Menu
Tax Notes logo

ICI Seeks Final Regs on Notice for Retirement Plan Participants

JUN. 6, 2019

ICI Seeks Final Regs on Notice for Retirement Plan Participants

DATED JUN. 6, 2019
DOCUMENT ATTRIBUTES

June 6, 2019

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

Michael J. Desmond
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. Desmond:

The Investment Company Institute1 is pleased to submit recommendations regarding retirement security issues for projects to be included on the 2019-2020 Priority Guidance Plan. A separate ICI submission will describe our recommendations regarding regulated investment companies.

I. Items from 2018-2019 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 2018-2019 Priority Guidance Plan includes a revenue procedure modifying the Employee Plans Compliance Resolution System (“EPCRS”) to provide guidance with regard to certain corrections. The most recent update to EPCRS, published in Revenue Procedure 2019-19, included helpful changes to expand the self-correction program, particularly with respect to plan loan errors. We urge the Service to continue making helpful changes to EPCRS, including expanding the availability of EPCRS in general and self-correction methods in particular. For example, we suggest that the Service:

  • 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 2019-2020 Priority Guidance Plan

The Institute requests that the Service add the following retirement security matters to the 2019-2020 Priority Guidance Plan. We have recommended these items in previous letters to the Service on the Priority Guidance Plan.

A. 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.4 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.5 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 employer's wishes to terminate a plan while at the same 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 with plan termination and would allow custodians to rely on an employer's direction that a plan is 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). 6

B. 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,7 a January 2014 Tax Court opinion which held that the one-rollover-per-year limitation applies on an aggregated basis to all of a taxpayer's IRAs and not to each IRA separately. 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, the IRA holder's investment 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.

Similarly, a distribution to the IRA holder may be reported under the circumstances described in Revenue Ruling 2018-17,8 where assets in a traditional IRA are paid to a state unclaimed property fund. If such assets are later recovered by the IRA owner, the one-rollover-per-year limitation could prevent the individual from returning the funds to an IRA.9

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-year 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

Elena Barone Chism
Associate General Counsel — Retirement Policy

Investment Company Institute
Washington, DC

cc:
Carol Weiser, Acting Benefits Tax Counsel

FOOTNOTES

1 The Investment Company Institute (ICI) is the leading association representing regulated funds globally, including mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts (UITs) in the United States, and similar funds offered to investors in jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. ICI's members manage total assets of US$23.1 trillion in the United States, serving more than 100 million US shareholders, and US$6.9 trillion in assets in other jurisdictions. ICI carries out its international work through ICI Global, with offices in London, Hong Kong, and Washington, DC.

2 73 Fed. Reg. 59575 (Oct. 9, 2008).

3 See ICI letter to Internal Revenue Service re: proposed regulation (REG-107318-08), dated January 7, 2009.

4 See ICI letter to W. Thomas Reeder, dated March 17, 2009; and ICI letter to W. Thomas Reeder, dated Nov. 12, 2008.

5 We note that pending legislation in Congress, including the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) (H.R. 1994) approved by the US House of Representatives on May 23, 2019, would require Treasury and the IRS to issue guidance that an individual 403(b) custodial account can be distributed “in kind” to the participant in a terminating plan and that the “distributed” account would retain its 403(b) tax-deferred status.

6 72 Fed. Reg. 41128 (July 26, 2007). See ICI letter to W. Thomas Reeder, dated March 17, 2009; and ICI letter to W. Thomas Reeder, dated Nov. 12, 2008.

7 T.C. Memo. 2014-21 (January 28, 2014).

8 Revenue Ruling 2018-17 provides that, under the facts and circumstances described, an IRA trustee who pays amounts from a traditional IRA to a state unclaimed property fund must report the payment on Form 1099-R and withhold federal income tax (unless the taxpayer made a withholding election)

9 Other outstanding issues related to Revenue Ruling 2018-17 include (1) a taxpayer's ability to make a late rollover of funds attributable to an escheated IRA and (2) the lack of an applicable distribution code for box 7 of Form 1099-R to indicate that the distribution was made to a state unclaimed property fund.

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID