Transcript Available of IRS Hearing on Distribution Table Regs

PUBLIC HEARING ON PROPOSED REGULATIONS
"UPDATED LIFE EXPECTANCY AND DISTRIBUTION PERIOD TABLES USEDFOR PURPOSES OF DETERMINING MINIMUM REQUIREMENT DISTRIBUTIONS"

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

[REG-132210-18]

Washington, D.C.

Thursday, January 23, 2020

PARTICIPANTS:

For IRS:

VICTORIA A. JUDSON
Associate Chief Counsel
Employee Benefits, Exempt Organizations, and Employment Taxes

LINDA S. MARSHALL
Senior Counsel
Qualified Plans Branch 1

ARSLAN MALIK
Assistant to the Branch Chief
Qualified Plans Branch 1

GREGORY K. DAVIS
Actuary
Employee Plans Ruling and Agreements

For U.S. Department of Treasury:

HARLAN WELLER
Senior Actuary
Office of Tax Policy

Speakers:

ALLISON WIELOBOB
American Retirement Association

MARK E. GRIFFIN
Committee of Annuity Insurers

* * * * *

PROCEEDINGS

(10:01 a.m.)

MS. JUDSON: Could people please take their seats? Welcome. This is the public hearing on proposed regulations, updated life expectancy, and distribution period tables used for purposes of determining minimum required distributions, reg. 132210-18.

Thank you so much for coming today. Just to go over our rules, we will have speakers who previously submitted an outline and requested to speak. They will be entitled to ten minutes, not including responses to questions that may come from the panel. Is there anyone else in the room who did not previously sign up before the hearing who would like to speak today?

Okay. We will at the end ask if anyone else wants to add comments. My name is Victoria Judson. I'm Associate Chief Council Employee Benefits, Exempt Organizations, and Employment Taxes. To my left is Linda Marshall with Qualified Plans Branch 1, to her left is Harlan Weller, Senior Actuary Office of Tax Policy, and to his left is Gregory Davis, Actuary Employee Plans, Rulings, and Agreements.

We have two speakers who requested to speak today and the first is Allison Wielobob from the American Retirement Association. Please come on up.

MS. WIELOBOB: Good morning. My name is Allison Wielobob. I'm the general council in the American Retirement Association and I'm here today on behalf of the ARA. We appreciate this opportunity to speak here today about the MPRM for updated life expectancy and distribution period tables used for determining required minimum distributions. We submitted a comment letter on the proposed rule dated January 6, 2020, under the signature of my colleague Marty Pivens.

The ARA is the coordinating entity for five underlying affiliate organizations representing the full spectrum of service providers to America's retirement system, including premier retirement industry associations, ASPA, the newly renamed American Society of Enrolled Actuaries, formerly ACOPA, the National Association of Plan Advisors, the National Tax Deferred Saving Association, and the Plan Sponsor Counsel of America. Altogether, nearly 28,000 members, a diverse group of retirement plan professionals of all disciplines, including financial advisors, consultants, administrators, actuaries, accountants, and attorneys.

As a general matter, ARA supports updating the mortality tables for MRDs. We see this as potentially beneficial for millions of plan participants, IRA owners, and their beneficiaries. That said, as presented in our outline we're here to comment on two things. First, the effective date of the proposal.

As you know, the proposed mortality tables generally would apply for distribution years beginning on or after January 1, 2021. You also know, I suspect, that changes to the RMD rules in the Secure Act raise RMD ages, the age for RMDs and the date for post-death distributions. These changes were effective January 1, 2020, just 12 days after becoming law.

The timing of the Secure Act changes to the RMD rules make for an abbreviated time frame to be sure to modify plan documents, software and administrative systems, reporting practices, disclosure documents, claims procedures, customer call center scripts, all of these things that are foundational for ensuring compliance.

The ARA urges you to synchronize in some reasonable way the timing of these significant Secure Act changes with the proposed rule. The effective dates in the Secure Act's provisions proceed the proposed rule's effective date, and it's not clear to us whether the proposed rule can be simplified — excuse me — can be finalized while disregarding Secure Act changes.

Because the Secure Act changes are effective now, ARA recommends that IRS and Treasury first issue proposed regulations on the Secure Act changes rather than incorporating them directly into a final regulation in an expanded rule. This is because we believe public comment on regulations under the Secure Act is essential.

Second, the ARA requests a minimum lead time of six months before a final rule is effective, more time would be even better. ARA's members have stressed to use the extensive operational changes that will be required for plans and service providers because of the proposed rule and because of the Secure Act. Software updates are critical, communications to participants need to be designed for ease of understanding, and financial institutions certainly need to consider how the Secure Act and the proposed rule can be implemented in the context of their systems.

Participants take RMDs throughout the year — especially in the middle of the year I'm told — but a not insignificant portion take them in January and February every year. Having a system completely built and operational in order to push out RMDs in early January 2021 would be essential, but if not accomplished there will be compliance risks. And as you know, failure to meet the requirements can lead to excise tax penalties, even with penalty waivers for reasonable cause.

Moreover, communications to participants must be designed and pushed out well in advance of the end of this year and service providers have to be ready to answer questions in their customer service functions once communications to participants start flowing. The more time available to design these communications the better. Thank you for your time.

MR. WELLER: Let me ask a question here. First off, I'd like to say that I agree with you that it would not be appropriate to just provide secure guidance directly, you know, final regulations without notice and comment. So I think the community can rest assured that we are not going to be doing that.

But assuming that we are going through a process where we do notice and comment for secure guidance, and you're assuming for the moment you're asking for six months lead time, which path would you be recommending that we would do? That we have the effective date that we proposed in these regulations and have a separate process for Secure? Or have a process for Secure and delay the effective date of these regulations so they would not go into effect for 2021?

MS. WIELOBOB: I'd say the latter.

MR. WELLER: So you think the coordination of the timing of doing all the 401(a)(9) changes together outweighs the benefit of getting the longer life expectancy tables in sooner?

MS. WIELOBOB: In the macro sense, or just as a procedural matter, yes. In the macro sense and thinking about principles of spreading — extending the lifespan of benefits into longer years. I mean, I think the question is comparing apples and oranges. But just for a matter of simplicity and what would certainly be in the interest of our members, making it easier for the people that work with plans, I think the latter path is preferable.

MS. JUDSON: Can I follow up with some questions? First, I want to note that in terms of guidance, it's a general principle that we don't issue final regs without natural outgrowth. So I think what it is, is just to the extent there's been a new statutory change, of course, we would consider that, and consider that in terms of any guidance on a totally separate set of changes.

But that gets me to my underlying question which is, can you help explain to me how you view the mortality tables so linked with the RMD starting date or other things that changed in the Secure Act? Because I could see some people would view those as separate things. You know, you determine when someone needs to start taking RMDs and how old they are. But then once you do that you just look to the tables, and if the tables change why would they be some intertwined?

MS. WIELOBOB: Yeah. I mean, I understand that. I've thought about that myself and I just think that it's from a system's perspective of our members, the software design and the TPAs it is, sort of, taking on two different sets of reprogramming issues in mind at the same time. I hear you. And I actually — we'd be happy to follow up on that point.

I know that Marty has more detailed thoughts on that than I do. But it is — that is the question.

MS. JUDSON: And we always welcome additional information if you have it.

MS. WIELOBOB: Okay.

MS. JUDSON: But so it's partly a bandwidth programming issue —

MS. WIELOBOB: Yes.

MS. JUDSON: — that you're —

MS. WIELOBOB: Yes.

MR. WELLER: When you're just focusing on that question can you also think in terms of the effective dates of Secure, as you say, are earlier. So the programming involved is being done or should be started as we speak.

MS. WIELOBOB: Correct.

MR. WELLER: So postponing the life expectancy so that the programming for that is going to be — say we work on the same six month assumption for the moment — so we're talking about is the programming for that going to be done in the second half of 2020 or the second half of 2021 is really what the focus is here, when you have to do some programming right now for things that are effective January 1, 22 days ago.

MS. WIELOBOB: Yes.

MS. MARSHALL: Right. And, you know, they're not going to be able to bump that programming off until we issue final regulations on the other 401(a)(9) changes regardless, because as you point out, the statute is effective immediately.

MS. WIELOBOB: Right.

MS. JUDSON: So I think some additional information, including addressing when people would expect to do the programming to implement Secure which, as was stated, is already effective, would be helpful.

MS. MARSHALL: I think it would also be helpful if we could get an idea about the magnitude of the programming costs related to adopting the new life expectancy tables. We asked for comments on that in the preamble and we got a couple of comments saying they're significant. But it would be helpful if we could get more specific information.

MS. WIELOBOB: Like real numbers.

MS. MARSHALL: Yes.

MS. JUDSON: Any other questions from the panelists? Thank you so much.

MS. WIELOBOB: You're welcome. Thank you.

MS. JUDSON: Next we have Mark Griffin from the Community of Annuity Insurances. Sorry, the Committee of Annuity Insurers. And I neglected to point out that we have this sophisticated light system, and so when it goes yellow you have one or two minutes left.

MR. GRIFFIN: Are you suggesting I'm going to be long-winded, is that what you're doing?

MS. JUDSON: I don't know. I just should —

MR. GRIFFIN: Okay. Thank you for the opportunity to speak today on the notice of proposed rulemaking setting forth the proposed updated RMD mortality tables. I'm Mark Griffin. I'm here on behalf of the Committee of Annuity Insurers. I'm a partner in the Washington D.C. law firm of Davis & Harmon LLP which serves as council to the committee.

The committee commends the Treasury and the IRS for taking the steps to update the mortality tables. We think that they have a potential for benefiting millions of plan participants, IRA owners, their beneficiaries, and retirees. The notice of proposed rulemaking was in response to President Trump's executive order 138-47, strengthening retirement security in America.

And the fact sheet that accompanies the executive order indicates that updating the RMD mortality tables is needed because more than half of all Americans are concerned they're not going to have enough savings to last through their retirement. I noticed the comments that were filed by individuals on the proposed rulemaking echo that and bear out that concern.

The stated goals of the executive order also include allowing retirees to keep money in their retirement plans and IRAs longer, and allowing them to spread those funds over a longer number of years. And what I want to talk about today is that the committee believes that those goals can be better served by doing three things.

One is basing the mortality tables on longer life expectances. Two, allowing the updated uniform lifetime tables to be used in applying the minimum income threshold test, or the MIT test, that is in the regulations currently and applies to commercial annuities that have certain increases in annuity payments. And three, updating the mortality tables every year, or every ten years, excuse me.

And, in addition, in light of the changes made by the Secure Act to the post-death RMD rules, we would respectfully ask that the effective date of the proposed mortality tables be delayed a year.

So, first, starting with the mortality tables. The notice of proposed rulemaking says the Treasury Department and the IRS have determined that the tables do need to be updated and the committee agrees. We think and recognize that there are a lot of different tables that could be used.

But the committee believes that the stated goals of the executive order to allow more money to be spread out over longer years and retained in plans longer can be better served by using tables that are based on the 2012 individual annuity reserving table with mortality improvements projected through at least 2021, if not longer, and using mortality improvements from the scale G2.

Those mortality rates would be more favorable than the ones in the proposed regs and we think that's appropriate for a number of reasons. Implicit in any table of life expectancies, it's half the population is going to outlive those estimate life expectancies.

So starting with life expectancies that are longer, it will help those people, especially those that live — that half of the population that outlives their estimated life expectancy to better keep assets in their retirement plans.

And, also, we noticed that for those people, to the contrary, the proposed tables actually reflect life expectancies that remain or actually decrease in that critical period where people outlive their life expectancies, beginning at age 92 through 103.

The 2012 IRA table is a prescribed table for statutory reserve purposes under state law for individual annuities, and just like those tables, operate to ensure that insurers have sufficient assets and reserves to meet their future obligations.

So two showed the mortality tables and the RMD regs provide that retirees, especially those who are going to outlive their life expectancy, have sufficient assets to be able to meet their financial needs and costs during their retirement years.

Also, it's important to note that the proposed tables are only updated to reflect mortality improvements through 2021. So beginning in 2021, they will all, they'll start to become outdated over time. So there is another reason why using higher life expectancies now we will help protect against the erosion of those life expectancies over time.

In addition, we think that it's very important that the final regulations address how the mortality tables apply to the minimum income threshold test, the MITT. That life annuities are uniquely positioned to further the purpose of the executive order because they're the only means that individuals have to guarantee that they will not outlive their assets and defined contribution planner and IRA.

The MITT was designed to prevent annuity payments that increase to the extent that they're viewed as providing impermissible backloading or deferral by requiring that the total value being annuitized has to be less than the total expected future payments that's computed in part assuming that only a single life table is used where there is just the life annuity and joint tables are sued where there's a joint life payout.

An operation, that rule operates to prevent important traditional and common forms of life annuities from being issued in irrational circumstances that don't further the objective of that rule and it makes annuities — life annuities — unavailable for those people who are trying to seek security through retirement by using guaranteed lifetime income.

The updated mortality tables will help to alleviate some of the incidents and degree of the problem but it won't solve the problem. The problem with the MITT will be virtually eliminated simply by allowing the application of the uniform lifetime table to and implementing the MITT both for single and joint life annuities.

The uniform lifetime table is already available for individual accounts, even for an individual who does not have a designated beneficiary and is only taking payments over there, for their life.

If this proposal is adopted and there's still a concern that the annuities could provide impermissible backloading, the committee is — thinks it's appropriate to apply the same five percent cap on increases in annuity payments for commercial annuities that are already in the regs for increase for defined benefit plans.

We think that the need for the guidance is critical and urgent because of the changes made by the Secure Act. Under the new law, the entire interest of an employee or an IRA owner has to be distributed within 10 years of their death or after an individual — an eligible beneficiary — dies within 10 years so more companies and contracts are going to be subject to this new rule.

We think that we — in light of that rule, as I mentioned more of those annuity streams are going to have to be commuted within 10 years after death. So and that includes annuities that have terms of at least 10 years and joint survivor annuities could also potentially be caught by these rules.

Regarding the frequency with which the tables should be updated, the committee believes that they should be updated every 10 years. We think that strikes a balance between the need to make the tables effective and also protect against undue burdens for administering and implementing the new rules.

Lastly, the notice of proposed rulemaking says that the new tables would be applicable for distributing calendar years beginning on or after January 1, 2021. The committee respectfully requires in light of the implementation of the Secure Act changes that need to be made, if that effective date be pushed off one year delayed.

In conclusion — and the committee would like to commend the Treasury and the IRS for taking the steps to update the mortality tables and we want to thank you for the opportunity to speak today.

We think that there are certain improvements we have suggested that be made to implement the new rules but we are fully supportive of updating the mortality table. Thank you.

MS. JUDSON: Thank you.

MR. WELLER: So let me understand on the reserving table, a reserving table builds in a margin for adverse experience on the part of the insurance company essentially if they have a pool of annuitants that live longer than average. Why is that theoretically appropriate for like an individual in, when you're doing a life expectancy calculation?

MR. GRIFFIN: The, as I understand it, the tables, the reserving tables are based off the 2012 IAM period tables which include a margin. That margin decreases and is eliminated over the life of the table but they also reflect, the reserving table also reflects mortality improvements based on the scale G2 from 2012 through 2021.

The IAR table is, they call it the generational table which makes a difference, which means that they can project beyond 2021.

But we are trying to come up with rules that apply on an individual basis based on information that you want to put in that this universal applicability. So I'm not sure I understood your question and why that's different for an annuity then it would be for an (inaudible).

MR. WELLER: Yeah, I guess the question is the purpose of the reserving table is to make sure that insurance company is able to meet its contractual commitments to pay these payments over a lifetime. And in the context of the minimum distributions there is not a contractual obligation.

If someone lives longer — in fact they do start — they start drawing down more slowly just because they're going to have a smaller account balance.

So I'm, it seems like it's apples and oranges to apply a reserving table or this individual process of drawing down their account.

MS. JUDSON: And I had a related question. Wouldn't a table developed for individual annuities, wouldn't people who purchase individual annuities, wouldn't there be some self-selection based on health and so would that also not appropriately reflect the group that would be covered by plans?

MR. GRIFFIN: The — to answer your question first, Harlan, the point is that the life expectancy tables are only essentially an average. So they don't account for the fact adequately that people are going to outlive their life expectancy even though they're designed to draw them down, the amounts down quicker.

So for example, the single life tables that are proposed actually show declining or flat life expectancies for the people starting in age 92. which is the time that they need to be increased. That's the goal of the executive order, to make sure that they last longer, not get accelerated more quickly.

And those single life tables are reflected, I assume, in the joint life table and in the uniform lifetime table so they have the same impact. And because the uniform lifetime table is based on people 10 years apart, you would expect that once both of those people get into the 90's, that you would see this effect. And if you look at the uniform lifetime tables, you will see that's the impact beginning shortly after age 100.

So it's all, the table is always going to require that you be able to recalculate based on your age at a certain time for accounts. The point is that that line, that recalculation needs to be moved further to older ages.

MR. WELLER: No other questions.

MS. JUDSON: On the MITT issue, I will also note that as we indicated, this proposed reg. deals with tables, not other rules, and we always have a process to request that items be included on the priority guidance plan.

MR. GRIFFIN: This has been requested on the plan and this is also I think an opportunity. It does address the application of the uniform lifetime table which is being updated. It also is implicated by the Secure Act. So you'll have two bites at this apple.

MR. WELLER: So let me make sure I understand the interaction with the Secure Act. You're saying that the requirement to pay over a 10 year period in the case of someone who has not an eligible designated beneficiary, that accelerated payment is a payment which by the current regulations would trigger the implementation of the minimum income threshold test. So more annuities are going to be subject to that test.

MR. GRIFFIN: That's right. There's a rule that treats commutations or accelerations as increases even though they don't result in deferral that need to be subject to the tests.

So now that these new rules under the new law, more and more companies and contracts are going to be subject to the MITT including the problems that we are facing with it.

MR. WELLER: Thank you.

MR. GRIFFIN: Sure.

MS. JUDSON: Do panelists have any additional questions? Thank you so much. Would anyone in the audience like to speak?

Thank you all for attending. This concludes the public hearing on proposed regulations, Reg. 132210-18, updated life expectancy and distribution period tables used for purposes of determining minimum required distributions. Thanks so much for joining us.

(Whereupon, at 10:31 a.m., the HEARING was adjourned.)