What Financial Organizations Need to Know About Amending IRA Documents

When major tax laws affecting IRAs are enacted, IRA document amendments are often necessary to disclose the rule changes and to keep IRAs in compliance. Not amending leads to outdated information that sometimes can cause negative tax consequences for IRA owners and IRS penalties for financial organizations. Two pieces of recent legislation—the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018—led to significant IRA rule changes.

So, is it time to amend? Financial organizations are responsible for deciding if IRA documents should be amended, which documents to amend, when to amend, and how to communicate these amendments to their clients. Ascensus® keeps watch on legislative changes to let financial organizations know when it’s time to amend and offers IRA document amendment solutions to help make the process easy.

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Reasons for Amending

New legislation may require amendments to the IRA plan agreement, to the disclosure statement, or both. (Amendments to the financial disclosure are never required.) Major tax law changes have called for many Traditional and Roth IRA amendments over the years. But changes in document providers, mergers, and acquisitions also may require amendments to notify IRA owners of specific changes in the documents.

Amendments keep IRA documents in compliance with new rules, and keep IRA owners informed.

Costs of Not Amending

Financial organizations that fail to amend—or amend timely—face potential penalties. Not providing a required plan agreement and disclosure statement amendment to an IRA owner could cost as much as $100 per IRA ($50 per document). Not amending also puts IRA owners at risk for negative tax consequences because of noncompliant documents and old information.

Plan Agreement Amendments

The IRS sometimes releases guidance requiring a plan agreement amendment and specifying when the amendment must be completed. Amending IRA plan agreements for law changes differs depending on the type of document being used.

  • IRS model plan agreements (e.g., Form 5305 series documents) need to be amended after the IRS releases a new version of these forms and specifically requires amendments. The IRS may issue new forms without requiring amendments.
  • Prototype plan agreements generally must be amended after each major law change that affects IRAs. Prototype documents primarily are based on sample language through the IRS’ Listing of Required Modifications (LRMs). Updated LRMs often accompany amendment guidance for major law changes that affect IRAs.

Disclosure Statement Amendments

Financial organizations must amend disclosure statements when a plan agreement amendment affects information in the disclosure statement. But sometimes disclosure statements must be amended even if the plan agreement is not. Treasury regulations state that disclosure statements cannot contain language that is false or misleading. And major tax law changes can lead to disclosure statements containing obsolete information. Amending the disclosure statement—regardless of whether plan agreements are amended—ensures that it contains the most current IRA rules.

Document providers typically notify financial organizations when an amendment to the disclosure statement is recommended (even if not required by the IRS). For example, Ascensus recommends a disclosure statement amendment for the following Tax Cuts and Jobs Act of 2017 and Bipartisan Budget Act of 2018 changes to IRA rules.

  • Recharacterizations of conversions and employer-sponsored retirement plan-to Roth IRA rollovers are no longer allowed.
  • The amount of medical expenses needed to qualify for the 10% early distribution penalty tax is reduced.
  • Rollover relief will be granted for returns of improper IRS levies.
  • The rollover deadline is extended for certain plan loan offset amounts.

How to Amend

Most document providers help financial organizations through the amendment process.

1.     Get Amendments
Amendments are purchased from a document provider or the financial organization drafts its own (with the help of its attorneys).

2.     Give to IRA Owners
A copy of the amendment and a cover letter explaining the changes is mailed to each IRA owner’s last known address. Any undeliverable amendments that are returned are retained in the IRA owner’s file.

3.     Keep Copies
A copy of the amendment is placed in each IRA owner’s file or a master file is created. A master file contains a copy of each amendment, a dated cover letter, and a list of mailing recipients.

Amendments for tax law changes usually do not require the IRA owner’s signature. But depending on the type of document, amendment, and state laws, amendments may require the IRA owner’s consent (i.e., a fully signed amendment by both parties). A financial organization should consult with its legal counsel if it’s unsure whether a signature is required.

Amendment Deadlines

Treasury regulations state that IRA owners should receive a copy of any amendments no later than 30 days after the date the amendment is adopted or 30 days after the date the amendment becomes effective, whichever is later. If an amendment is required, the IRS usually provides deadlines, possibly allowing for a longer amendment period.

If a plan agreement amendment is not required, disclosure statements should be amended as soon as administratively feasible after the changes become effective.