Amending IRA Documents: Why, When, and How
By Lisa Walker, CISP, CHSP
Part of maintaining a compliant IRA program is to amend your IRA documents when required. And with new IRA model documents promised “soon” by the IRS, you likely will have to amend in the near future. In fact, IRS Notice 2020-68, issued in September 2020, states that IRA trustees, custodians, and issuers must amend their IRA plan agreements for the Setting Every Community Up for Retirement Enhancement (SECURE) Act by December 31, 2022, or a later date as prescribed by the Treasury Secretary. But what does it mean to amend? Why do you have to amend your IRA documents and when? How do you do it? Knowing the answers to those questions is helpful but taking on the task may seem overwhelming. Fortunately, document providers, like Ascensus, can help you through the amendment process.
Why Amend
An amendment to your IRA documents often is necessary when a major tax law is enacted that affects IRAs. It may be needed for both a plan agreement and a disclosure statement or only for the disclosure statement. The IRS often releases guidance, usually in the form of a revenue procedure, specifying that an amendment is required and when the amendment must be completed. If the IRS does not release guidance but changes to the IRA rules affect your documents, amending the disclosure statement often is required.
New legislation and rule changes aren’t the only reasons for amending IRAs. Changes in ownership of your organization may trigger some form of amendment to the plan documents. Another reason is if your financial organization decides to use a different IRA document. In this situation, your financial organization should review the IRA documents it currently uses and the new documents. In some cases, your organization may simply start using the new documents. In others, it may need to notify IRA owners of specific document changes.
If your organization fails to amend or does not amend timely, it faces potential penalties from the IRS. Not providing a required plan agreement or disclosure statement amendment to an IRA owner could cost your organization $50 per failure (as much as $100 per IRA if both the plan agreement and disclosure statement are required to be amended). In addition, not amending puts your organization and clients at risk for errors and negative tax consequences because of noncompliant documents and outdated information.
When to Amend
Plan Agreement
When to amend an IRA plan agreement for law changes depends on whether it’s a model document or a prototype. Treasury regulations require amendments to be completed no later than 30 days after the date the plan agreement amendment is adopted or 30 days after the date the amendment becomes effective, whichever is later.
IRS model plan agreements (e.g., Form 5305 series documents) satisfy the basic statutory requirements for IRAs and need only be amended after the IRS releases a new version of these forms and specifically requires amendments. Sometimes the IRS issues new forms but does not require amendments. If the IRS does require amendments, it will usually specify a deadline to amend, which often is later than the 30th-day deadline prescribed by regulations.
Prototype plan agreements generally must be amended after each major law change that affects IRAs. IR annuity endorsements generally require amending as indicated for IRA prototype plans. Prototype documents primarily are based on sample language provided by the IRS through its listing of required modifications (LRMs). The IRS periodically updates its LRMs, often accompanied with amendment guidance, for major law changes or after a series of changes has occurred.
Disclosure Statement
Your organization is required to provide a current disclosure statement—the nontechnical explanation of the rules set forth in the plan agreement—to individuals when they open an IRA. Treasury regulations state that disclosure statements cannot contain language that creates a false or misleading understanding of the rules governing IRAs. Thus, disclosure statements generally must contain current IRA rules.
Further, a disclosure statement amendment is required when a plan agreement is amended if the changes to the plan agreement materially affect the disclosure statement information. If the IRS requires that plan agreements be amended, then disclosure statements generally must be amended at the same time. Unless the IRS provides guidance for a specific amendment event, disclosure statement amendments must be completed 30 days after the date the plan agreement amendment is adopted or the date it becomes effective, whichever is later.
Regulations are not clear on when to amend disclosure statements for law changes if a plan agreement amendment is not required. The safest course of action is to amend disclosure statements as soon as administratively feasible after significant changes become effective.
How to Amend
Most document providers, like Ascensus, offer amendments. When both the plan agreement and disclosure statement are being amended, document providers usually combine both into one amendment event. Once your organization has the amendments, it should follow these steps.
Mail each IRA owner a copy of the amendment to the individual’s last known address. It’s a good idea to enclose a cover letter explaining the amendment. If any are undeliverable and are returned, keep the undelivered amendment in the IRA owner’s file.
Document that the amendment was sent by placing a copy in each IRA owner’s file or creating a master file. A master file should contain a copy of each amendment, a dated cover letter, and a list of mailing recipients.
Amendments for tax law changes often do not require a signature or consent from the IRA owner. But some amendments may require the IRA owner’s consent (i.e., a fully signed amendment by both parties), depending on the type of document, amendment, and state laws. For example, a change in the trustee or custodian often requires an affirmative consent. If your organization is unsure whether a signature is required for an amendment, it should check with its legal counsel.
Trust the Experts
A document provider, like Ascensus, can offer a plan document and disclosure statement amendment, either separately or together. Ascensus offers multiple options to help you amend your IRAs, including an amendment mailing service.
With new IRS model documents on their way, and required amendments likely, trust the experts at Ascensus to help. We’d be happy to provide a complimentary document review and discuss amendment options for your organization. Schedule a call with your Ascensus sales representative today or contact us at 800-346-3860.
