Friday, September 28, 2012

Separate and Un-Equal Treatment for IRA and Employer Plan Documents

One of the core principles of retirement plan administration is that, wherever discretion is allowed, policies and procedures are to be applied “in a uniform and nondiscriminatory manner.”  Equal treatment is another way to put it; and you would be hard-put to find an IRS auditor or DOL examiner who would not echo this sentiment. 
We find it interesting, then, that there is such an obvious and perhaps illogical difference between the IRS’s approach to qualified retirement plan vs. IRA documents?  We have a tightly regulated, predictable, six-year cycle for the updating of documents and restatement of pre-approved qualified retirement plans.  We also may have numerous interim amendments during the normal six-year cycle.  The purpose of this regimen is to make sure that plan administrators, participants, and beneficiaries know the provisions under which a plan operates.   The last plan restatement cycle for EGTRRA began in 2006, and another for the PPA document is well underway.  Document compliance and consistency with the most up to date rules is not left to chance in the qualified plan world.
In contrast, it has been a decade since revised, up-to-date IRA model documents have been drafted and issued by the IRS.  During this time there have been seven significant pieces of legislation with IRA implications, and numerous items of interpretive guidance issued.  These changes affect such things as required minimum distributions (RMDs), Roth IRA conversions, rollovers from employer plans to IRAs, special options for military reservists and victims of natural disasters, transfers from IRAs to health savings accounts (HSAs), and more. 
In December of 2009, the IRS’s web site forms-release schedule targeted January, 2010, for issuance of updated model IRA forms.  At that time, statements from the IRS indicated that the actual redrafting of these model forms had been completed, and they were awaiting clearance from higher levels within the agency before being released.   Two and one-half years later, the model forms have not been issued, and the IRS has withdrawn the forms from its release schedule.
The IRA forms guidance that has been received arrived in June of 2010, when the IRS issued updated listing-of-required-modification (LRM) language for Traditional, Roth and SIMPLE IRAs.  LRM is a acronym for the “boilerplate” language that is used, either verbatim, or similar enough that it is identical in meaning, when forms drafters craft their own IRA documents.  These LRMs contain significant changes from the prior governing LRMs, two examples being requirements associated with beneficiary IRAs, and rollovers from employer plans to Roth IRAs.
Yet despite the numerous changes for law and guidance, and the new LRMs, the IRS surprisingly issued the ambiguous directive—in Revenue Procedure 2010-48—that prototype IRA documents DID NOT have to be revised in order for an IRA owner to take advantage of the law changes reflected in the new LRMs.  If IRA prototype drafters updated their documents only for the changes described therein, the IRS indicated that application for new opinion letters was not needed.
Finally, the IRS concluded Rev. Proc. 2010-48 ambiguously.  After stating that “The Service expects to issue revised model IRAs shortly,” it states that “use of the new models is not required,” but that “the Service recommends adoption of the latest model IRAs.”  With all the changes that have occurred in the decade since the last IRA model forms issuance, in 2002, it seems incomprehensible to advise that new and up-to-date IRA documents—whenever these finally do appear—would not be mandated, but merely recommended.
Some IRA document providers, like Ascensus, have during this past decade,  voluntarily redrafted their IRA prototype and model-based IRA agreements to better align them with current law and guidance, as well as providing amended “plain English” disclosure statements to reflect new requirements. 
The extremely long drought in release of new model IRA documents, combined with the lack of any IRS roadmap to IRA document consistency, has left the industry with a patchwork of IRA documents that varies greatly between custodians, trustees and issuers.  This approach to IRA document compliance isn’t accepted in the qualified plan world.  We wonder why the IRS not been equally concerned and diligent with IRAs?  Especially when we see the rapid growth in IRA deposits and increased regulatory scrutiny related to IRAs for things such as defining fiduciaries and providing investment advice.   It will be interesting to see where the IRS goes with the IRA amendment process.