Empower Retirement Issues Public Comment on IRS Notice

WASHINGTON, Nov. 2 -- Edmund F. Murphy III, president and CEO of Empower Retirement of Great-West Life and Annuity, Greenwood Village, Colorado, has issued a public comment on the Internal Revenue Service notice entitled "SECURE Act grab bag notice THE FINAL Notice". The comment was posted on Oct. 30, 2020:

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Thank you for the opportunity to provide comments on behalf of Empower Retirement to your Notice 2020-68, which offers guidance on several provisions contained in the SECURE Act. Empower serves more than 40,000 retirement plans with over 9.7 million participants as well as 140,000 IRAs, and we greatly appreciate receiving this guidance. We will use this opportunity to both comment on issues addressed in Notice 2020-68 and identify areas where future guidance would be helpful.

1. Section 107 of the SECURE Act allowing post-age-701/2 contributions to IRAs

We appreciate the clarification that this is an optional provision as well as the clarifications regarding how these contributions are treated for purposes of the required minimum distribution rules and qualified charitable distributions from IRAs. However, we are concerned with the requirement that, if an IRA custodian chooses to accept these contributions, they must send updated disclosure statements to all of their account holders. While we agree it's important for account holders to whom this change would be relevant (those age 701/2 or older) to know of the change, we are concerned with the cost of having to send full updated disclosures to all account holders. We believe the purpose of the disclosure requirement can be met using less burdensome approaches such as:

* Providing a stand-alone notification using an IRS-approved method for delivery of required disclosures instead of sending an entire new IRA contract and disclosure; and/or

* Limiting the disclosure to situations in which it is relevant--e.g., sending a separate notification only to account holders that are age 701/2 or older and providing an updated IRA contract and disclosure to an account holder following the IRA custodian's receipt of a post-age-701/2 contribution.

2. Section 112 of the SECURE Act requiring inclusion of long-term, part-time employees

Notice 2020-68 takes the position that the ability to exclude pre-2021 years of service contained in Section 112(b) of the SECURE Act only applies for purposes of determining eligibility and does not apply for purposes of calculating vesting credit. This clearly puts plan sponsors and administrators in an untenable situation since they had no reason to track and maintain hours of service for vesting credit for employees working less than 1,000 hours prior to 2021.

We do not believe the language in the SECURE Act compels IRS to apply the effective date rule differently for purposes of eligibility than it does for vesting. The first sentence in Section 112(b) of the SECURE Act states that amendments made by Section 112 (which includes the new vesting rule contained in SECURE Act Section 112(a)(2)(D)(iii)) apply to plan years beginning after December 31, 2020. We believe IRS has authority to exclude pre-2021 service for vesting purposes based on this statutory language.

The next sentence of Section 112(b) further clarifies that 12-month periods before January 1, 2021, shall not be taken into account. While that sentence references the eligibility rule and does not reference the vesting rule, we believe it's reasonable to interpret it as applying to both rules. The vesting rule is included in a section of the SECURE Act on "Special Rules" that apply to employees entering a plan as long-term part-time participants. The vesting rule states that, for vesting purposes, a 12-month period during which an employee earns at least 500 hours shall be treated as a year of service. A reasonable interpretation of that language is that the vesting "special rule" interprets the eligibility provision for vesting purposes, so the fact that vesting isn't specifically referenced in the second sentence of Section 112(b) does not compel the conclusion that Congress intended to have the effective date apply differently for vesting purposes than for eligibility.

In Notice 2020-68 a comment is specifically requested on how to reduce administrative burdens for counting years of service before 2021 for long-term part-time participants. While we think the right solution here is to avoid that burden by interpreting Section 112(b) of the SECURE Act to apply to all parts of Section 112(a), we offer the following suggestions:

* Allow for the use of any reasonable method to estimate hours for pre-2021 vesting service.

* Publish a non-enforcement policy confirming that, if plan sponsors made a good-faith effort to estimate pre-2021 vesting service, IRS will not find that plan representatives or the plan did not comply with SECURE Act Section 112(a)(2)(D)(iii).

We understand IRS intends to publish additional guidance on SECURE Act provisions, and we offer the following suggestions for guidance on implementation of the long-term part-time employee rule.

* Entry dates - Confirmation that a plan can use the same entry date rules for long-term part-time employees as it does for employees entering the plan under the 1,000-hour service rule. In other words, as long as a plan's entry date rules are in compliance with IRC Sec.410(a)(4) (employees enter no later than the earlier of the date that is six months after satisfying eligibility requirements or the beginning of the first plan year after satisfying the requirements), those rules can be applied to employees entering the plan as long-term part-time participants. It would also be helpful to clarify that service for eligibility and vesting purposes should be counted for employees who don't currently meet a plan's minimum age requirement, and that, once both the age and service requirements are met, the employee will be eligible to enter the plan as of the next entry date permitted under the plan.

* Eligibility computation periods - Please confirm that the ability to switch eligibility computation periods after the initial eligibility computation period is available with respect to long-term part-time employees in the same manner as it is applied to full-time employees. For example, while the initial 12-month computation period is triggered off an employee's hire date, subsequent periods can be based on plan years beginning with the first plan year during which the one-year anniversary of the employee's hire date occurs.

* Methods for counting service - Many plans use either the elapsed time method or an equivalency method for counting service as these methods are simpler to administer than counting actual hours worked. Since these methods are generally more generous in counting service than counting actual hours, it would make sense to allow their use and to provide guidance in coordination with the Department of Labor on how these methods should be applied when counting service for long-term part-time employees (for example, cutting in half the hours credited during a day, week, semi-monthly payroll period or month during which an employee has at least one hour of service). In addition, it would be helpful to clarify that, when counting service for vesting purposes, a plan can use the same vesting computation period that it uses for other participants and is not required to use the eligibility computation period.

* Applicability of non-statutory employee class exclusions - Many plans contain exclusions for certain categories of employees beyond the statutory exclusions defined in IRC Sec.Sec.410(b)(3) and (b)(4). It would be helpful to receive guidance confirming that, unless a class exclusion is solely based on hours worked, the exclusion remains valid and can be applied to long-term part time employees the same way it's applied to full-time employees.

* Counting long-term part-time employees for purposes of Form 5500 reporting - Congress went to great lengths to minimize both the cost and administrative complexity for employers resulting from the inclusion of long-term part-time employees. It did not, however, address whether those employees should be counted as part of the plan population for determining applicability of the ERISA requirement that a plan covering 100 or more participants generally must include an accountant's opinion as part of its Form 5500 filing. This concern will primarily impact small employers for whom the cost and complexity of offering a plan already pose significant challenges. We believe it would be consistent with Congressional intent for IRS and DOL to exclude long-term part-time participants when applying the rules under ERISA Sec.103(a)(3)(A).

* Flexibility in plan design - Some employers are interested in offering benefits to long-term part-time participants in excess of what the statute requires. For example, an employer may want to count pre-2021 years of service, allocate a match to these participants, or include these participants in certain non-discrimination tests. It would be helpful for IRS to clarify that these options are available and that an employer will not lose the benefits offered in Section 112 of the SECURE Act by virtue of waiving one or more of those benefits. For example, a plan that offers matching contributions to long-term part-time employees may separately elect to exclude such employees from its non-discrimination test demonstration or from the receipt of profit-sharing contributions

3. Section 113 of the SECURE Act allowing for qualified birth or adoption distributions (QBADs)

There has been significant demand from our clients to add this in-service withdrawal option so we greatly appreciate the guidance provided, in particular the ability of plan representatives to rely on reasonable representations regarding eligibility unless they have actual knowledge to the contrary. It would be helpful for IRS to confirm that this reliance is also available with respect to the certification that an adoptee over the age of 18 meets the definition in IRC Sec.72(m)(7) of someone who is physically or mentally incapable of self-support.

It would also be helpful to get clarification on Q&A D-13 contained in Notice 2020-68. Question D-13 describes the circumstances under which a retirement plan must accept recontributions of QBADs. It would be helpful to clarify that, unless the conditions in D-13 (a)-(c) apply, eligible retirement plans are not required to accept recontributions of QBADs. For example, a plan could offer QBADs but not accept recontributions of QBADs that were distributed from a different plan or from an IRA. Similarly, if a plan's rollover rules limit rollover ability to active employees, the plan would not be required to accept a recontribution from a terminated employee even if the QBAD was distributed from that plan.

Following are suggestions of additional guidance that would be helpful regarding QBADs.

Ability to place reasonable restrictions on the availability of QBADs - We have received numerous requests from our plan sponsor clients about the ability to offer QBADs as an in-service withdrawal option but place restrictions on their availability. These restrictions may include:

* Setting a minimum amount that can be withdrawn.

* Restricting money sources to fund QBADs.

* Limiting availability to active employees.

We believe that plans should be able to impose reasonable restrictions if those restrictions comply with non-discrimination or other generally applicable plan rules and encourage IRS to provide guidance to that effect.

Monitoring the $5,000 limit - It would be helpful for IRS to confirm that plans are only responsible for monitoring the limit across a controlled group of plans and that IRA trustees and custodians are only responsible for monitoring it within the IRA from which the QBAD is requested. It would also be helpful to confirm that if an individual exceeds the limit by taking QBADs outside the scope of what plan representatives or IRA trustees or custodians are obligated to monitor, there will be no negative consequence to either the plan or IRA.

Event triggering the end of the one-year period - QBADs must be distributed during the one-year period beginning on the date of a birth or the finalization of a legal adoption. Since processing times may vary in responding to a request for a QBAD, we recommend that IRS provide guidance to the effect that as long as a request for a QBAD is received by the appropriate plan or IRA representative within one year of a birth or adoption, the one-year rule is deemed to be satisfied. It would also be helpful to receive guidance on when an adoption is considered to be finalized.

Interaction with other plan rules - While we believe it's fairly clear that a QBAD can be added mid-year to a safe-harbor plan without requiring an updated notice to be distributed to participants, it would be helpful for IRS to confirm this position. It would also be helpful to provide guidance to the effect that QBADs are not subject to the requirement under the hardship distribution rules that all available distributions be taken before a hardship distribution can be made. In other words, if a participant requests a hardship withdrawal from a plan that offers QBADs, the plan is not obligated to determine whether a QBAD would be available to that participant before making a hardship distribution. Finally, it would be helpful to clarify that, similar to the rules that apply to adding or deleting hardship distributions in a plan, a plan can add and then remove QBADs without violating the anti-cutback rule in IRC Sec. 411(d)(6).

Tax withholding and reporting - Our understanding is that the amount requested as a QBAD in a plan allowing QBADs as an in-service withdrawal option should be reported on Form 1099-R using Code 1 in Box 7, and that no 402(f) notice or 20% mandatory withholding is required. It would be helpful to receive guidance clarifying that if a normal/non-QBAD request is received (regardless of whether QBADs are available as an in-service withdrawal option in that plan), tax reporting and withholding should occur based on the type of distribution requested, and plan representatives have no obligation to inquire as to whether any portion of the distribution is eligible to be treated as a QBAD. It would also be helpful to receive guidance to the effect that if a participant takes a non-QBAD distribution and subsequently decides to treat some or all of it as a QBAD, this is addressed solely through the individual's tax return, and their plan is not responsible for changing how the distribution was initially reported.

Following are suggestions of additional guidance that would be helpful regarding QBAD recontributions.

Setting a time limit on recontributions - Under the SECURE Act there is no time limit for recontributions of QBADs. This poses significant practical concerns with respect to tracing and tax reporting. It would be helpful for IRS to provide guidance to the effect that, even if a plan is otherwise required to accept recontributions of QBADs, it can place a time limit on accepting those contributions. A reasonable time limit might be three years from the date of distribution since that is a limit imposed in disaster relief repayment provisions.

Verification of eligibility for recontribution - We recommend that IRS use the same standard it set for verification of coronavirus-related distributions, i.e., that plan representatives can rely on a participant's reasonable representation that the amount being repaid is eligible for recontribution unless they have actual knowledge to the contrary. We anticipate that the self-certification will require the name and birth or adoption date of the person with respect to whom the QBAD was made. This standard should apply regardless of whether a QBAD originated in the same plan or from a different plan.

Allocation of recontributions - Our recommendation is that, if a QBAD is being paid back to the plan that distributed it, the recontribution should be allocated in accordance with the source(s) of the original distribution (pretax, after-tax, Roth). Assuming plans can place reasonable restrictions on the time period for recontributions, plan administrators should have records of this information so no additional documentation from participants would be needed. If a QBAD is being repaid to a different plan, our recommendation is that the receiving plan should be able to allocate it 100% to a pretax account unless the participant provides documentation (e.g., a statement or check stub containing tax information) to support a different allocation. Providing this documentation should be optional. Participants should have the ability to adjust their individual returns to avoid double taxation if they choose not to supply this information.

Section 401 of the SECURE Act modifying the required minimum distribution rules for beneficiaries

While Notice 2020-68 does not address the new rules for post-death distributions of required minimum distributions, there are a significant number of unanswered questions in applying these new rules, and we want to take this opportunity to highlight a few key areas were guidance is needed.

Designated trust multiple beneficiaries - Under Treas. Reg. Sec.1.401(a)(9)(4) a trust meeting certain requirements is treated as a designated beneficiary. If the trust has multiple beneficiaries, the beneficiary with the oldest date of birth is used to determine the required distribution period. There are two key questions needing clarification in this area:

1. If the trust is a designated trust with multiple beneficiaries that include both eligible designated beneficiaries and non-eligible designated beneficiaries, should the trust be treated as an eligible designated trust or a non-eligible designated trust?

2. If the trust is treated as an eligible designated trust, are the non-eligible designated beneficiaries included in the determination of who has the oldest date of birth?

Age of majority - The child of an account owner is treated as an eligible designated beneficiary if they have not reached the age of majority and cease to be an eligible designated beneficiary as of the date they reach majority. Please confirm in formal guidance that the age to be used for this purpose is a federally determined age of 18 as indicated in the educational piece on your website at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimumdistributions-rmds.

Determination of when an individual is chronically ill or disabled - The SECURE Act allows individuals who are either disabled as defined in IRC Sec.72(m)(7) or chronically ill as defined in IRC Sec. 7702B(c)(2) for an indefinite period of time expected to be lengthy in nature to be treated as eligible designated beneficiaries not subject to the 10-year rule. Guidance is needed regarding how plan representatives can make a determination that these conditions are satisfied in a manner that both prevents fraud and protects privacy. Our recommendation is that a process be defined similar to the process IRS defined for purposes of substantiating hardship distributions as outlined in its February 23, 2017, update to the Internal Revenue Manual. In other words, the person making the representation (or their legal representative) would need to confirm certain facts and be advised of the need to maintain documentation supporting their claim, as well as the potential consequences of misrepresentation, but plan representatives would not be obligated to review documentation or confirm medical details regarding the claim.

Treatment of alternate payees - Clarification is needed regarding whether a former spouse who has rights to a deceased participant's plan benefits by virtue of a qualified domestic relations order or to a deceased IRA holder's benefits by virtue of a divorce decree, is treated as a spousal-eligible designated beneficiary under the new rules. Our recommendation is that the guidance under Treas. Reg. Sec.1.401(a)(9)-8, Q&A-6(a) and Treas. Reg. Sec.1.408-8, should be followed such that a former spouse with rights to benefits by virtue of either a QDRO or a divorce decree be treated as a spouse under the eligible designated beneficiary rules.

We appreciate this opportunity to provide comment on the Internal Revenue Service's guidance in relation to implementation of SECURE Act provisions.

Sincerely,

Edmund F. Murphy III, President & CEO

Empower Retirement | Great-West Life & Annuity

8515 E. Orchard Rd. | Greenwood Village,

CO 80111 empower-retirement.com

For important disclosures and product information, click here (https://docs.empower-retirement.com/Disclosure-ER.pdf).

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The notice can be viewed at: https://www.regulations.gov/document?D=IRS-2020-0034-0001

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