IRS provides Temporary Relief for IRAs with Indemnification Agreements and/or Grants of Security Interests

 

[25721]

December 16, 2011

TO: PENSION MEMBERS No. 69-11
BANK, TRUST AND RETIREMENT ADVISORY COMMITTEE No. 79-11
BROKER/DEALER ADVISORY COMMITTEE No. 84-11 RE: IRS PROVIDES TEMPORARY RELIEF FOR IRAs WITH INDEMNIFICATION AGREEMENTS AND/OR GRANTS OF SECURITY INTERESTS

 

The Internal Revenue Service issued Announcement 2011-81 providing temporary relief with respect to IRAs in circumstances in which the IRA owners signed certain indemnification agreements or granted certain security interests in accounts that may have an effect on their IRAs. [1] The announcement states that the Department of Labor is considering further action to address these issues, including consideration of a class exemption request expected to be submitted to the Department. Pending further review by the Department, the IRS states that it will determine the tax consequences relating to an IRA without taking into account prohibited transactions that may have resulted from entering into an indemnification agreement or granting a security interest, so long as there has been no execution or other enforcement against an IRA account of the individual entering into the indemnification agreement or granting the security interest.

The IRS issued the announcement in response to two Department of Labor Advisory Opinions: 2011-09A [2] (which concluded that relief under Prohibited Transaction Class Exemption 80-26 is not available for an indemnification agreement between an IRA owner and a broker where the agreement is required in order for the IRA to engage in futures trading), and 2009-03 [3] (which concluded that it would be a prohibited transaction for an IRA owner to grant to a brokerage firm a security interest in the assets of non-IRA accounts held by the broker as a requirement for establishing an IRA with the broker). The requester of both advisory opinions is an attorney who has participated in filing class action lawsuits against brokerage firms alleging that the brokerage firms knew or should have known that requiring an IRA owner to pledge the IRA owner’s non-IRA assets for the benefit of the brokerage firm would result in the IRA owner engaging in a prohibited transaction and thus losing the tax-exempt status of their IRA.

 

Howard Bard
Associate Counsel - Pension Regulation

endnotes

 [1] A copy of the IRS Announcement 2011-81 is available here: http://www.irs.gov/pub/irs-drop/a-11-81.pdf.

 [2] See Memorandum to Pension Members No. 63-11, Bank Trust and Retirement Advisory Committee No. 75-11, Broker/Dealer Advisory Committee No. 80-11 [25680], dated November 30, 2011.

 [3] See Memorandum to Pension Members No. 53-09, Bank Trust and Recordkeeper Advisory Committee No. 51-09, Broker/Dealer Advisory Committee No. 62-09 [23944], dated November 10, 2009.