The Effects of Comment Letters

The Effects of Comment Letters -One Practitioner’s "Results"

© 2002, Barry Picker, CPA/PFS, CFP
www.BPickerCPA.com
email: Barry@BPickerCPA.com

On March 29, 2001, I sent in my comment letter on the January, 2001 proposed regulations. That letter had eight points requesting change or clarification. The following is a synopsis of the eight points, and the "response" in the final regulations.

1. Comment letter: "The first area of uncertainty has to do with the determination of the designated beneficiary on the last day of the year following the year of the account holder’s death. The uncertainty has to do with the possibility that the beneficiary named by the account holder will not survive until that date. If the beneficiary as of the date of death dies prior to the determination date (December 31^st of the year after the year of the account holder’s death), who will be the designated beneficiary?"

Final regs: The final regs changed the determination date to September 30^th of the year after the year of the account holder’s death. Reg 1.409(a)(9)-4, A-4(c) states that if an individual is a beneficiary as of the date of the account holder’s death and then dies prior to the determination date, that individual will continue to be treated as a beneficiary, regardless of who the successor beneficiary may be. While this provision solves the problem, it also eliminates the possibility that the death of the beneficiary could have resulted in a new beneficiary having a longer life expectancy than the deceased beneficiary.

2. Comment letter: "A second area of uncertainty has to do with a spouse beneficiary more than ten years younger than the account holder. If such a spouse is the sole beneficiary for the entire year, the account holder can use the actual joint life expectancy table to compute the required minimum distribution. The uncertainty has to do with the scenario where the spouse-beneficiary dies during the year. There is even a question as to what the rule is if the account holder dies during the year. For example, if the account holder dies, is the spouse the beneficiary for the entire year? What will the result be if the spouse then disclaims? Does this mean that the minimum required distribution for year of death has to be recomputed based upon the uniform distribution table? The regulation should be clarified to reflect that if the spouse is the beneficiary on the date of either the spouse’s or account holder’s death, then the spouse will be deemed to be the beneficiary for that entire year."

Final regs: Reg 1.409(a)(9)-5, A-4(b)(2) holds that if a husband and wife are married on January 1^st of a given year, they will be deemed to be married for the entire year for 401(a)(9) purposes. Thus, the account holder will not fail to have a spouse as the sole beneficiary merely because they are not married for the entire year. However, if the account holder should change the beneficiary to another person after a divorce, then the spouse is not the beneficiary for the entire year, and the uniform distribution table would have to be used to compute the minimum required distribution for that year. In the case of the death of the beneficiary spouse, the spouse is deemed to be the beneficiary for the entire year even if the account holder changes the beneficiary after the death of the spouse. In any case, in the following year, the account holder will have to use the uniform distribution table.

3. Comment letter: "Under the old proposed regulations, I was asked on many occasions whether a minimum required distribution had to be taken for the year of the account holder’s death. Without any guidance on this question, I always advised that I believed the distribution had to be taken, and that the safest course of action was to do so. The new proposed regulations allude to this being the correct answer by mandating that a spouse-beneficiary had to take the year of death minimum required distribution before she could take the decedent’s IRA as her own. However, there is still no direct statement in the regulations that every account in pay status is required to distribute the decedent’s year of death minimum required distribution, if not previously taken by the decedent. The final regulations should clearly state what the rule is for this circumstance."

Final regs: Reg 1.409(a)(9)-5, A-4(a) states "If an employee dies on or after the required beginning date. the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee’s death is determined as if the employee had lived throughout the year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee’s death and that amount must be distributed to a beneficiary to the extent it had not already been distributed to the employee". It seems clearly stated to me.

4. Comment letter: "Although the proposed regulations and the Code are very clear on the definition of the required beginning date, there is still a question of when minimum required distributions actually accrue, in cases where an account holder dies after reaching his 70½ year, but before the statutory required beginning date. Clearly if the account holder dies before the required beginning date, the beneficiaries use the rules for death before the required beginning date. But if, for example, Sam, who will be 70½ on December 30, 2002 were to die on January 2, 2002, would a year 2002 distribution be required despite Sam’s death? If yes, does the distribution have to be taken by December 31, 2002, or can it be taken up to April 1, 2003? I suggest that the proposed regulations clearly reflect that if death occurs prior to the required beginning date, there are no lifetime minimum required distributions that have to be taken. However, whichever way the Service decides this issue, it should be clarified in the regulations."

Final regs: The quoted final reg section in item 3 above specific talks about the employee dying on or after the required beginning date. I understand this to imply that if death is before the required beginning date, even if death occurs in the year the employee attains age 70½, there is no year of death minimum required distribution. If anyone disagrees, I’d like to hear why.

5. Comment letter: "Prop. Reg. 1.401(a)(9)-4, A-4(a) talks about a beneficiary who was a beneficiary at the date of death but is not a beneficiary due to a disclaimer. Must such a disclaimer be a qualified disclaimer in accordance with the rules of Sec. 2518?"

Final regs: Reg 1.409(a)(9)-4, A-4(a) talks about a person disclaiming an employee’s benefit "pursuant to a disclaimer that satisfies section 2518...", not being taken into account in determining the designated beneficiary on the determination date. So the answer to the question in the comment letter is "yes".

6. Comment letter: "Do these new regulations apply to beneficiaries of decedents who died prior to January 1, 2001?"

Final regs: Reg 1.409(a)(9)-1, A-2(b)(1) says that the final regs apply to beneficiaries even if the account holder died before January 1, 2003. For 2003 and later years, the designated beneficiary will be determined under the final regs, and the distribution period will be restated to conform to the new tables. Beneficiaries who are under the five year rule may switch to the lifetime payout if the plan permits, provided that any amounts that should have been distributed under the lifetime payout, are distributed by earlier of December 31, 2003, or the date that the five year payout would have had to been completed.

7. Comment letter: "The rules for having the custodians compute the annual minimum required distribution have to take into account things like outstanding rollovers, and recharacterized Roth conversions. Otherwise an individual can avoid having the custodian report a required distribution by converting his IRA to a Roth every December, and recharacterizing it back to the traditional IRA by the following April 15^th."

Final regs: The final regs do not require the custodian to report the minimum required distribution to the IRS. Starting in 2004, custodians will merely have to note on Form 5498 that the IRA holder is required to take a minimum required distribution. However, starting in 2003, the custodian will either have to notify the IRA holder of the amount of the minimum required distribution, or notify the IRA holder that the custodian will compute the minimum required distribution for the IRA holder on request. There is no reporting requirements for Roth IRAs or IRAs of deceased IRA holders. The reporting requirements are listed in Notice 2002-27, 2002-18 IRB 1.

8. Comment letter: "Although it seems clear from the preamble to the proposed regulations that splitting retirement accounts after death when there are multiple beneficiaries is anticipated, the technical language of Prop. Reg. 1.408-(a)(9)-8, A-2 is not clear. For the sake of clarity, I request that the proposed regulations reflect that if an account with multiple beneficiaries is split into separate accounts prior to December 31^st of the year after the year of the account holder’s death, each beneficiary will be a designated beneficiary for their separate account."

Final regs: Reg 1.409(a)(9)-8, Q&A-2 & 3, discusses separate shares and treating each beneficiary as a designated beneficiary of their separate share. The account can be split up to December 31^st of the year after the year of the account holder’s death. However, the determination date is September 30^th, so there appears to be a question of how to determine a minimum required distribution when the account is split between October 1^st and December 31^st of the year after the year of death of the account holder.