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T. Rowe Price Suggests Changes to Proposed MRD Regs

MAY 23, 2001

T. Rowe Price Suggests Changes to Proposed MRD Regs

DATED MAY 23, 2001
DOCUMENT ATTRIBUTES
  • Authors
    McCauley, Patricia A.
  • Institutional Authors
    T. Rowe Price Associates Inc.
  • Cross-Reference
    For a summary of REG-130477-00 and REG-130481-00, see Tax Notes, Jan.

    15, 2001, p. 311; for the full text, see Doc 2001-1780 (27 original

    pages) [PDF], 2001 TNT 14-131 Database 'Tax Notes Today 2001', View '(Number', or H&D, Jan. 12, 2001, p. 977.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    profit-sharing plans
    annuities, employee, exempt organizations
    IRAs
    pension plans, required minimum, shortfall
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-17813 (14 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 130-16

 

=============== SUMMARY ===============

 

Patricia A. McCauley of T. Rowe Price Associates Inc., Baltimore, Md., has suggested changes to the proposed regs on the calculation of minimum required distributions (MRDs) from qualified plans, IRAs, and other related retirement savings. (For a summary of REG-130477-00 and REG-130481-00, see Tax Notes, Jan. 15, 2001, p. 311; for the full text, see Doc 2001-1780 (27 original pages) [PDF], 2001 TNT 14-131 Database 'Tax Notes Today 2001', View '(Number', or H&D, Jan. 12, 2001, p. 977.) Specifically McCauley suggests (1) clarifying that MRDs distributed in 2001 under the 1987 proposed regs were properly handled; (2) modifying Q&A-3(b) to provide that if an employee's benefit is divided into separate accounts the special account rules of Q&A-2 and Q&A-3 of reg. section 1.401(a)(9)-8 apply; and (3) specifying that contributions and forfeitures are counted no earlier than the year in which they are actually deposited in the plan. She also recommends allowing plans to negotiate how and when MRDs will be paid under spinoffs, mergers, transfers, and consolidations.

 

=============== FULL TEXT ===============

 

May 23, 2001

 

 

CC:M&FP:RU (REG-130477-00/REG130481-00)

 

Room 5226

 

Internal Revenue Service

 

Post Office Box 7604, Ben Franklin Station

 

Washington, DC 20044

 

 

Re: Required Minimum Distributions From Qualified Plans,

 

403(b)s, 457s and IRAs

 

 

Dear Sir or Madam:

 

 

I am writing on behalf of T. Rowe Price Group, Inc. about proposed regulations recently issued by the Internal Revenue Service ("IRS") with regard to minimum required distributions ("MRDs") under Internal Revenue Code ("Code") section 401(a)(9) ("2001 proposed regulations").

T. Rowe Price heartily applauds the effort made by the Treasury Department and the IRS in developing these proposed regulations. We feel these proposed regulations are a significant improvement and simplification of the proposed regulations that were issued in 1987 ("1987 proposed regulations"). In general, the proposed regulations are so simple, the average IRA or 403(b) owner should have no trouble calculating his or her own MRD.

Nonetheless, we have serious objections to the reporting requirements of proposed Treasury Regulation section 1.408-8, Q&A-10. Our other comments on the proposed regulations involve additional improvements, recommendations for simplification or requests for clarification.

Our comments on the proposed regulations, which are presented in the same order as the proposed regulations themselves, are as follows:

AMENDMENT OF QUALIFIED PLANS

1. ADAPTATION OF MODEL AMENDMENT -- IRS and Treasury officials have stated informally that if a sponsor of a qualified plan adopts the model amendment set forth in the 2001 proposed regulations, all MRDs for the year in which the model amendment is adopted must be calculated in accordance with the terms of the 2001 proposed regulations. Unfortunately, the IRS did not issue the proposed regulations until mid-January 2001. By the time an employer learned of the 2001 proposed regulations and was contemplating adopting the model amendment, it may have already distributed one or more MRDs for 2001 under the 1987 proposed regulations. The IRS should issue immediate guidance clarifying that MRDs distributed in 2001 under the 1987 proposed regulations before a plan sponsor implemented the 2001 proposed regulations were properly handled notwithstanding adoption of the model amendment.

2. PROTOTYPE PLANS -- Some prototype plan sponsors do not want to adopt the model amendment for their prototype plans. These prototype plan sponsors recognize, however, that some adopting employers may want to adopt the model amendment. The IRS should clarify that adoption of the model amendment by an employer user of a prototype document will not cause the employer's plan to be treated as an individually designed plan.

PROPOSED EFFECTIVE DATE

Based on statements made by officials in Treasury and the IRS, it seems clear that Treasury and IRS intend that a participant in a qualified plan may choose to follow either the 1987 proposed regulations or the 2001 proposed regulations for MRDs paid for 2001, regardless of whether the qualified plan is calculating MRDs using the 1987 proposed regulations or the 2001 proposed regulations. We recommend that the IRS clarify in the final regulations that this is, in fact, the case. Further, we request that the final regulations state that: (1) the plan sponsor is not required to notify participants of their ability to follow either the 1987 proposed regulations or the 2001 proposed regulations notwithstanding the plan's method of calculating MRDs for 2001, and (2) a plan sponsor that does not adopt the model amendment for 2001 is not required to notify a participant of the participant's MRD for 2001 calculated under the 2001 proposed regulations.

SECTION 1.401(a)(9)-2 DISTRIBUTIONS COMMENCING BEFORE AN EMPLOYEE'S DEATH

Q&A-2(e) provides that a plan may provide that the required beginning date for all employees is the April I following the year in which an employee attains age 701/2. If an employee who is not a 5 percent owner has not retired by that date, the plan's required beginning date comes before the statutory required beginning date. To be consistent with statements made by IRS and Treasury officials that individuals may use the 2001 proposed regulations to calculate their MRDs regardless of whether the plan has adopted the model amendment, the IRS should also clarify that any employee in a plan that defines the required beginning date only in terms of attaining age 70 1/2 may elect to follow the statute and final regulations in calculating his or her MRD. Thus, for distributions received in years before the participant's statutory first distribution year, no amount will consistent of an MRD and the distribution will qualify for roll over treatment (to the extent otherwise allowed).

SECTION 1.401(a)(9)-3 DEATH BEFORE REQUIRED BEGINNING DATE

1. SEPARATE ACCOUNTS AND THE LIFE EXPECTANCY RULE -- The last sentence of Q&A-3(a) provides that if an employee's benefit is devided into separate accounts, the special separate account rules of Q&A-2 and Q&A-3 of Section 1.401(a)(9)-8 apply. This last sentence of Q&A-3(a) also applies when a spousal beneficiary is not the sole designated beneficiary. Therefore, we recommend that a reference like that in the last sentence of Q&A-3(a) be added to Q&A-3(b).

2. NON-SPOUSE BENEFICIARIES AND THE "DEFAULT" RULE -- Q&A-4 generally provides that the default rule is the life expectancy rule of Code section 401(a)(9)(B)(iii). Treasury and IRS officials have stated that it is intended that the life expectancy rule can be used even if the first payment is not made within the one-year period. We request that the IRS clarify this in the final regulations.

SECTION 1.401(a)(9)-4 DETERMINATION OF THE DESIGNATED BENEFICIARY

1. IDENTITY OF DESIGNATED BENEFICIARY -- The last sentence of Q&A-1 states, "The fact that an employee's interest under the plan passes to a certain individual under applicable state law does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan." Presumably, this language reflects the thought that the determination of a beneficiary in a qualified plan should not be preempted by state law. (See, e.g., the recent Supreme Court decision in Egelhoff v. Egelhoff.) However, not all plans subject to the MRD rules are subject to ERISA (e.g., IRAs, some 403(b)s, etc.). Therefore, we recommend that the IRS provide guidance involving situations where state law would provide that some or all of the assets would pass to an individual other than an individual named as beneficiary under the terms of a plan, such as instances where an individual lives in a community property state or when a spouse claims his or her spousal share under state law.

2. WHO IS A DESIGNATED BENEFICIARY -- The parenthetical in the first sentence of Q&A-1 should read "(or the employee's beneficiary)."

3. DATE DESIGNATED BENEFICIARY IS DETERMINED -- The first sentence of Q&A-4(b) contains a typographical error. The phrase "this A-5" should read "this A-4."

4. DATE OF DETERMINATION OF DESIGNATED BENEFICIARY -- We think it is an excellent idea that the designated beneficiary is determined at some particular date after the date of death of the participant. However, using December 31 of the year after the year in which the individual died as the date on which the determination is made presents a practical challenge. It is very difficult (if not impossible) to calculate and pay an MRD on the same date that the determination of the "designated beneficiary" is made.

As a practical matter, the MRD generally is paid sometime before December 31 of the year after the year of the individual's death. For instance, suppose Employee Z dies with his two surviving children as his named primary beneficiaries, sharing equally. Child A takes her half share of the decedent's account in the year Employee Z died. Child B elects to receive his share over his life expectancy. In mid-December of the year after the year of the employee's death, Child B receives a distribution of the MRD for that year based on his life expectancy. On December 30 of the same year, Child B dies. On December 31 of the year after the year of Employee Z's death, Child B is not the designated beneficiary. (A similar but much more complex timing issue arises in the context of lifetime distributions in determining whether a spouse is the sole primary beneficiary "at all times during the entire distribution calendar year." See discussion below.)

We recommend that September 30 (or possibly October 31) of the calendar year following the calendar year of the employee's death be the date for determining the designated beneficiary so IRA beneficiaries and plan administrators will have sufficient time to determine the designated beneficiary(ies), perform the calculations and make the minimum required distribution by the end of the year.

5. TRUST NAMED AS BENEFICIARY -- Q&A-5(b) specifies standards that must be met for the beneficiaries of a trust to be treated as if they are beneficiaries of the employee or IRA or 403(b) owner. Q&A- 6(a) and (b) might be interpreted that it is the individual's choice whether to make certifications (Q&A-6(a)(2) and (b)(1)) or give the paperwork to the plan administrator and have the plan administrator make the determination (Q&A-6(a)(1) and (b)(2)). The final regulations should clarify that it is the plan sponsor's/IRA trustee's/403(b) custodian's choice whether to require certifications.

SECTION 1.401(a)(9)-5 REQUIRED MINIMUM DISTRIBUTIONS FROM DEFINED CONTRIBUTION PLANS

1. DETERMINATION OF DECEMBER 31 ACCOUNT BALANCE -- Q&A-3(b) provides that contributions, forfeitures, etc. that are added to the account balance during the distribution calendar year that are allocated as of December 31 of the preceding year (i.e., the valuation calendar year) must be counted as part of the December 31 account balance of the preceding year (i.e., the valuation calendar year). (For this purpose, we assume December 31 is the last valuation date in the year.)

This requirement presents significant practical problems because additions during the distribution calendar year that are allocated as of the previous year may not be made until after the MRD for the distribution calendar year is calculated and paid. For instance, contributions to a qualified plan (or a SEP or SIMPLE IRA) for a plan year need not be made until the due date of the plan sponsor's tax return (plus extensions). This could be as late as 8 1/2 months after the end of the valuation calendar year. Similarly, an IRA owner may make a contribution for his or her first valuation calendar year as late as April 15 of his or her first distribution calendar year 1 In all of these instances, however, it may be necessary to calculate the MRD before the contribution is made (e.g., the employee decides to take a total distribution in January of the distribution calendar year).

We request that the final regulations provide that contributions, forfeitures, etc. be counted no earlier than the year in which they are actually deposited in the plan.

2. SPOUSAL EXCEPTION WHILE THE EMPLOYEE IS ALIVE -- Q&A-4(b) provides that the table in Q&A-4(a)(2)(i) is not used to calculate the MRD if the employee's sole beneficiary at all times during the distribution calendar year is his or her spouse and the spouse is more than 10 years younger than the employee. This standard presents an insurmountable practical challenge because the date that the plan sponsor can know the spouse has been the sole beneficiary for the entire year generally is the last date that the MRD payment for a year can be paid. Also, it is difficult to determine if an individual has been named as a beneficiary for a period of time rather than on a particular date.

Certainly, any standard should be relatively simple to understand and apply. This is particularly true in the context of IRAs and 403(b)s because many IRA and 403(b) owners calculate the MRD themselves and need time for the IRA or 403(b) custodian to effect their requests for the MRD. And, of course, taxpayers, the IRS and the financial industry want substantially identical rules to apply to all plans (qualified plans, IRAs, 403(b)s and 457 plans) to the extent possible.

Possible standards include:

a. Require that the spouse be the sole primary beneficiary for all of the first nine months of the distribution calendar year. (The nine month period would give the IRA or 403(b) owner or the plan administrator time to make the determination, perform the calculation and distribute the MRD before the end of the year. However, if an MRD must be distributed before September 30 of a distribution calendar year, the plan administrator or IRA or 403(b) owner will not know if the requirement is satisfied when the MRD must be calculated and paid.)

b. Require that the spouse be the sole primary beneficiary on September 30 of the distribution calendar year. (See the comment in the parenthetical in paragraph a above.)

c. Retain the proposed standard but delay the due date for all MRD payments (including those to designated beneficiaries, see comment #4 under Section 1.401(a)(9)-4 above) for all years until the immediately following April 1. However, this is not an attractive solution because for each distribution calendar year that an MRD is delayed until the following distribution calendar year, the adjustment to the valuation calendar year described in Q&A-3(c)(2)(i) would be required (and Q&A-3(c)(2)(i) would have to be modified accordingly). Just as important, this standard would not solve the "early" distribution problem described in the parenthetical in paragraph a above.

d. Require that the spouse be the sole primary beneficiary for the entire valuation calendar year. Under this standard, the IRA or 403(b) owner will know (and the plan administrator may better know) if the standard has been met on the first day of the distribution calendar year. (This raises an interesting issue where a single individual gets married in year 0. Even if the new spouse is named as the sole primary beneficiary on December 31 of year 0, the individual will not be able to use the spousal exception until year 2.)

e. Require that the spouse be the sole primary beneficiary on December 31 of the valuation calendar year. This standard has the same advantage of option d, and has the added advantage of allowing a newly married employee to use the spousal exception earlier. Another advantage is that the determination is made on a particular day (which also is usually the day the account balance must be determined) rather than over a period of time.

Frankly, we think option e is by far the most workable standard. Therefore, we recommend that the final regulations provide that the table in Q&A-4(a)(2)(i) is not used for a distribution calendar year if the employee's sole beneficiary on December 31 of the valuation calendar year is his or her spouse and the spouse is more than 10 years younger than the employee.

3. APPLICABLE DISTRIBUTION PERIOD FOR POST-REQUIRED BEGINNING DATE DEATH -- Under Q&A-5(a)(1), a designated beneficiairy who is older than the employee would have a shorter distribution period than a beneficiary (e.g., trust or estate) that does not qualify as a designated beneficiary. Therefore, we request that Q&A-5(a)(1) be rewritten to provide that the applicable distribution period is "the longer of (i) the life expectancy of the employee's designated beneficiary determined in accordance with paragraph (c)(1) or (2) of this A-5, or (ii) the remaining life expectancy of the employee determined in accordance with (c)(3) of this A-5; or". The suggested change would produce the same applicable distribution period for a designated beneficiary who is older than the employee as the applicable distribution period for a beneficiary does not qualify as a designated beneficiary. This change also would be consistent with the measurement of the applicable distribution period determined in accordance with Q&A-7(c)(2) of the same proposed regulation section.

4. POST-DEATH APPLICABLE DISTRIBUTION PERIOD -- We request that Q&A-5(b) and (c)(1) be modified to delete the word "remaining." In each instance, no life expectancy of the beneficiary was being measured before the employee's death for the beneficiary to have any remaining life expectancy after the employee's death.

5. POST-DEATH APPLICABLE DISTRIBUTION PERIOD FOR SPOUSE DESIGNATED BENEFICIARIES -- The second sentence of Q&A-5(c)(2) should read, "for the calendar year after . . ."

SECTION 1.401(a)(9)-7 ROLLOVERS AND TRANSFERS

1. DISTRIBUTION FROM ONE PLAN IS ROLLED OVER TO ANOTHER PLAN -- With respect to the last sentence of Q&A-2, a recipient plan, which is responsible for determining and distributing that plan's MRDs, cannot know that the distribution it is receiving was made to the employee in a prior year. Plan sponsors currently must perform due diligence in determining whether to accept each rollover. That due diligence does not now involve determining when distributions were made because the 60-day rollover test is based on date of receipt by the employee, not date of distribution by the plan. In addition, in the instance of direct rollovers, there is no time by which the direct rollover must be deposited in the receiving plan or IRA. Sometimes these checks are deposited many months after the distribution is made. For instance, some plans send direct rollover checks to the employees who sometimes then delay delivering the check to the receiving plan or IRA trustee.

If this rule survives, plan sponsors may decide to forego accepting rollovers so that they will not have to determine the year rollover amounts were distributed. Alternatively, a plan sponsor may refuse to accept rollovers from participants age 69 1/2 and older.

Based on the foregoing, we recommend that the last sentence of Q&A-2 be deleted so that in all cases any amount rolled over to a receiving plan is counted as an asset of the receiving plan no earlier than the date it is deposited in the receiving plan.

This issue is not as much of a problem in the instance of a rollover to an IRA or 403(b) (see Prop. Reg. sections 1.408-8, Q&A- 7 and 1.403(b)-2, Q&A-1(b)) because the IRA or 403(b) owner, who is responsible for the MRD calculation, will know the year of the distribution from the Form 1099-R for the distribution. However, an IRA trustee that may be required to calculate and report an IRA owner's MRD for a year cannot know when the plan made the distribution. Therefore, in the interest of consistent application of the MRD rules to all types of plans, IRAs, 403(b)s, etc., we recommend that section 1.408-8, Q&A-7 be revised so that in all cases any amount rolled over to an IRA is counted as an asset of the IRA no earlier than the date it is deposited to the IRA.

2. "HOLDBACKS" BY TRANSFEROR PLANS -- Q&A-3 says the transferor plan "may" retain the MRD for the year. This option does not seem workable. First, if assets retained to pay the MRD are invested, the assets may gain or lose value; if they lose value, the transferor plan will not have enough assets to distribute the entire MRD. More important, the transferor plan will not be able to calculate the MRD for a year if (1) the participant died in the previous calendar year and the final regulations retain the standard that the determination of the designated beneficiary is not made until December 31 of the year after the participant's death, 2 (2) the participant's sole beneficiary is his spouse who is more than 10 years younger and the final regulations retain the requirement that the spouse must be the sole beneficiary for the entire year, 3 or (3) contributions attributable to the valuation calendar year are not made until a date after the date of transfer. 4 Finally, in the instance of a plan merger (see Q&A-5 of the same proposed regulation section), it is not practical to expect the transferor plan to merge anything but ALL of its assets into the transferee plan.

We recommend that, in the instance of transfers, spinoffs, mergers and consolidations, the plans involved be allowed to negotiate how and when MRDs will be paid, subject to the general rules for determining and distributing MRDs.

SECTION 1.401(a)(9)-8 SPECIAL RULES

1. SEPARATE ACCOUNTS -- The separate account rule in Q&A-2 is a very helpful clarification of prior guidance issued in PLRs after issuance of the 1987 regulations. However, we do not think it is appropriate to require that gains, losses, contributions, etc. be allocated on a pro rata basis between the separate portions of the employee's benefit. For instance, in the instance of a deceased employee, it is very common to set up actual separate accounts so each beneficiary of the employee can direct his/her own investments, decide when and how to take a distribution (subject to plan rules), etc. Pro rata allocation of gains and losses is not appropriate in those circumstances. Therefore, we recommend that the first sentence of Q&A-3(a) be amended by deleting the phrase "on a pro rata basis" from the first sentence thereof.

2. TYPOGRAPHICAL ERROR -- The word "matter," in the first sentence of Q&A-3(a) should be replaced with the word "manner."

3. QDROs -- In most defined contributions plans, once a separate account (or segregated share) is established for an alternate payee, that separate account is treated for all purposes as if it is held solely for the benefit of the alternate payee. To the extent consistent with the terms of the plan, the alternative payee controls the investment of the separate account's assets, the time distributions are made from the separate account, etc. In such instances, it is inappropriate to apply the MRD rules to the alternate payee's separate account as if the assets in the account were still held on behalf of the employee. Therefore, we recommend that Q&A-6(b) be rewritten to provide that, for all purposes, the MRD rules will apply to an alternate payee's separate account using the alternate payee's age, required beginning date, etc.

4. CODE SECTION 41(d)(6) BENEFIT OPTIONS -- The first sentence of Q&A-12 could be interpreted such that the 1987 proposed regulation options included in a qualified plan are protected benefits under Code section 411(d)(6). The range of options available under the 1987 proposed regulations are complex and confusing. Forcing an employer to treat such plan options as protected benefits, even during the relatively short period of time before which they may be eliminated under the recently finalized protected benefit regulations, will add even more complexity to the MRD rules. We strongly recommend that the IRS exercise its discretionary authority to provide that 1987 proposed regulation options included in a plan are NOT Code section 411(d)(6) protected benefits.

SECTION 1.408-8 DISTRIBUTION REQUIREMENTS FOR INDIVIDUAL RETIREMENT PLANS

1. PLAN-TO-IRA AND IRA-TO-IRA ROLLOVERS -- We are confused by the first sentence of Q&A-7. Is this intended to describe the situation where the surviving spouse is the beneficiary of an employee's interest in a qualified plan and the surviving spouse rolls over that interest to an IRA in the name of the deceased employee? We request that the IRS clarify what is intended in this sentence.

2. IRA-TO-IRA TRANSFERS -- Like the 1987 proposed regulations, the second sentence of Q&A-8 provides that if an individual subject to the MRD rules transfers the assets in an IRA to another IRA, the MRD must be paid before the transfer is effected. This proposal is inconsistent with the aggregation guidance provided in section 1.408- 8, Q&A-9. That is, the MRD for the IRA that is being transferred may already have been distributed from another IRA that the individual holds as the IRA owner. We recommend, therefore, that the IRS not require that the transferor IRA must distribute any amount before the transfer.

3. IRA REPORTING REQUIREMENTS -- We are strongly opposed to the MRD reporting requirements proposed in Q&A-10. We are very concerned that the MRD amounts reported to the participant and the IRS will be incorrect because the IRA trustee has incomplete or out of date information.

The factors that will lead to incorrect calculation of MRD amounts by IRA trustees for IRA OWNERS include, but are not limited to:

a. The IRA trustee will be missing the date of birth of the IRA owner. Date of birth is not required to open an IRA account. Many IRA trustees ask for date of birth, but sometimes it is not provided.

b. If the IRA owner's spouse is the sole primary beneficiary,

i. The IRA trustee does not have the date of birth of the spouse. Again, the IRA owner does not always provide this information.

ii. The trustee has not been informed that the spouse has died. This is not an unusual situation. Benefits are not due when the beneficiary of an IRA owner dies, so the IRA owner has no reason to tell the IRA trustee his or her spouse has died. One might think that the IRA owner would want to change his or her beneficiary after the beneficiary's death. However, if the IRA owner had previously named a secondary beneficiary (e.g., children), the IRA owner may be content with the secondary beneficiary taking the benefits after the owner's death. Thus, an IRA owner commonly won't inform an IRA trustee of his or her spouse's death and may not even change his or her beneficiaries after the spouse's death.

iii. The trustee has not been informed that the spouse and IRA owner are divorced. Unless all or part of the IRA is awarded to the spouse in the divorce, the IRA owner has no reason to inform the IRA trustee of the divorce. One would think the IRA owner would immediately change his or her beneficiaries, but divorced IRA owners frequently do not. Maybe the divorce decree requires that the ex- spouse be the beneficiary. More likely, the IRA owner just forgets to change it. (See, e.g., Egelhoff)

c. If the requirement that the spouse must be the sole primary beneficiary for the entire distribution calendar year is included in the final regulations, the IRA trustee cannot possibly know until the last day of the year whether the special spousal rule applies.

d. The IRA trustee has not yet been informed that the IRA owner died in a previous year. It is not uncommon that IRA trustees are not informed of an IRA owner's death in the year of death. If an IRA owner dies late in a year, the IRA trustee commonly is not informed of the death until the following year (at the earliest). If the IRA owner has died in a prior year but the IRA trustee does not know it, the IRA trustee is performing the incorrect MRD calculation.

e. Assuming the final regulations are not changed as suggested above for purposes of determining the December 31 account balance, the IRA trustee will not know at the beginning of the distribution calendar year whether the December 31 account balance of the valuation year must be adjusted for contributions, transfers and/or rollovers that are attributable to the valuation year but are not received until the distribution year. In the instance of contributions, the IRA trustee MAY know later in the year that the December 31 account balance must be adjusted for such contributions, but if transfers and rollovers made in the valuation calendar year are received in the distribution calendar year, the IRA trustee will not know that they must be counted as if received in the valuation calendar year.

f. The IRA trustee will not know that a trust beneficiary qualifies for "look-through" treatment.

g. The IRA owner does not inform the IRA trustee of the relationship of the primary beneficiary to the IRA owner. It is important to know whether the primary beneficiary is the IRA owner's spouse if the beneficiary is more than 10 years younger than the IRA owner.

h. The IRA trustee may not know that a surviving spouse beneficiary of an IRA owner has elected to treat the IRA as his/her own.

The factors that will lead to incorrect calculation of MRD amounts by IRA trustees for IRA BENEFICIARIES include, but are not limited to:

a. The IRA trustee is not informed that an IRA owner died in a previous year. (See d above for examples of how this can happen.) If the IRA owner died on or after his or her RBD and the IRA trustee does not know the IRA owner died in a previous year, the IRA trustee is calculating the MRD for the IRA owner instead of for the beneficiary. If the IRA owner died before his or her RBD and the IRA trustee does not know the IRA owner died in a previous year, the IRA trustee will not know that it should be calculating an MRD for anyone.

b. The IRA trustee may know the IRA owner has died and the identity of the named beneficiaries, but it may not know the identity of the designated beneficiaries. For instance, has a named beneficiary predeceased the IRA owner? Is there a disagreement as to who the beneficiary(ies) should be (e.g., Egelhoff situation or spouse claims his/her statutory or community property share, which is more than the spouse otherwise would be entitled to receive under the IRA owner's naming of beneficiaries)? Did the decedent IRA owner live in a community property state and fail to name his or her spouse as beneficiary without appropriate spousal consent? Did the named primary beneficiary kill the IRA owner? (Yes, all of these things actually happen.)

c. The IRA trustee may know that the surviving spouse is the designated beneficiary but does not know that the surviving spouse beneficiary has elected to treat the IRA as his or her own. Whether the surviving spouse has elected to treat the IRA as his or her own makes a big difference in when MRDs must begin and how they are calculated.

d. Assuming that the IRA trustee knows the identity of the designated beneficiaries, the IRA trustee may not have date of birth information for the designated beneficiaries.

e. The relationship of a designated beneficiary to an IRA owner may not be known to the IRA trustee. The relationship must be known to perform any calculations because the MRD rules that apply to surviving spouse designated beneficiaries are very different from the rules that apply to non-spouse designated beneficiaries. Similarly, the IRA trustee may know that the beneficiary is a trust but not know that the beneficiaries of the trust qualify for look-though treatment. All of these factors significantly affect the calculation of the MRD and the year MRDs must begin.

f. In the first distribution calendar year after the death of the IRA owner, the IRA trustee cannot know the identity of the "designated beneficiary" until the date on which the determination of the designated beneficiary is made. Under the 2001 proposed regulations and under our suggestion, this will not be any earlier than the second half of the year.

We have strong misgivings about sending incorrect MRD amounts to both IRA owners and the IRS. All dollar amount reporting information currently delivered to the IRS and IRA owners and beneficiaries is correct (e.g., distributions reported on Forms 1099- R and contributions reported on Form 5498). We think it sets a dangerous precedent to require reporting of information that sometimes will be incorrect. For the same reasons described above, we also recommend that the IRS not impose reporting requirements on custodians of 403(b) accounts and issuers of 403(b) contracts.

Reporting based on assumptions is not a reasonable alternative. Reporting on assumptions, such as assuming the IRA owner is alive, that the primary beneficiary is not the spouse, that adjustments need not be made to the actual December 31 account balance, etc., will produce an even higher number of incorrect calculations. Even if the IRA trustee gives clear and frequent notice to IRA owners and beneficiaries that the calculations are based on assumptions and may be wrong, the natural inclination of IRA owner and beneficiaries is to rely on information provided to them by an IRA trustee.

Therefore, no matter how well or frequently the IRA trustee warns IRA owners and beneficiaries that the calculations may be incorrect, many IRA owners and beneficiaries will nonetheless rely on the incorrect calculations -- especially when the IRA owner and beneficiaries know that the IRA trustee will be reporting the same MRD amount to the IRS. (Because the information is being reported to the IRS, all IRA owners and beneficiaries naturally will expect the IRS to "audit" the IRA owner or beneficiary if the IRA owner or beneficiary does not take at least the amount reported by the IRA trustee.)

In the alternative, we propose that IRA trustees be required to submit to the IRS with each year's December 31 account balance the date of birth in the IRA trustee's records for each IRA owner. The date of birth information would enable the IRS to determine whether an IRA owner is subject to the MRD rules and would better enable the IRS to confirm that the IRA owner is taking the correct MRD. In addition, IRA trustees could be required to annually notify IRA owners who are at least 69 1/2 years old (based on available data in the IRA trustee's records) of the requirement to take MRDs and where IRA owners could find explanatory material.

We also propose that when an IRA trustee is notified and has confirmed an IRA owner has died, the IRA trustee be required to submit to the IRS with each year's December 31 account balance for each such IRA (1) a notation that the IRA is inherited, and (2) in and after the year the beneficiaries are determined, the date of birth of the oldest individual beneficiary of the IRA (if the date of birth is in the IRA trustee's records). In addition, IRA trustees could be required to notify the beneficiaries of the MRD rules, and where IRA beneficiaries could find explanatory materials.

Given the significant simplification of the 2001 proposed regulations and implementation of the foregoing suggestions, we believe MRD compliance would substantially increase.

If the IRS fails to adopt our recommendation regarding reporting, we strongly recommend that the effective date for any reporting requirement be delayed to ensure that IRA trustees have time to make any systems or other changes needed to comply.

MISCELLANEOUS

1. TRANSITION RULES -- The proposed regulations do not contain any rules for transitioning from the 1987 proposed regulations to what will be the final regulations. In the interest of having uniform and simple MRD calculations, we heartily recommend that the final regulations contain no "grandfathering" of any aspects of the 1987 proposed regulations.

Transitioning to the 2001 proposed regulations (or final regulations) while an employee is alive is straightforward. However, transition for beneficiaries of deceased employees is less clear. We recommend that the final regulations provide that designated beneficiaries must apply the final rules as if they were in effect at the time of death of the employee. For instance, a non-spouse designated beneficiary who calculates his or her MRD using the life expectancy method under the 2001 proposed regulations would first calculate his or her age in the year following the year of the employee's death and then reduce it by one for each subsequent year until reaching the year for which the MRD is being paid. This proposal would ensure that all beneficiaries, whether currently in pay status or entering pay status after the regulations are finalized, will be calculating MRDs in the same manner.

2. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS UNDER CODE SECTION 72(t) -- Code section 72(t)(1) imposes a 10% penalty tax on early distributions from a qualified retirement plan as defined in Code section 4974(c). Code section 72(t)(2)(A)(iv) provides an exception from the 10% penalty tax for distributions which are part of a series of substantially equal periodic payments.

IRS Notice 89-25 provides three methods under which distributions will be considered to be substantially equal periodic payments. Under the first method, payments will qualify as substantially equal periodic payments if the annual payment is determined using a method that would be used for calculating the minimum distribution required under Code section 401(a)(9) (the "Section 401(a)(9) method"). Under the second method, distributions will be treated as substantially equal periodic payments if the amount to be distributed annually is determined by amortizing the individual's account balance for the life expectancy of the individual and the individual's beneficiary with life expectancies determined in accordance with the Code section 401(a)(9) regulations using a reasonable interest rate (the "amortization method"). Under the third method, payments will be treated as substantially equal periodic payments if the annual distribution is determined by dividing the account balance by a reasonable annuity factor determined as of the date the payments commence (the "annuity method").

The amortization method and the annuity method are not susceptible to use by the average IRA owner without consulting a financial professional. If the table in proposed regulation section 1.401(a)(9)-5, Q&A-4(a)(2) were extended to ages below 70, an IRA owner could easily structure payments to qualify as substantially equal periodic payments within the meaning of Code section 72(t)(2)(A)(iv) without consulting a financial professional. This would be a substantial boon to IRA owners who desire to take distributions that qualify as a series of substantially equal periodic payments under Code 72(t)(2)(A)(iv). Therefore, we recommend that the table in proposed regulation section 1.401(a)(9)-5, Q&A- 4(a)(2) be extended to ages below 70.

3. MODIFICATION OF SUBSTANTIALLY EQUAL PERIODIC PAYMENTS UNDER CODE SECTION 72(t) -- Section 72(t)(4) provides that if a series of substantially equal payments made over life expectancy is modified before the individual attains age 59 1/2 or within five years of the first payment, section 72(t)(2)(A)(iv) does not apply to the entire series of payments. Because an individual currently using the section 401(a)(9) method or the amortization method may want to use the 2001 proposed regulations or the final regulations to calculate his or her payments, we recommend that the IRS clarify that modifying substantially equal periodic payments under Code section 72(t)(2)(A)(iv) merely to use the 2001 proposed regulations or the final MRD regulations will not comprise a modification within the meaning of Code section 72(t)(4).

We appreciate your attention to these comments. We would be glad to provide additional information or to discuss them with you by telephone, e-mail or in person at your convenience.

Very truly yours,

 

 

Patricia A. McCauley

 

Vice President and Associate Legal

 

Counsel

 

T.Rowe Price Associates, INc.

 

Baltimore, Maryland

 

 

cc: Marjorie Hoffman, Internal Revenue Service

 

Mark Iwry, Department of the Treasury

 

William Sweetam, Department of the Treasury

 

W. Thomas Reeder, Department of the Treasury

 

Deborah Walker, Department of the Treasury

 

FOOTNOTES

 

 

1 This is an issue for an IRA owner's first valuation calendar year because an IRA owner may be eligible to make a contribution for that year.

2 This will be the case even if the date of determination of the designated beneficiary is changed to September 30 (or October 31).

3 Using a standard based on the valuation calendar year could solve this problem.

4 Using a standard based on actual December 31 account balance could solve this problem.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    McCauley, Patricia A.
  • Institutional Authors
    T. Rowe Price Associates Inc.
  • Cross-Reference
    For a summary of REG-130477-00 and REG-130481-00, see Tax Notes, Jan.

    15, 2001, p. 311; for the full text, see Doc 2001-1780 (27 original

    pages) [PDF], 2001 TNT 14-131 Database 'Tax Notes Today 2001', View '(Number', or H&D, Jan. 12, 2001, p. 977.
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    profit-sharing plans
    annuities, employee, exempt organizations
    IRAs
    pension plans, required minimum, shortfall
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-17813 (14 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 130-16
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