IRA Providers Give Thanks to IRS

IRA Providers Give Thanks to IRS

By Mark Smith, Dan Buchner and Adam Cohen

On November 23, 2010, the IRS issued Rev. Proc. 2010-48, providing helpful guidance regarding the amendment and approval of prototype IRAs for a host of statutory changes. With demographic changes driving the growth of IRAs over the next decade, the sensible and useful positions taken by the IRS are most welcome, and will help minimize the formalistic compliance costs and risks for IRAs to the ultimate benefit of IRA owners.

Procedural Guidance

The IRS provided guidance on the following procedural points:

  • IRA documents are not required to be amended for a list of recent statutory changes (enumerated below) that became effective after June 2007. IRA providers can continue to rely on prior prototype approval of their IRA documents or the prior IRS model form without amendments.
    • Many IRA providers have read the Internal Revenue Code to mean that, unlike section 401(a) qualified retirement plans, IRAs need not be amended for statutory changes unless Congress specifically requires such an amendment.
    • It is good news to see the IRS confirm that position, at least for the enumerated statutory changes. As a technical matter, however, the guidance provided by Rev. Proc. 2010-48 will not apply to the next legislative enactment applicable to IRAs.
  • Prototype IRA providers may operate IRAs in accordance with these recent statutory changes "without specific authorizing language in the prototype IRA." That is, the IRS will accept prototype IRAs administered in accordance with applicable law as qualified under Internal Revenue Code § 408, without taking a scrivener's eye to the documents.
  • IRA providers thus have the choice of either (i) continuing to use existing IRA documentation and observing recent statutory changes in IRA administration, in which case any prior prototype approval (whether from use of the IRS model form or from an IRS opinion letter) continues to apply; (ii) incorporating the recent statutory changes into their IRA documents, in which case the prior prototype approval also continues to be valid; or (iii) amending their prototype IRA documentation and (if desired) submitting it for an IRS opinion letter. To receive a favorable letter from the IRS, a prototype IRA must include every applicable issue from the IRS List of Required Modifications, and use of the LRM language is strongly encouraged.
  • Additional and significant procedural relief is provided for prototype IRA annuities described in Code § 408(b). For prototype approval applications submitted to the IRS after December 13, 2010, prototype sponsors must only submit one application for each IRA endorsement, regardless of the number of associated annuity contract forms. Among other things, the endorsement must provide explicitly that the terms of the endorsement supersede any conflicting terms of the associated contract. Opinion letters will be issued with respect to the endorsement rather than the contract form. The IRS expects to reduce the number of opinion letters issued and the amount of fees paid by issuers.
    • It is unclear from the Revenue Procedure whether prior approvals for IRA endorsements now extend beyond the specific contract form for which the endorsement was approved.
    • This new procedure is reflected in the revised Form 5306, which may also be used for opinions on single-contract endorsements and by those providers that prefer to have separate opinion letters for each contract.

Revised model IRAs are expected shortly. The IRS also plans to issue new model IRAs for traditional individual retirement annuities and SIMPLE individual retirement annuities

Prototype IRA providers should revise their IRA disclosure statements to update both (i) any disclosures affected by the recent legislation, and (ii) if applicable, any statement about IRS approval of the prototype IRA that is affected by the new guidance.

Statutory Changes for IRAs

The statutory developments expressly covered by the Revenue Procedure (which also serves as a helpful checklist for IRA administration) include:

Since 1981, Mark Smith, a member of Sutherland's Tax Practice Group, has advised clients on tax, ERISA and other issues related to retirement, executive compensation, insurance, cafeteria and other employee benefit plans. He is engaged on behalf of insurance companies, broker-dealers, investment advisers and managers, banks, consulting firms, other service providers and plan sponsors for a range of consulting, transactional, regulatory and litigation matters.

Daniel Buchner is a member of Sutherland's Tax Practice Group concentrating in the areas of employee benefits, executive compensation, exempt organizations, Employee Retirement Income Security Act (ERISA) Title I, insurance and annuity products, and corporate tax controversy. He assists a broad base of clients in matters relating to tax-qualified retirement plans, equity compensation arrangements, obtaining and retaining tax-exempt status, and defense against a variety of challenges by the Internal Revenue Service (IRS) and the U.S. Department of Labor.

Adam Cohen, a member of Sutherland's Tax Practice Group, focuses his practice on employee benefits and executive compensation. He assists a diverse group of clients, including public companies, closely held businesses and tax-exempt organizations, in matters including:

  • Tax-qualified retirement plans.
  • Nonqualified deferred compensation plans.
  • Equity compensation arrangements.
  • Executive employment and separation agreements.
  • Employee benefits due diligence and transaction agreement provisions arising in mergers and acquisitions.

If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.

Daniel M. Buchner 202.383.0869
Adam B. Cohen 202.383.0167
Jamey A. Medlin 404.853.8198
Alice Murtos 404.853.8410
Joanna G. Myers 202.383.0237
Robert J. Neis 404.853.8270
Vanessa A. Scott 202.383.0215
W. Mark Smith 202.383.0221
William J. Walderman 202.383.0243
Carol A. Weiser 202.383.0728

© 2010 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.

. . . .

Explore the Estates, Gifts & Trusts and Elder Law resources

Discover the features and benefits of LexisNexis® Tax Center