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Does federal law prohibit surrender charges or CDSC for Simple IRA assets?


Guest Richard Plant
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Guest Richard Plant

Does federal law prohibit surrender charges or CDSC for Simple IRA assets?

An employer offering a SIMPLE IRA through an insurance based provider has employees that purchased a variable annuity as the underlying investment option. The variable annuity purchased by each employee in their SIMPLE IRA has sizeable surrender charges. The employer is now switching the SIMPLE IRA investment provider to a mutual fund provider.

Is it true that Federal law prohibits participant’s Simple IRA assets from incurring Contingent Deferred Sales Charges (CDSC) or Surrender Charges as indicated on page 6 of the enclosed link?

If so where can I find a link to the IRC text that references this law?

See the ninth line up from the bottom on Page 6 (absolute paging = page 10)

”As required by federal law, no CDSC will be assessed to contracts issued under a Simple Plan.”

http://mediacenter.merrillcorp.com/interfa...r=RETRIEVE_FILE

Thank you.

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It depends. If the EMPLOYER is making the decision on where funds must be invested, (a "designated financial institution") then yes, that is correct. See IRC 408(p)(7), and IRS Notice 98-4 Section J.

In my limited experience with SIMPLE's, most employers do not use the DFA route, in which case the above restriction does not apply.

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Guest Fred Bee

A plan that was established using model IRS Form 5304-SIMPLE permits each employee to select his or her own vehicle to receive plan contributions, which could include an account that has surrender charges.

By contrast, a plan that was established using model IRS Form 5305-SIMPLE limits employee choices to a financial institution designated by the employer. However, accounts under this type of plan are not permitted to have surrender charges (Article IV part 4). The designated financial institution must agree to permit transfers to another IRA without cost or penalty to the participant.

Both of these forms may be obtained at http://www.irs.ustreas.gov/formspubs/lists...d=97817,00.html

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  • 4 weeks later...
Guest Richard Plant

The employer has had the existing plan for years and has since changed to another plan which is a Non-DFI plan.

With respect to the phrase:

As required by federal law, no CDSC will be assessed to contracts issued under a Simple Plan. References throughout this prospectus to CDSC do not apply to contracts issued under Simple Plans.

My understanding is that this Insurance Company believes that ANY SIMPLE plan (DFI or no-DFI) should not impose CDSC (or surrender charges) as the SIMPLE Plan could be amended and would cause confusion. I have posted a separate question to address this situation. Thank you.

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That's an interesting issue. I'd maintain that if you want to be technical, and are using the IRS model SIMPLE forms, that you cannot "amend and restate" a 5304 SIMPLE plan to a 5305 SIMPLE plan, or vice versa. They are two separate plans. The SIMPLE form provides for establishing a SIMPLE plan, but not for restating.

Some support for this theory can be found in IRS Notice 98-4, Q&A B-3. It would apear that the prohibition against establishing a SIMPLE plan in a given calendar year applies if you maintain anotehr SIMPLE plan, as for these purposes, the SIMPLE is considered a qualified plan. Also, see Q&A K-1 of 98-4.

So, I'd argue that if you want to switch from DFI plan to non-DFI plan, or vice versa, you must wait to establish it for the next calendar year. And then, the separate rules may continue to apply to the separate SIMPLE-IRA's that were established - surrender charges allowed or not depending upon whether DFI or non-DFI.

As to the Nationwide approach not to allow the charges on any SIMPLE, I think this is an admirable solution to any possible confusion or conflict, and is user-friendly. Obviously, they have determined they can still make money even with no such charge. Too bad this doesn't extend to all other qualified plan business as well!

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