Institute Testifies Before IRS on Required Minimum Distributions

Washington, DC, June 1, 2001 - The Internal Revenue Service held a hearing on its proposed regulations on required minimum distributions (RMDs) today. Chip Denkovic, ERISA/Benefits Counsel for Citigroup, Inc. provided testimony on the Institute's behalf.

The Institute limited its testimony to concerns and suggestions regarding the new proposed reporting requirement that would be imposed on IRA trustees. ICI stated its support of the goals of the proposed reporting requirement-to improve compliance and further reduce the burden imposed on IRA owners and beneficiaries. However, ICI emphasized the concern that the reporting requirement would result in both the Service and a substantial number of taxpayers receiving inaccurate tax information, which will lead to more, not less, taxpayer confusion regarding RMD obligations.

The testimony included data regarding the population subject to the RMD rules. For instance, current census data indicate that 9 percent of the population, about 25 million Americans, is 70 years old or older. Approximately 16 million households have a head of household who is 70 years old or older and approximately 5.2 million of these households own an IRA subject to the RMD rules. ICI data indicates that the average IRA-owning household has two IRAs. The IRS reporting requirement would therefore result in IRA trustees performing over 10 million RMD calculations and issuing over 10 million RMD reports to an estimated five million households. Many of these reports would be incorrect.

One example of a situation where IRA trustees would likely report an inaccurate RMD amount to IRA owners and the Service involves the spousal beneficiary exception. The number of IRA owners subject to this exception is quite significant. Over 14 percent of Americans aged 70 and older are married to a spouse more than 10 years younger. This represents approximately two million individuals. ICI estimated in its testimony that IRA trustees would likely issue close to one million RMD reports to households subject to the spousal beneficiary exception. ICI also highlighted the situation where a rollover crosses calendar years as another example of where IRA trustees would report an inaccurate RMD amount. When transfers occur at year-end, the IRA trustees will be unable to calculate an accurate RMD amount because the December 31 balance will not reflect the rollover amount.

The testimony also listed other problems that IRA trustees would face in reporting accurate RMD amounts including, lack of date of birth information for IRA owners and beneficiaries; death of accountholder or beneficiary; multiple IRAs with multiple trustees; multiple IRAs and first year's calculations; and life events, including death, divorce and marriage that affect the RMD calculation. Accounting for just the spousal exception and the death rate for IRA owners aged 70½ and older, ICI estimated that IRA trustees would send 1½ to 2 million incorrect RMD reports annually. This number will certainly increase as the Baby Boomers reach retirement and become subject to the RMD rules.

ICI also suggested two reporting alternatives-the "notification" approach and the 1040 approach. Under the notification approach, trustees would be required to provide IRA owners and beneficiaries with information designed to notify them of the RMD rules and how to calculate the RMD amount. In addition, trustees would be required to provide the Service with available date of birth information for their IRA owners. Under the 1040 approach, taxpayers would include their dates of birth on Form 1040 and refer to worksheets to calculate their RMD amounts.