Comments Regarding Proposed Regulations Under Code Section 401(a)(9)

April 17, 2001

CC:M&SP:RU
(REG–130477–00/ REG130481–00)
Room 5226, Internal Revenue Service
POB 7604, Ben Franklin Station
Washington, DC  20044

Re: Comments Regarding Proposed Regulations Under Code Section 401(a)(9)

Gentlemen:

The American Society of Pension Actuaries (ASPPA) and its members welcome the January 17, 2001, publication of Proposed Regulations under section 401(a)(9) of the Internal Revenue Code (Code). On behalf of ASPPA and its members, we respectfully submit comments regarding: (1) effective dates and use of the model amendment; (2) establishment of separate accounts; (3) the identification of beneficiaries and the ability to split trusts after the participant's death; and (4) application of the proposed rules to 403(b) plans. In addition ASPPA is considering supplementing these comments at a later date.

ASPPA is a national organization of approximately 4,200 members who provide actuarial, consulting, administration, legal and other professional services for qualified plans and tax-sheltered annuities. ASPPA's members and their clients are committed to compliance with the legal requirements affecting these plans and arrangements.

I. COMMENTS REGARDING EFFECTIVE DATES AND USE OF THE MODEL AMENDMENT

a. With regard to the effective date of the re-proposed regulations, we note that the originally proposed regulations were never finalized. Although the originally proposed regulations were not issued until July 27, 1987, the Service allowed taxpayers to rely on them, pending issuance of final regulations, for calendar years after 1984. Since we presume that the re-proposed regulations are intended to clarify and simplify existing law, we believe it would be fair to taxpayers, including those who began receiving required minimum distributions (RMDs) prior to 2001, to apply the new regulations on a fully retroactive basis back to 1985.

b. ASPPA appreciates the model amendment the Service has provided for implementing the new proposed required minimum distribution rules. However, we would strongly urge the Service to allow for adoption of the amendment at the same time and in the same manner as the other required compliance amendments for GUST (within the GUST remedial amendment period) and that plan sponsors be allowed to administratively apply the new rules without having to first adopt the model amendment. We believe that the approach taken with IRAs (where the IRA sponsor does not have to adopt the amendment in order for the IRA participant to calculate the minimum distributions under the new rules) should be mirrored for qualified plans. Even though the cost of doing a model amendment should be relatively small, there will nevertheless be some cost associated with it for plan sponsors. Permitting plan sponsors to adopt the model amendment concurrently with and as a part of the GUST amendment will reduce the cost of the amendment for smaller plans. Further, it will enable the amendment to be included in the restated document, thus permitting the sponsor and its advisors to utilize one document for purposes of administering the plan in the future. We understand this request to be consistent with the Service's guidance in Rev. Proc. 97-41 (and subsequent pronouncements) that all plan amendments integrally related to GUST can be adopted within the remedial amendment period.

II. COMMENTS REGARDING THE ESTABLISHMENT OF SEPARATE ACCOUNTS

a. Prop. Reg. Sections 1.401(a)(9)-8, A-2 and 3 are very similar to §§ 1.401(a)(9)-1H-2 and H2A of the originally proposed regulations. Under the original proposal, the participant was required to establish a separate account at the earlier of his death or required beginning date. The separate accounts were required to be divided by the governing beneficiary instruments (i.e., beneficiary designation of the IRA). For example, if the beneficiary is a trust and the terms of the trust further divide the IRA benefits into three subtrusts, there are no separate accounts. See PLR 199903050. However, if the decedent had established eight separate IRAs and named the same six individuals as equal beneficiaries of each IRA, each beneficiary would be entitled to a 1/6th interest in each IRA. In PLR 199931048, the Service ruled that separate accounts were created.

The new proposed regulations provide that if death occurs before the required beginning date, separate accounts may be established by the last day of the year following the year of death. However, if death occurs after the required beginning date, the new proposed regulations do not provide the same extended date. Presumably, this omission is an oversight and the outside date for establishment of separate accounts is not the required beginning date. We recommend that the final regulations provide for the same extended date when death occurs after the required beginning date.

b. Proposed Reg. Section 1.401(a)(9)-8, A-2(b) states that separate accounts need not be aggregated for lifetime distributions. In the event that an employee has separate accounts, each with different beneficiaries, it is clear that distributions must be made from each account. It is also clear that after the employee’s death, each beneficiary must distribute the remainder of the account on which they are named as beneficiary over a period not to exceed their single life expectancy. What is not clear is whether multiple beneficiaries on one account may “split” the account into separate accounts after the death of the employee.

For example, assume that employee E has two accounts of equal size, one with his son, S, as the beneficiary and the other with his daughter D. During E’s lifetime, distributions from the two accounts are determined separately using a distribution period based on E’s attained age. After E’s death, S may distribute the balance in his account over S’s life expectancy and D may distribute the balance in her account over D’s life expectancy.

On the other hand, if E simply had one account on which S and D were named as beneficiaries, distributions during E’s lifetime would be calculated on the value of the single account (although it would be mathematically equal to the amount of distributions from the separate accounts just discussed). At E’s death, the regulations as proposed appear to require that the remaining account balance be distributed over the shorter of S or D’s life expectancy.

We recommend that the proposed regulations clarify that S and D may split the account into two separate accounts so that each may distribute their share over their individual life expectancies.

III. COMMENTS REGARDING THE IDENTIFICATION OF BENEFICIARIES AND THE ABILITY TO SPLIT TRUSTS AFTER THE PARTICIPANT'S DEATH

a. Prop. Reg. Section 1.401(a)(9)-4, A-4(b) addresses the situation where the surviving spouse is the participant's designated beneficiary and dies before the required beginning date. The Code treats this situation as if the surviving spouse was the participant and the proposed regulations provide that the relevant designated beneficiary is the designated beneficiary of the surviving spouse. ASPPA recommends that the final regulations clarify that unless the surviving spouse has acted somehow to alter the situation, the Service will treat the original participant's contingent beneficiary as the designated beneficiary of the surviving spouse so that the 5-year rule does not apply.

b. The final regulations should recognize the need for greater flexibility and appropriate discretion in connection with family financial matters. The final regulations should allow practitioners to draft trusts that can be split following the death of the participant. For example, it is not uncommon to have a pot trust for children and grandchildren if there is a predeceased child. Assume three children aged 30, 25, and 20, and a two year-old child of their deceased sibling. Under these circumstances, it would be reasonable to give the trustee power to split the pot trust into four separate trusts. It may be appropriate to start with a pot trust when the children are small and wealth is modest. Of course, things change and parents often fail to make corresponding changes to their estate plans. If the parents died in an accident, the proposed regulations would require the use of the 30 year old's age for determining the period over which distributions would be made. Splitting the pot trust four ways would be most beneficial to the family, beneficiaries, and trustees if the IRA or retirement plan was now a large asset, unlike when the plan was first established and the children were very young.

c. Similarly, the final regulations should provide greater flexibility in dealing with the situation described in Proposed Regulation section 1.401(a)(9)-5, A-7 (example 2). Giving the trustee the power to segregate appropriate amounts into a separate trust following the death of the participant, and in accordance with the participant's general intentions, would be very helpful to the trustee. For example, assume a $2,000,000 retirement plan account is left to a marital trust for a 65 year-old spouse, then to a 90 year old mother (if living), then to the participant's children. Under example 2 of the proposed regulations, it would be necessary to use the mother's age rather than the spouse's age to determine the period of required minimum distribution. A more appropriate and realistic treatment would be to give the trustee flexibility to split the marital trust into two trusts: e.g., $200,000 and $1,800,000, respectively, with the mother disclaiming all but the smaller amount.

IV. COMMENTS REGARDING APPLICATION OF THE PROPOSED RULES TO 403(b) PLANS

a. Section 1.403(b)-2, A-2 of the proposed regulations states that “the distribution rules provided in section 401(a)(9) do not apply to the balance of the account balance under [a] section 403(b) contract valued as of December 31, 1986, exclusive of subsequent earnings.” However, the proposed regulations are silent on how or when this December 31, 1986, 403(b) account balance is to be distributed, other than with regard to the minimum distribution incidental benefit requirements as noted below. The final regulations should clarify this matter.

b. It is generally believed that distributions from a December 31, 1986 account must begin at age 75, based on advice found in Letter Rulings issued by the Service (See, e.g., IRS Private Letter Ruling 9345044). However there is no official guidance on how any required distributions are to be determined. In order to provide complete guidance regarding distributions from 403(b) plans, we recommend that the proposed regulations (A) specifically state that distributions from a December 31, 1986, 403(b) account balance must begin in the year in which the participant attains age 75 and (B) that the required distribution from that balance be determined in the manner described in proposed regulation section 1.401(a)(9)-5.

c. Section 1.403(b)-2, A-3 of the proposed regulations states that distributions attributable to the value of the 403(b) account balance under the contract or account as of December 31, 1986 is treated as satisfying the minimum distribution incidental benefit requirement if such distributions satisfy the rules in effect as of July 27, 1987, interpreting 1.401-1(b)(1)(i). Because of the complexity of those rules, we recommend that they be simplified, consistent with the Services’ goal achieved by the new proposed regulations.

d. If the December 31, 1986, account balance is required to be distributed at age 75 as suggested above, the current minimum distribution incidental benefit requirements would automatically be satisfied by applying the new distribution period table. This would render section 1.403(b)-2, A-3 of the new proposed regulations unnecessary.

e. 403(b) plans are to be treated like IRAs for distribution purposes. However, if an annuity is the investment vehicle for the 403(b), it may be helpful to follow the annuity rules, rather than the IRA rules. Will 403(b) contracts have to be amended prior to use of the proposed regulations? We request that you clarify this.

f. The preamble of the proposed regulations states that the IRS and Treasury are considering whether reporting requirements described in section 1.408-8, A-10 would be appropriate for 403(b) contracts. We believe that imposing these reporting requirements would be beneficial to taxpayers who would not otherwise have the knowledge or ability to determine the amount of distributions that are required from their 403(b) contracts. We further believe that such reporting requirements would help reduce the number of violations caused by failure of 403(b) plans to make required distributions. Therefore, we encourage the Service to include 403(b) contracts in these reporting requirements.

These comments were prepared principally by Jeffrey C. Chang, Chair of the ASPPA IRS Subcommittee, with the assistance of the ASPPA Tax-exempt and Governmental Plans Subcommittee, the ASPPA Actuarial/Pension Benefit Guaranty Corporation Subcommittee and the ASPPA 401(k) Plans Subcommittee.

Please contact us if you have any comments or questions regarding our comments.

Sincerely,