Deemed IRAs

[Theresa Lynn]

Are any of you familiar with any deemed IRAs, whether traditional or Roth, being created as an adjunct to any existing qualified plans, 403(b) plans, or government 457 plans? Are they successful? Are employees using them to make voluntary contributions? Have any of you seen any plan administrative materials or plan documents for the same (or than the IRS sample amendment language)? I have trouble seeing the advantages of any of this, but hope to see some articles or other materials that educate me on all of this.

Thanks!

[jstorch]

I'm currently reviewing a governmental 457 plan with deemed IRAs, but don't know how successful they are with participants. The language is pretty sparse; just appears to take the relevant language from Code Section 408(q).

I agree that there seems to be little advantage to the employer to offer deemed IRAs and am considering recommending to the employer dropping them.

Have you found any articles discussing advantages/disadvantages in offering them?

[Theresa Lynn]

According to the following Ballard, Spahr article (http://www.ballardspahr.com/press/article.asp?ID=668),

"deemed IRAs encourage employee savings and facilitate coordination of pension and IRA investments. More importantly, deemed IRAs will provide ERISA protections and will shield deemed IRA assets from creditors' claims in bankruptcy proceedings."

I have not seen any other helpful articles on the subject...

Thanks for sharing about your own experience.

Theresa Lynn

[jstorch]

Thanks for the link.

After reviewing the IRS Rev. Proc. 2003-13 sample amendment to add deemed IRAs, I'm apprehensive about offering them.

Section .02 requires that in addition to the sample amendment, the plan must contain language satisfying Code §§ 408 or 408A, then refers to the Listing of Required Modifications for IRAs. The LRMs are fairly extensive.

Does this mean that a plan offering deemed IRAs has to contain everthing from the appropriate LRM? Even if inapplicable provisions could be stricken, it seems like an awful lot of language to add to the plan document. I don't think the employer would be very excited about my suggesting a 5 page amendment to replace the current deemed IRA paragraph.

Has anyone out there drafted a deemed IRA provision for a plan? If so, how did you address the 2003-13 LRM guidance?

[Harwood]

http://www.sablaw.com/files/tbl_s10News/Fi...1/916044_11.pdf

My favorite line:

"Perhaps most significantly, under the proposed regulations, if any Deemed IRA fails to satisfy the applicable requirements to be a Traditional or Roth IRA under Code section 408 or 408A, the entire plan will be treated as failing to satisfy the plan’s qualification requirements."

[Theresa Lynn]

I started this thread long ago, and it appeared to me that there is little interest in deemed IRAs. Seemed like the risks of disqualification to the whole plan exceeded any benefits to the employees and participants.

Does anyone feel differently now that the final regulations are out?

Does anyone feel differently about the qualified Roth contribution program under IRC Sec. 402A, which will be effective for 2006 through 2010 (unless the sunset is lifted)? Does it look any more attractive? If so, why--is it because of the nontaxable distributions?

[MWeddell]

Under the final regulation, as long as the deemed IRA assets are in a separate trust or separate annuity, then a problem with the deemed IRA doesn't disqualify the whole plan. Hence, this is now a plan design I'd consider. The fact that there is no coverage testing and the regulation expressly states it isn't a BRF either on the deemed IRA feature also might make it attractive. I'd lean toward offering just the Roth IRA as a deemed IRA due to the higher compensation limits for eligible employees.

Does anyone know of any major 401(k) recordkeepers who have the capability of administering a deemed IRA feature? There would be a ton of programming for a feature that is unlikely to become widely used. How about any that are planning on introducing this feature effective 1/1/2005? I can't get excited about the plan design possibilities without knowing that some providers can administer the darned things.

Contributions to the Roth 401(k) accounts will count toward the 402(g) limit and the ADP test limits, so they quite different from a plan deisgn viewpoint even though the participant would view them as similar to a Roth deemed IRA account.

[mbozek]

Can anyone explain the advantage in adding a benefit that does not increase the amount of tax deferrals for an employee and will increase the cost of plan admin (which must be passsed on to either the employee or employer)? What featue does a deemed IRA provide (other than protection from creditors) which is not available in a regular IRA? Many states protect IRA assets from creditors anyway. The disadvantage of funds in a deemed IRA is that they are not available for plan loans.

[E as in ERISA]

Can deemed IRAs be used by a plan to comply with the mandatory rollover rules -- in case they can't find another provider?

[mbozek]

Yes- but the plan sponsor can avoid the mandatory rollover requirement by limiting involuntary cashouts to $1000 and charging a admin fee to terminated participants. Also the admin fee charged in a mandatory rollover IRA cannot exceed the risk free rate of return earned on the funds- which will deter most providers from wanting these funds.

[MWeddell]

Advantages of deemed IRAs:

(1) protected from creditors as you've pointed out,

(2) can be presented by the employer as part of the employee benefit package, not just as something extra that the employee arranges on his own,

(3) might be presented as a useful solution to sheltering HCE deferrals that can't be accommodated due to ADP test or 402(g) limits for those below the Roth IRA compensation threshold, and

4) may have access to the same funds potentially as the 401(k) plan, thereby taking advantage of economies of scale from the participant's point of view (an advantage only if the employer's plan is large and hence has driven down the cost of investment management and account maintenance to less than what if available to individuals) and building up additional buying power through the accumulation of plan assets from the employer's point of view.

Are they worth the bother? I doubt it. However, if there are major 401(k) recordkeepers prepared to offer these feature, I'm at least interested enough to investigate further now that there's a way to have problems with the deemed IRAs not disqualify the whole plan. So I'll repeat my question: Does anyone know of any major 401(k) recordkeepers who have the capability of administering a deemed IRA feature?

[mbozek]

All of the features except #3 are available if the funds are kept in a qualified plan since all pre tax money can be rolled into a qualified plan and would also be available for loans. There is not enough money in Roth IRAs for HCEs to make a deemed IRA program a worthwhile proposition for most employers.

[MWeddell]

My prior post was intended to list advantages of allowing employees to contribute to a deemed IRA feature versus not offering one at all (leaving employees to establish their own Roth IRAs for the few who bother to do so). Sorry if that was unclear.

[Guest KGriffith]

Are there any special IRS reporting requirements if an Employer chooses to allow traditional IRA rollover contributions to their 401(k) plan? I'm unclear as to who is the trustee/custodian of the assets if the participant commingles their funds with their 401(k) assets in a single trust fund. Any help is appreciated. Thanks, Keri