Is Gift for Establishing Rollover IRA or Roth IRA a PT?

[Gary Lesser]

Can a brokerage firm pay a $500 finder's fee or gift for establishig a new rollover IRA using outside funds?

I was under the impression (PTE 93-1) that "The fair market value of the property or other consideration which may be measured by its cost to the financial institution, or the cash received, must not exceed $10 for a deposit of less than $5,000 and $20 for a deposit of $5,000 or more. The conditions of the proposed exemption did not specifically limit the form the premium or other consideration may take."

From a recent email from a National Brokerage Firm ("NBF") --{name has been changed}

Credits for deposits of new funds or securities from accounts outside of NBF will be made as follows: deposits over $250,000 receive $500; deposits between $100,000 and $249,999 receive $250; deposits between $50,000 and $99,999 receive $100; deposits between $25,000 and $49,999 receive $50. This offer is valid only for new or existing IRAs (limited to Rollover IRAs, Traditional IRAs, Roth IRAs), but excludes NBF Securities and Bank accounts. Deposits of new funds or securities from existing NBF Bank and NBF securities accounts are not eligible for this offer. New funds or securities must be deposited or transferred within 45 days of new account opening or enrollment in offer, and must be from accounts outside of NBF Bank and NBF Securities. One account promotion per customer. Promotion is limited to one account per User ID and is not valid with any other offers. Deposits must be made into a new or existing IRA account to qualify for credit. NBF... associates, and non-U.S. residents not eligible. New funds or securities must remain in the account (minus any trading losses) for a minimum of 6 months or the credit may be surrendered. The credit will be made to your account within 8 weeks of account funding. We reserve the right to terminate this offer at any time. Accounts must be enrolled by December 31, 2011, the offer expiration date.

..... may be subject to IRS Form 1099-MISC reporting requirements should the total value of those items exceed $599 in a calendar year.

Although as a percentage it is not that bad, I was not aware of any interpretation that allows gifts of this magnitude (i.=e., over $20).

Anyone have any additional information?

20/5000 = .004

500/250000 = .002

[Gary Lesser]

Someone must have some thoughts on whther this is a PT or exempted?

[Peter Gulia]

Gary, a quick look at EBSA's webpage on class exemptions does not show an update PTCE 93-1. http://www.dol.gov/ebsa/Regs/ClassExemptions/main.html

Here's the more important question: Why does this broker-dealer think that, after it makes its profit margin of 20% or more, its excess compensation will still be enough that the b-d can afford to pay up $500 for opening an account?

[jevd]

Gary,

I heard of a similar situation and questioned it and was told that the particular institution had received an ok from IRS but details were not given. I'm back but have limited access due to call center job.

JEVD

[Peter Gulia]

But, since President Carter's 1978 reorganization, the Treasury department lacks power to decide a prohibited-transaction exemption.

[jpod]

Maybe I didn't read the quoted material carefully enough, but does it say where the $500 will be deposited? If it is deposited to the IRA after the rollover IRA is established, and the depositor does not have the option to receive it personally, then I think (a) it is not a pt, and (b) it can be characterized as IRA earnings (rather than an IRA contribution).

[Gary Lesser]

Maybe I didn't read the quoted material carefully enough, but does it say where the $500 will be deposited? If it is deposited to the IRA after the rollover IRA is established, and the depositor does not have the option to receive it personally, then I think (a) it is not a pt, and (b) it can be characterized as IRA earnings (rather than an IRA contribution).

Really, as earnings?! How do you reconcile your thoughts with PTE 93-1?

Howver it would be receved (directly or indirectly) it would likely be a PT (at $500). Perhaps if the $500 bonus was made to a charity in the bank's name I could see a way out.

Also, (as Peter Gulia mentions). there is not that much of a profit margin to be offering $500.

[jpod]

What I am saying is: Where is the PT if the gift for doing the rollover is that a bonus of $500 will be deposited TO THE IRA?

[Gary Lesser]

What I am saying is: Where is the PT if the gift for doing the rollover is that a bonus of $500 will be deposited TO THE IRA?

JPOD, I agree with you in principal. I am only questioning whether the amount ($500) amount fits within the DOL’s exemption scheme. PTE 93-1 only allows this “gift” by a disqualified person IF the conditions of the exemption are satisfied (i.e., the incentive must be de mimimis). Also, the DOL specifically rejected tiered schemes that considered more than $5,000 of assets.

Also consider, if the amount isn’t a gift then perhaps it is a contribution subject to the annual limits and/or reportable compensation (“other income”).

Back to the IRA and PTE 93-1. Because the incentive exceeeds $20 (in value). It has to have its own exemption or exception, and I can find none! A special exemption applies to certain group term life insurance

When it was in proposed form, commenters urged the DOL to delete or modify the $10 and $20 limits. “The Department believes that deleting or increasing the dollar limits, or substituting a maximum limit set as a percentage of total plan investment, could have an adverse impact on IRAs and Keogh Plans by creating an incentive for individuals to make IRA or Keogh Plan investments at a particular financial institution for reasons unrelated to the purposes for which such plans are established, i.e. to provide retirement income.” In addition, the DOL stated it “is not persuaded by the comments submitted in favor of this modification. The Department continues to believe that the value of the cash, premiums or other consideration allowed under the exemption must be de minimis to assure that such transactions do not conflict with the basic purpose of IRAs and Keogh Plans which is to provide retirement savings for participants and their beneficiaries.” [see PTE 93-1, Discussion of Comments] http://www.dol.gov/ebsa/programs/oed/archives/93-1.htm

In the context of an HSA, the DOL stated in Advisory Opinion 2004-09A that, in certain situations, an HSA provider would not violate the prohibited transaction provisions under Code section 4975© or ERISA section 406 where the HSA provider offers an incentive to individuals for establishing an HSA with that provider by depositing cash directly into the individual's HSA. A cash contribution to an HSA generally would not be considered a "sale or exchange of property" or "a transfer of plan assets" for purposes of the prohibited transaction provisions of the Code. Because the cash contribution goes to the HSA and not the HSA account holder, the HSA's receipt of the cash contribution also would not be considered an act of self dealing on the part of the HSA account holder nor a receipt by the HSA account holder in his or her individual capacity of any consideration from a party dealing with the HSA. It should be noted that PTE 93-1 does not apply to an HSA.

[jpod]

If the bonus goes and can only go to the IRA, there is (in my judgment) no PT and therefore 93-1 is irrelevant. Also, I don't think even IRS would consider treating the bonus as a contribution by or on behalf of the depositor. It should be considered earnings of the IRA.