Guest Article

Revising IRA Plan Agreements and Disclosures for EGTRRA

By PenServ, Inc.

Contact: Pamela Himes, (903) 455-5135

(October 26, 2001) - Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs and Coverdell Education Savings Accounts (formerly Education IRAs) have been affected by certain provisions of EGTRRA (the Economic Growth and Tax Relief Reconciliation Act of 2001). Changes to these plans are generally effective on January 1, 2002.

One of the most frequently asked questions PenServ has received is when IRA plan agreements and related disclosure statements should be amended to include the amendments made by EGTRRA.

PenServ has discussed this issue with an IRS official. We were told that the Model IRA forms are currently being revised by the IRS. The revised Model forms will be released later along with guidance with respect to the timing of and the requirement for amending these forms. It is anticipated that necessary amendments to IRA documents with respect to the MRD regulations can be accomplished at the same time as amendments are made for EGTRRA.

According to Regulation §1.408-6, revised IRA agreements are required to be provided to existing IRA owners not later than the 30th day after the later of the date on which the amendment is adopted or becomes effective. We have specifically asked the IRS to consider issuing guidance that provides for a much longer compliance date for updating IRA documents and disclosure statements, such as no earlier than December 31, 2002. Although we have not received any formal answer from the IRS, they have indicated verbally that they will work with the industry, especially since so many other changes are happening at the same time.

As far as IRA agreements are concerned, most financial institutions use the IRS Model Forms as its basic IRA plan document, and then add additional language in one of the blank articles in order to "customize" the agreement to the specific institution. If a financial organization uses this approach, no IRS approval is ever required on the institution's IRA documents.

However, if a financial institution writes its own IRA document (a "prototype"), a favorable IRS Opinion Letter must be received on that document. IRS-approved "prototype" IRA agreements always take much longer to develop and receive approval. Thus, this may be a perfect opportunity to begin using the IRS Model IRA Agreements as the organization's basic IRA plan document and then add additional articles to customize the agreement for the specific financial institution.

The various IRA documents currently being revised by the IRS to reflect the law changes under EGTRRA and the MRD regulations include:

As one can see from this list of IRS Model IRA Agreements, the IRS has a lot of work to do to revise them to reflect the law changes under EGTRRA. It is unknown at this time when the IRS will publish these revised forms. IRS is aware of the critical nature of this issue and a financial organization's concerns for having adequate time to then develop complete packages.

Will IRA plan agreements and disclosure statements be required to be updated by January 1st in order to accept the higher IRA contribution limits?

We again contacted the IRS to find out when guidance will be issued on updating IRA documents. The IRS official we spoke with confirmed the following:

1. Financial institutions may accept the higher IRA contribution limits applicable to tax year 2002 even though the document has not yet been updated. This also applies to the "catch-up" contributions for those IRA owners who are attaining the age of 50 on or before December 31, 2002.

2. Financial institutions may accept rollover contributions from governmental §457(b) plans with respect to distributions from such plans made after December 31, 2001, even though the document does not yet specifically permit such rollovers.

3. Financial institutions may accept rollover contributions of "after-tax" employee contributions from employer plans with respect to distributions from such plans made after December 31, 2001, even though the document does not yet reflect rollovers of after tax employee contributions.

4. Financial institutions can apply the new MRD regulations in determining minimum required distributions, even though the current document reflects the prior regulations.

The IRS is working very hard to issue various forms of guidance with respect to EGTRRA. They cannot confirm when specific IRA guidance will be released including revised Model IRA Forms (all of the 5305 series forms previously listed). The IRS also hopes to include the new minimum required distribution rules in the next revision of the Model IRA forms. This means that if the MRD changes and the EGTRRA law changes are made at the same time, organizations will only need to revise IRA agreements once.

The IRS official also assured us that financial institutions will have an adequate period of time to update all necessary IRA agreements and disclosure statements and then to mail the amended documents to existing IRA customers. Until the IRS publishes specific guidance on IRAs, an organization's current IRA trust or custodial agreement can continue to be used.