[15295]
November 15, 2002
TO: PENSION COMMITTEE No. 45-02
PENSION OPERATIONS ADVISORY COMMITTEE No. 74-02
RE: DRAFT COMMENT LETTER ON DEEMED IRAS
Deemed IRA Provision
The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) enacted
new section 408(q) of the Internal Revenue Code (the “Code”), which permits a qualified
employer plan to allow employees under the plan to make voluntary employee contributions to
a new savings vehicle called a “deemed IRA.” Under certain circumstances, these contributions
may be treated, for purposes of the Code and ERISA, as individual retirement accounts or
annuities and not as part of the qualified employer plan.
If the deemed IRA meets the requirements applicable to either traditional IRAs or Roth
IRAs, then the separate account or annuity will be deemed to be either a traditional IRA or a
Roth IRA, as applicable, for all purposes of the Code. According to the legislative history, this
means, for example, that the reporting requirements applicable to IRAs would apply to the
deemed IRA. Consistent with this treatment, the deemed IRA and contributions to the deemed
IRA will not be subject to Code rules pertaining to the qualified employer plan. Neither the
deemed IRA nor contributions to the deemed IRA are taken into account for purposes of
applying rules applicable to the qualified employer plan or contributions to such plan.
The deemed IRA and contributions to the deemed IRA are subject to the exclusive
benefit and fiduciary rules of ERISA to the extent that such rules are otherwise applicable to the
qualified employer plan. However, deemed IRAs are not subject to the ERISA reporting and
disclosure, participation, vesting, funding and enforcement provisions that are applicable to the
qualified employer plan. Qualified employer plans that may establish deemed IRAs include
401(k) plans, 403(b) plans and 457 plans.
Draft Comment Letter
The attached draft letter expresses the Institute’s strong support for new savings
vehicles that provide additional opportunities for individuals to save for their retirement. The
letter points out that it is important, if participants are to be encouraged to use this new savings
vehicle, that those who elect to contribute to a deemed IRA have the same portability rights that
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they would have if they invested in a traditional or Roth IRA. The letter also points out that the
deemed IRA will add a new level of complexity to a qualified employer plan, as well as
additional cost and administrative burden. To encourage employers to assume this additional
complexity, cost and administrative burden, the Institute urges Treasury to draft clear, simple
guidance that treats the deemed IRA as a separate plan from the qualified employer plan.
Treating the deemed IRA as a separate plan will provide employers with needed flexibility to
(1) convert deemed IRA account balances and include them in a participant’s qualified plan
balance, (2) transfer deemed IRA balances to a traditional or Roth IRA that is not a part of the
employer’s qualified plan and (3) cash out small amounts in a deemed IRA in situations where
such a distribution would otherwise be permitted from a qualified plan. Moreover, separate
plan treatment should permit employers to satisfy fiduciary requirements by ensuring that a
qualification problem with the deemed IRA does not result in disqualification of the qualified
employer plan, or vice versa.
The comment letter suggests that guidance permit streamlined reporting to reduce
administrative costs, e.g., reporting information about deemed IRAs on Form 5500. Finally, the
comment letter suggests that guidance include a simple model amendment that cross-references
section 408(q) and includes optional administrative amendments. Your input also is requested
regarding whether to address the following issues not included in the draft:
Recordkeeping requirements. What recordkeeping conventions would be the most
reasonable to keep track of a deemed IRA within a qualified plan?
Eligibility. How will eligibility to contribute to the deemed IRA be determined? Since
the deemed IRA is part of the qualified plan, should ability to contribute to the deemed
IRA be contingent on participation in the qualified plan? Can the employer set
additional limits on deemed IRA participation, such as a minimum initial contribution
or a requirement that only payroll deduction contributions will be accepted?
Required Minimum Distributions (“RMDs”). Presumably, separate RMD rules will
apply to the deemed IRA and the qualified plan. Must the plan administrator or other
responsible party prepare an RMD calculation or offer to provide such a calculation with
respect to the deemed IRA? Will different required beginning dates apply?
Forms and Reporting. Should we make specific recommendations regarding how to
report information regarding deemed IRAs, other than the comment letter’s suggestion
that deemed IRA information be reported on a revised Form 5500?
Investments. Must a deemed IRA be restricted to the investments available under the
qualified plan, or may a wider (or narrower) range of investment choices be offered?
Beneficiary Designations. Will the participant’s beneficiary designation apply to both
the deemed IRA account and the qualified plan account? Must the plan permit separate
beneficiary designations if the participant desires to do this?
QDROs. Will QDROs apply to deemed IRAs?
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Compliance Issues. Section 408(q) does not directly address compliance issues with
respect to deemed IRAs. How will violations of the rules applicable to deemed IRAs be
handled? How should deemed IRAs be handled if there is a plan termination?
We would appreciate your comments on whether any of the issues listed above should be
addressed in the comment letter.
Proposed regulations with respect to deemed IRAs have not been published. However,
the Treasury Department has stated that it may issue guidance early next year and is
interested in receiving comments. Please provide any comments that you have to the
attached draft comment letter to me no later than November 20, 2002 by phone (202-326-5835),
fax (202-326-5841), or e-mail (lrobinson@ici.org).
Lisa Robinson
Assistant Counsel
Attachment
Attachment (in .pdf format)