Guidance Issued to Assist Drafters of IRAs, SEPs

The IRS has provided (1) guidance to drafters of individual retirement arrangements (IRAs), simplified employee pensions (SEPs) and SIMPLE IRA plans; (2) guidance to users of IRS model IRAs and plans; and (3) transitional relief for users of IRAs and plans that have not received IRS approval. The guidelines, which take effect on January 28, 2002, modify section 4.01 of Rev. Proc. 87-50, 1987-2 CB 647.

Opinion Letters

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) made several tax law changes affecting traditional, Roth and SIMPLE IRAs, SEPs (including salary reduction SEPs (SARSEPs)) and SIMPLE IRA plans that took effect on January 1, 2002. Beginning on April 1, 2002, prototype sponsors can apply for opinion letters on prototype documents that incorporate EGTRRA changes and the final required minimum distribution rules. All prototype sponsors with currently approved prototype IRAs, SEPs and SIMPLE IRA plans must amend the documents and submit an application for opinion letters on the amended documents no later than December 31, 2002, in order to remain prototype sponsors of such documents.

Drafters of Code Sec. 408(c) IRAs must also amend their documents and submit applications for opinion letters on the amended documents no later than October 1, 2002. The documents must be submitted using the appropriate application form and following the instructions on that form.

A Listing of Required Modifications (LRMs) that the IRS deems acceptable for prototype IRAs, SEPs and SIMPLE IRA plans will be available shortly on the IRS's website at www.irs.gov. To access the LRMs, interested parties should click on "Tax Info For Business," then "Employee Plans Corner," then "Listing of Required Modifications (LRMs)." In order to receive a favorable opinion letter, prototype documents must include language that addresses every point in the LRMs, unless clearly inapplicable. While identical language is not necessary, LRM concepts cannot be abbreviated by using references to tax code sections or such phrases as "in accordance with the law."

With respect to prototype sponsors that are issuers of individual retirement annuities described in Code Sec. 408(b) and that must apply to one or more state insurance departments for approval of amended IRA documents, expedited review will be granted for IRS-approved EGTRRA prototype IRA documents amended for changes required by a state insurance department, provided that: (1) the IRS-approved EGTRRA document is submitted to the state insurance department within 90 days of the date on which the IRS issues a favorable EGTRRA opinion letter; and (2) the prototype sponsor resubmits the document, as amended to comply with changes required by the state insurance department, to the IRS within 90 days after it is approved by the state insurance department.

Adoption of Revised Plans

The IRS plans to issue revised model IRAs in early 2002 containing EGTRRA changes and required minimum distributions rules that comply with final regulations. Existing model IRAs cannot be used to establish new IRAs after June 1, 2002. Individuals using existing model IRAs who want to take advantage of the EGTRRA changes in 2002 must adopt revised model IRAs, or appropriate amended prototype IRAs, by the end of 2002.

Individuals using currently approved prototype IRAs must adopt either (1) the prototype sponsor's amended document within 180 days after the date on which the IRS issues a favorable EGTRRA opinion letter on the amended document, or (2) an appropriate model IRA by the end of 2002. Employers or employee associations using currently approved Code Sec. 408(c) IRAs must adopt amended IRAs within 30 days after the date on which the IRS issues a favorable EGTRRA opinion letter on the amended document.

Financial institutions that serve as trustees, issuers or custodians for model or prototype IRAs must change the corresponding disclosure statements required by Code Sec. 408(i) to reflect the contents of the revised IRAs. the institutions must distribute the amended disclosure statements to each individual using the revised IRAs.

The IRS plans to issue revised model SEP and SIMPLE IRA forms in early 2002 that will reflect EGTRRA changes. Existing model SEPs and SIMPLE IRA plans cannot be used to establish new SEPs or SIMPLE IRA plans after June 1, 2002. Employers using existing model SEPs that wish to take advantage of the EGTRRA changes for the first plan year beginning after 2001 must adopt revised model plans or appropriate amended prototype plans by the end of the first plan year. Employers using existing model SIMPLE IRA plans must adopt revised model plans or appropriate amended prototype plans by the end of 2002. However, participating employees must be notified of the increased EGTRRA contribution limits by October 1, 2002.

Employers using currently approved prototype SEPs that want to take advantage of the EGTRRA changes for the first plan year beginning after 2001 must adopt the prototype sponsor's amended document within 180 days after the date on which the IRS issues a favorable opinion letter on the amended document. Employers using currently approved prototype SIMPLE IRA plans must adopt the prototype sponsor's amended document within 180 days after the date on which the IRS issues a favorable opinion letter on the amended document. Participating employees must be notified of the increased EGTRRA contribution limits by October 1, 2002.

Employers using SEPs that have favorable rulings because the participants also participated in their terminated defined benefit plans must adopt amended SEPs. Because the Code Sec. 415(e) aggregation rules have been repealed, the IRS will no longer issue rulings on whether a SEP, in combination with a terminated defined benefit plan, satisfies the requirements of Code Sec. 415.

Transitional Relief

Individuals and financial institutions that establish trusts, custodial accounts, or annuity contracts as IRAs after 2001 using documents that have not received EGTRRA opinion letters are deemed to have established the IRAs using EGTRRA-approved documents provided that the following conditions are satisfied: (1) the IRA was established using a document provided by a prototype sponsor; (2) the prototype sponsor applies to the IRS for an opinion letter on the document no later than December 31, 2002; (3) the approved document is adopted within 180 days after the date on which the IRS issues a favorable opinion letter to the prototype sponsor; and (4) the individuals and financial institutions comply in operation with applicable statutory requirements for the period beginning on the date of the IRA's establishment under the original document through the date on which the IRS-approved document is adopted.

Employers that establish plans as SEPs or SIMPLE IRA plans after 2001 using documents that have not received EGTRRA opinion letters are deemed to have established the plans using an EGTRRA-approved document provided that the following conditions are satisfied: (1) a document provided by a prototype sponsor was used to establish the SEP or SIMPLE IRA plan; (2) the prototype sponsor applies to the IRS for an opinion letter on the document no later than December 31, 2002; (3) the approved document is adopted within 180 days after the date on which the IRS issues a favorable opinion letter to the prototype sponsor; and (4) the employers comply in operation with applicable statutory requirements for the period beginning on the date the SEP or SIMPLE IRA plan was established under the original document through the date on which the IRS- approved document is adopted.

Source: CCH, Incorporated

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