ICI Submits Recommendations for Treasury/IRS 2009–2010 Business Plan (pdf)

May 29, 2009 Michael Mundaca Clarissa Potter Acting Assistant Secretary for Tax Policy Acting Chief Counsel U.S. Department of the Treasury Internal Revenue Service Room 3104 Room 3026 1500 Pennsylvania Avenue, NW 1111 Constitution Avenue, NW Washington, DC 20220 Washington, DC 20224 RE: 2009-2010 Business Plan Suggestions on Retirement Security Issues Dear Acting Assistant Secretary Mundaca and Acting Chief Counsel Potter: The Investment Company Institute (the “Institute”)1 is pleased to submit recommendations regarding retirement security issues for projects to be included on the 2009-2010 Guidance Priority List. A separate ICI submission describes our recommendations regarding regulated investment companies. I. Items from 2008-2009 Guidance Priority List First, we request that the Service update the safe harbor language under section 402(f) to reflect changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”). EGTRRA implemented a new automatic rollover provision and requires that 402(f) notices explain the effect of the automatic rollover rules. Although Notice 2005-5 provides guidance on automatic rollovers, the Service has not yet updated Notice 2002-3’s model 402(f) safe harbor language. The revised 402(f) notice should include an explanation of rollover options available with respect to designated Roth contribution accounts. Because the automatic rollover rules and designated Roth contribution rules are already in effect, updated 402(f) language is needed now to allow for the proper administration of rollover distributions, especially for plans with mandatory distribution provisions and designated Roth accounts. While we emphasize the importance of publishing a revised model 1 The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. Members of ICI manage total assets of $9.71 trillion and serve over 93 million shareholders. Mr. Michael Mundaca Ms. Clarissa Porter May 29, 2009 Page 2 of 4 notice as soon as possible, we also believe that, given the length and complexity of the current notice, a revised and simplified notice format would greatly benefit plan participants. Second, 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 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. II. New 2009-2010 Guidance Priority List Items The Institute requests that the Service add the following retirement security matters to the 2009-2010 Guidance Priority List. First, we request additional guidance on the 2009 waiver of the required minimum distribution (“RMD”) rules, enacted under the Worker, Retiree, and Employer Recovery Act of 2008. The attached list of issues needing guidance originally was communicated to Treasury in February 2009. Guidance on rollover issues (Item 7 in the attached document) is of particular importance. For example, certain retirees may not be able to use the 2009 waiver to the fullest extent unless Treasury waives the 60-day rollover rule or permits RMD-eligible holders of inherited IRAs to rollover would-be RMD funds. In addition, given the complexity of RMD rules and temporary nature of the waiver, we recommend that Treasury establish a “good faith” waiver compliance period for plan sponsors, RMD-eligible individuals and service providers. Second, we request guidance, possibly in the form of a revenue ruling, regarding how to accomplish an effective 403(b) plan termination. 4 In particular, there is significant confusion surrounding termination of 403(b) plans funded through individual custodial accounts. Effective plan termination depends on distribution of 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. To resolve this issue, we recommend that guidance provide for at least two possible alternatives as valid means of plan 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. Mr. Michael Mundaca Ms. Clarissa Porter May 29, 2009 Page 3 of 4 termination: (1) taxation of any remaining balances in individual accounts after a specified period (e.g., one year) and (2) automatic rollover to an IRA after a specified period, to the extent permitted by the custodial agreement and plan. Guidance in this regard will facilitate any 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).5 Third, we request guidance from the Service permitting payors to mask social security numbers on Forms 1099 and 5498 sent to individual taxpayers. Identity theft is a serious problem, as evidenced by the 2007 report of the President’s Task Force on Identity Theft, which recommended that Federal agencies decrease unnecessary use of social security numbers.6 In a letter to the Service dated September 18, 2008, ICI recommended that payors be permitted to mask the entire social security number on these forms. If the Service determines to permit truncation instead of full masking, we suggested that the Service should specify a uniform truncation standard for payors to use, such as masking the first five digits and leaving the last four digits visible. Fourth, we request guidance on the proper tax treatment of escheated amounts from retirement plans and IRAs. In 2004, the Department of Labor (“DOL”) issued guidance regarding missing participants in terminating defined contribution plans.7 The DOL guidance requires that a plan administrator use certain search methods to locate a missing participant. If all efforts to locate the missing participant fail, the DOL provides, then the fiduciary should consider distributing the amounts to a federally insured bank account or escheating them to a state unclaimed property fund. The requested business plan guidance should address certain federal tax implications of escheatment, including (1) whether Form 1099-R reporting is required, (2) whether payors should designate amounts as escheated and, if so, how payors should make such a designation, and (3) whether withholding is required. We have requested this guidance in prior years and we wish to reiterate its importance. We understand that several states recently have increased their efforts to collect unclaimed property in IRAs and other retirement plans. Finally, we request guidance complementing the DOL’s final regulations on the termination of abandoned plans.8 This guidance should implement language in the preamble to the DOL’s regulations that the Service will not challenge the qualified status of any plan termination under the DOL’s 5 72 Fed. Reg. 41128 (July 26, 2007). 6 See Combating Identity Theft – The President’s Identity Theft Task Force Report (April 2007). 7 U.S. Department of Labor, Employee Benefits Security Administration, Field Assistance Bulletin No. 2004-02, dated September 30, 2004. 8 71 Fed. Reg. 20820 (April 21, 2006). Mr. Michael Mundaca Ms. Clarissa Porter May 29, 2009 Page 4 of 4 regulations or take any adverse action against a “qualified termination administrator” (the party that assumes responsibility for plan distributions and termination), the plan, or any participant or beneficiary of the plan as a result of the termination, provided that several conditions are met.9 The guidance also should clarify how parties other than a participant can establish IRAs for abandoned plan accounts;10 under the DOL’s regulations, IRAs for abandoned plan participants could be established by default — without the participant’s involvement — in a manner similar to IRAs established under the automatic rollover rules of EGTRRA. * * * If we can provide you with any additional information regarding these issues, please do not hesitate to contact the undersigned at 202/326-5826. Sincerely, /s/ Mary Podesta Mary Podesta Senior Counsel – Pension Regulation Attachment cc: J. Mark Iwry 9 These conditions are as follows: (1) the qualified termination administrator reasonably determines whether, and to what extent, the survivor annuity requirements of sections 401(a)(11) and 417 apply to any benefit payable under the plan; (2) each participant and beneficiary must have a non-forfeitable right to the benefit as of the deemed termination date, subject to income, expenses, gains, and losses between that date and the distribution date; and (3) participants and beneficiaries must receive notification of their rights under section 402(f). 10 See Notice 2005-5; Institute Letter to the U.S. Department of Labor, dated March 10, 2003.