincerely,

David Abbey
Deputy General Counsel
Retirement Policy
Investment Company Institute
Washington, DC

Elena Barone Chism
Associate General Counsel
Retirement Policy
Investment Company Institute
Washington, DC

cc:
Robert J. Neis, Benefits Tax Counsel