The IRA Guide to Summer Compliance and Review
By Kristiana Rodriguez, CIP
Everyone loves a good summer to-do list and we’re here to help. Now that the IRS Form 5498, IRA Contribution Information, reporting has been reviewed and submitted to the IRS, you may find that you finally have time to breathe. Whether you are new to your position or nearing retirement, it’s never a bad idea to refresh your IRA knowledge and get familiar with what your documents say and what your processes are. It’s the perfect time to survey your IRA department and see how you’re doing and what can be improved or implemented.
Here are five things you can review this summer to get your IRA department ready for fall.
Plan Documents
Every summer requires a great summer read. There are three documents required to open an IRA, but have you read them?
Once you’ve read your opening documents, you’ll be able to answer these questions.
If an IRA owner does not name a beneficiary, who or what is the default beneficiary?
What can your financial organization do if an IRA owner does not make an RMD election?
Which method of projecting future account value does your financial organization use on the IRA financial disclosure?
Plan Agreement Overview
The plan agreement is the contract between your financial organization and the IRA owner. Articles I-VII are standard language from the IRS and cannot be customized. Below is an overview of what the articles contain.
Article I. Contributions
Article II. Nonforfeitable
Article III. Restrictions on investments
Article IV. IRA distributions, RMDs, and beneficiary options
Article V. Reporting
Article VI. Articles I through III of the plan agreement are the controlling articles in the IRA plan agreement
Article VII. Amendments
Article VIII (Article IX in the Roth IRA model documents) Customized language
Disclosure Statement Overview
The disclosure statement is the document that explains the IRA rules in nontechnical language. Treas. Reg. 1.408-6(d)(4)(iii) specifies the information that must be contained in a disclosure statement, including the following.
An explanation of the
statutory requirements that pertain to an IRA;
tax consequences of establishing an IRA, including the
deductibility of contributions (unless a Roth IRA),
tax treatment of distributions,
availability of income tax-free rollovers, and
tax status of IRAs;
limitations and restrictions on some IRA contributions; and
circumstances under which an IRA owner may revoke the IRA.
A statement explaining
that a prohibited transaction will cause an IRA to lose its tax exemption, which results in the taxable funds being included in gross income;
that all or any portion of an IRA that is used as security for a loan is considered to be distributed, and that untaxed amounts are taxable in the year of distribution; and
the reasons for and results of the early distribution, excess contribution, and excess accumulation penalties; and
Distributions, including required minimum distributions (RMDs).
The disclosure statement also contains the financial disclosure, which is completed when an IRA is opened and projects an IRA’s potential growth. The financial disclosure is intended to be a consumer information device to be used to compare financial organization’s fees and penalties and to secure the best investment for IRA dollars.
Amending an IRA
Is your organization ready to amend its IRA documents? Since 2020, the IRS has indicated that it plans to release new IRA model documents for each type of IRA. When that happens, financial organizations will be required to use either the new model documents or, if using a prototype document, the new listing of required modifications(LRMs) in drafting an updated document for all clients.
Current Amendment Deadline
Financial organizations must amend their IRA plan agreements and disclosure statements to adopt provisions enacted under the SECURE Act of 2019, the Miners Act, the CARES Act, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, and the SECURE 2.0 Act of 2022. The current amendment deadline is December 31, 2026, so it’s good to have a gameplan as to how your organization will handle this future amendment mailing.
Previous Amendment Events
Plan Agreements
In 2002, the IRS required amendments for both prototype plan agreements and IRS model forms.
In 2007 and 2010, prototype plan agreements were updated for law changes and IRS pronouncements.
In 2017, the IRS released new model IRA trustee and custodial plan agreements.
Since then, your financial organization may have sent out IRA amendments due to a merger or acquisition or a change in form providers.
Disclosure Statements
The IRS last required disclosure statement amendments in 2002. Financial organizations must amend their disclosure statements when they amend their plan agreements. They must also provide an up-to-date disclosure statement when an IRA is opened. For this reason, disclosure statements are amended more frequently than plan agreements.
The IRS has not addressed when financial organizations should amend their disclosure statements for existing IRAs when a plan agreement amendment is not yet needed. Such disclosure statement amendments, therefore, should be made as soon as administratively feasible.
Document providers, including Ascensus, have recommended Traditional and Roth IRA disclosure statement amendments to address several changes to the IRA rules since 2002—including for the CARES Act, SECURE Act of 2019, SECURE Act of 2022, and the 2024 RMD regulations.
So how do you know if new documents are being used and if amendments were sent to your clients? This brings us to our next summer to-do item, the Master File.
Master File
When major mailings are sent to your client, the IRS gives you two options to prove that they were sent.
Document that the amendment was sent by placing a copy in each IRA owner’s file.
Create a master file that contains a copy of each amendment, a dated cover letter, and a list of mailing recipients.
A master file can be used when a variety of mailings are sent to clients—such as withholding reminder notices, IRA amendments, general correspondence, or beneficiary update letters.
Correspondence should be sent to the individual’s last known address. You may wish to enclose a cover letter explaining the amendment. If any letters are undeliverable and are returned, keep the undelivered letter in the IRA owner’s file.
Does your organization use option one or two above with major mailings? If you use a master file, where are they stored?
Beneficiary Update
Although not an IRS requirement, having up-to-date beneficiary information is important to an IRA owner, and to your financial organization. It makes processing death claims easier for you and the beneficiaries. Some financial organizations make it a point to send out beneficiary update letters to their clients.
Does your financial organization have something like this in place? If your summer season is slow, it might be a good time to consider doing a mailing and getting practice generating a master file.
Procedure Manual
The final item on this summer to-do list is determining whether your IRA department has a procedure manual. A procedure manual is a useful way to store institutional knowledge and the processes that your IRA department should follow. The IRS is not one hundred percent clear on how to process every IRA transaction. The procedure manual can help address “grey areas” when your financial organization needs to decide the best course of action and make a business decision on how to handle certain situations, such as divorce, bankruptcy, and guardianship orders.
If your financial organization has a procedure manual, it’s a great time to read it. Take note of anything that is out of date, areas your team may need additional training in, and when the manual was last updated.
Next Steps
Whether your IRA department has a lot of turnover or incredible longevity, it’s good to take time midyear and review what processes you have in place, what your documents communicate to clients, and what annual mailings you might have time to do during slower seasons.
Enjoy your summer.
