ERISA-IRS Provides Relief To IRA Owners Who Have Entered Into Indemnification Agreements With Brokers or Other Financial Institutions

In Announcement 2011-81, the Internal Revenue Service (the “IRS”) provides temporary relief to owners of Individual Retirement Accounts (“IRAs”) in circumstances in which the owners have signed certain indemnification agreements, or granted certain security interests in accounts, that may have an effect on the IRAs.

By way of background, according to the Announcement, on October 20, 2011, the Department of Labor (the “DOL”) issued Advisory Opinion 2011-09A, which indicated that an IRA owner’s agreement to indemnify a broker in order to cover indebtedness of, or arising from, the IRA with the broker would be an impermissible “extension of credit,” as described in § 4975(c)(1)(B) of the Internal Revenue Code (the “Code”), and that DOL class exemption PTE 80-26 would not provide any relief from this prohibited transaction. Subsequent to the issuance of Advisory Opinion 2011-09A, similar issues have been raised regarding the IRA owner’s grant of a security interest among the non-IRA accounts and the IRA (referred to collectively as cross-collateralization agreements) with a broker or other financial institution. Previously, on October 27, 2009, the DOL issued Advisory Opinion 2009-03A, which held that the grant by an individual to a broker of a security interest in the individual’s non-IRA accounts with the broker would be an impermissible extension of credit to the individual’s IRA, as described in § 4975(c)(1)(B) of the Code. Under Advisory Opinion 2011-09A, PTE 80-26 does not provide relief for the prohibited transaction arising from such extensions of credit.

The Announcement said that the DOL has advised the IRS that it is considering further action with respect to the issues described above, including the consideration of a new class exemption to provide relief. Pending further action by the DOL, and until issuance of further guidance from the IRS, the IRS will determine the tax consequences relating to an IRA, without taking into account the consequences that might otherwise result from a prohibited transaction under § 4975 resulting from entering into any indemnification agreement or any cross-collateralization agreement similar to the agreements described in DOL Advisory Opinions 2009-03A and 2011-09A. This will obtain so long as there has been no execution or other enforcement pursuant to the indemnification or cross-collateralization agreement against the assets of the IRA account which is the subject of the agreement.

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