Should service providers ask plan sponsors whether one wants to change the required beginning date applicable age?

[Peter Gulia]

I hope BenefitsLink neighbors will help me learn something about a particular oddity regarding remedial-amendment cycles.

For optional changes a recent Act of Congress permits, a typical way a recordkeeper or third-party administrator knows what a plan’s sponsor adopted often results practically from the sponsor’s responses to a service provider’s solicitation of instructions. These sometimes involve not only express instructions but also implied assent to the service provider’s proposed default instructions. Even when a sponsor does not make or keep its own records, the service provider’s records of what it was instructed become a history that can support the remedial amendment.

It seems at least some big recordkeepers did not (in 2020-2022) ask, even in implied-assent form, whether a sponsor wanted to change the applicable age for a required beginning date from 70½ to 72, and again have not asked whether a sponsor wants to change it to 73.

Many plans’ documents still say 70½. If a service provider did not ask whether a sponsor wants an optional change in the applicable age for a required beginning date, how does one know what the plan provides?

(I recognize that what service a provider was or is obligated to provide need not, and often does not, refer to what the plan provides.)

Even if we expect 99.99% of sponsors would adopt all permitted changes to the applicable age, should service providers “go through the motions” of seeking a sponsor’s instruction (and proposing a default instruction) on the required beginning date applicable age?

Or are there reasons not to ask?

[Belgarath]

Since most DC plans, at least, these days use pre-approved plans, and most that I've noticed incorporate 401(a)(9) by reference, (although they then add in a lot of specifics) I'd assume that they would follow SECURE and SECURE 2.0 ages UNLESS they chose or instructed otherwise. 

[CuseFan]

Also, for DC plans, is there any utility or advantage in retaining earlier commencement requirement and disconnect from the statutory RBD?

For DBPs that are still required to provide actuarial increases from 70.5 to commencement at statutory RBD, I can see where the plan sponsor could want to retain a pre-SECURE required commencement date (and we did ask).

[Peter Gulia]

Many IRS-preapproved documents did not (and still do not) state a required beginning date or its applicable age by referring to a relevant Internal Revenue Code text.

For example, an IRS-preapproved document a recordkeeper presented to my client in July 2022 includes six uses of age 70½, with none of them modified by reference to any subpart of Internal Revenue Code section 401.

Let’s consider a potential by-reference interpretation. Suppose the IRS-preapproved document includes: “All distributions required under [the document’s part for minimum distributions] will be determined and made in accordance with Regulations under Code § 401(a)(9) and the minimum distribution incidental benefit requirement of Code § 401(a)(9)(G).” (That’s a quotation from the document presented to my client.) That provision does not negate the same document’s uses of age 70½. A distribution would not fail to meet those regulations because the distribution begins sooner than the Internal Revenue Code’s required beginning date. Further, those regulations describe age 70½ as the age that sometimes sets a required beginning date.

We recognize the Internal Revenue Service’s procedures for a preapproved plan often results in documents that do not reflect current provisions of the Internal Revenue Code and other law.

We recognize that tax law includes a tolerance that permits a plan’s administrator to interpret a plan as if states provisions the administrator anticipates could become the plan’s provisions with retroactive effect.

We recognize it’s reasonable to presume a plan’s sponsor prefers to provide as a required beginning date’s applicable age the latest the plan may provide without defeating treatment as a tax-qualified plan.

But without asking for at least an implied-assent instruction, how do we know that the plan’s in-operation provision changed from 70½ to 72, and again to 73?

If one accepts the remedial-amendment regime, wouldn’t it be better to maintain a thorough record of a plan’s in-operation provisions?

[Paul I]

Peter raises some interesting points regarding the changes in RMD provisions by recent legislation including CARES, SECURE 1.0 and SECURE 2.0.  The industry seems to operating under the consensus that plans can pick and choose how they want to operate and can wait until later to make formal amendments to the plan documents.  Let's all sing kumbaya. 

With CARES, major recordkeepers generally chose between two approaches.  One approach was to tell clients how the recordkeeper was going to administer the plan unless the plan opted out.  The other approach was to tell clients that the recordkeeper was not going to allow for optional changes unless the plan opted into those changes.

What is interesting with respect to the RMD changes is IRS Notice 2020-51 Guidance on Waiver of 2020 Required Minimum Distributions included a paragraph that said:

"Under section 2203(c) of the CARES Act, any plan amendment pursuant to section
2203 must be adopted no later than the last day of the first plan year beginning on or
after January 1, 2022 (January 1, 2024, for governmental plans), and must reflect the
operation of the plan beginning with the effective date of the plan amendment. The
timely adoption of the amendment must be evidenced by a written document that is
signed and dated by the employer (including an adopting employer of a pre-approved
plan)."

This called for an affirmative action by the employer to adopt an amendment even if the plan document was a pre-approved and even though the pre-approved plan provider often has the privilege to amend the plan on behalf of all employers.  This suggests that the IRS views RMD plan amendments should be treated differently from other plan amendments.

This discussion gives rise to another question.  If a plan document defines the Required Beginning Date explicitly as 70 1/2 (or 72 or 73 or 65 for that matter) and the amount is determined using the RMD formula based on factors for that age, does that make the distribution not eligible for rollover? Or, does the participant have the right to say the payment is not an RMD and roll it over until the participant reaches the latest permissible RMD age?  Analogously, because a plan does not have to allow an active participant to defer RMDS until separation from service, it would seem participant discretion on how characterize a payment is not available.

 

[Peter Gulia]

About Paul I’s last paragraph:

In my interpretation, a distribution paid or delivered before January 1 of the year in which the participant attains the applicable age Internal Revenue Code § 401(a)(9)(C)(v) allows within the conditions for treating a plan as a tax-qualified plan (not a younger age a plan might provide) is treated as not § 401(a)(9)-required and so an eligible rollover distribution (if it otherwise qualifies).

See 26 C.F.R. § 1.402(c)-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(c)-2.

[Peter Gulia]

About what writing is helpful to remember which in-operation provisions a plan’s administrator applied while waiting for an eventual remedial amendment, I do not suggest a need for a plan sponsor’s affirmative choice.

But I wonder whether a service provider should “go through the motions” of seeking a sponsor’s instruction (and proposing a default instruction) on the required beginning date applicable age.

Or, if the service provider prefers not to present a choice, at least informing a service recipient that it instructs the service provider to provide services on the presumption that the plan’s in-operation provision is the § 401(a)(9)(C)(v) applicable ages for setting a required beginning date.

Either notice might set up some written evidence about which in-operation provisions were administered while waiting for an eventual remedial amendment.

Even if nothing is done, the risk of administration contrary to the plan’s retroactive provisions might be slight.

Even a service provider with a power to amend a user’s plan might prefer to restrain its use of that power. Further, until the plan is amended, a service provider might be cautious about not too lightly presuming what the plan’s in-operation provisions are.

While waiting for an eventual amendment (whoever later makes it), a plan’s named fiduciary administrator might have discretionary authority to interpret a not-yet-amended plan document to include provisions the administrator anticipates likely could become the plan’s provisions with retroactive effect.

But a service provider might lack such an interpretation power.