IRS Distinguishes 'Deemed IRA' From Qualified Plan

May 20, 2003 ( -The Internal Revenue Service (IRS) has proposed regulations to draw a general distinction between the "deemed IRA" and the rest of the qualified plan.

>The proposal is a result of a newly available Economic Growth and Tax Relief Reconciliation Act (EGTRRA) provision that allows employees to contribute to an account or annuity within a qualified pension plan that is treated like an individual retirement account (IRA).   Under the proposal, issues like eligibility, participation, disclosure, nondiscrimination, contributions, distributions, investments, and administration are to be resolved under the separate rules applicable to each entity, according to Washington-based legal publisher BNA.

>With the implementation, unnamed sources told BNA their predictions that “deemed IRAs” would be made widely available.   This is due to the design being attractive to both employers, who benefit from commingled investment assets and increased plan assets overall, and to employees, who will have the administrative framework for establishing and contributing to an IRA available at work. Also standing to benefit are advisors, because of the ease of setting up an account with the 401(k) provider, preventing that money from being redirected elsewhere.

Rules Changes

Among the changes that provide for “deemed IRAs”:

  • “Deemed IRAs” do not have to be made available in the nondiscriminatory manner required of qualified plans.
  • Section 219(f)(3) contribution rules, that allow contributions made to an IRA made after the last day of the taxable year to be treated as contributed in the preceding year, apply to “deemed IRAs.” However, amounts withheld by the employer are includible in income in the year withheld rather than the preceding year.
  • Funds from multiple “deemed IRAs” can be held in the same trust but the trust must be separate from that which holds the other assets of the qualified plan and each “deemed IRA” must be accounted for separately. Assets of a “deemed IRA” may be commingled with other assets of the plan for investment purposes, but separate accounts must be maintained and gains and losses must be reflected in each.
  • Plan documents must reflect the “deemed IRA” and the IRA must be in place before contributions are accepted, except for plans that first include the feature in 2003, which have until the end of the plan year to add the provisions.

Similar Results

>The family resemblance between the   “deemed IRA” and qualified plan can be seen in the event of failure of the “deemed IRA” to meet the requirements for traditional and/or Roth IRAs under Sections 408 and 408A, respectively.   In such an event, the plan as a whole would fail to satisfy the plan’s qualification requirements, causing problems if a plan sponsor has commingled “deemed IRA” assets with qualified plan assets.   Under this scenario, the disqualification of the plan could cause the “deemed IRAs” themselves to be disqualified.

>Other similarities exist in the compensation limits for IRAs under Sections 219 and 408A.   These statutes still apply for deemed IRAs, as do all the rules applicable to rollovers to and from IRAs.

The regulations are proposed to apply beginning August 1 and will be published in the May 20 Federal Register.   Comments should be sent to CC:PA:RU (REG-157302-02) Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. They can also be hand-delivered to CC:PA:RU (REG-157302-02), courier’s desk, IRS, 1111 Constitution Ave., Washington, D.C., or submitted electronically at .