On November 23, 2010, the IRS issued Rev. Proc. 2010-48, providing helpful guidance regarding the amendment and approval of prototype IRAs for a host of statutory changes. With demographic changes driving the growth of IRAs over the next decade, the sensible and useful positions taken by the IRS are most welcome, and will help minimize the formalistic compliance costs and risks for IRAs to the ultimate benefit of IRA owners.

Procedural Guidance  

The IRS provided guidance on the following procedural points:  

  • IRA documents are not required to be amended for a list of recent statutory changes (enumerated below) that became effective after June 2007. IRA providers can continue to rely on prior prototype approval of their IRA documents or the prior IRS model form without amendments.  
    • Many IRA providers have read the Internal Revenue Code to mean that, unlike section 401(a) qualified retirement plans, IRAs need not be amended for statutory changes unless Congress specifically requires such an amendment.  
    • It is good news to see the IRS confirm that position, at least for the enumerated statutory changes. As a technical matter, however, the guidance provided by Rev. Proc. 2010-48 will not apply to the next legislative enactment applicable to IRAs.  
  • Prototype IRA providers may operate IRAs in accordance with these recent statutory changes “without specific authorizing language in the prototype IRA.” That is, the IRS will accept prototype IRAs administered in accordance with applicable law as qualified under Internal Revenue Code § 408, without taking a scrivener’s eye to the documents.  
  • IRA providers thus have the choice of either (i) continuing to use existing IRA documentation and observing recent statutory changes in IRA administration, in which case any prior prototype approval (whether from use of the IRS model form or from an IRS opinion letter) continues to apply; (ii) incorporating the recent statutory changes into their IRA documents, in which case the prior prototype approval also continues to be valid; or (iii) amending their prototype IRA documentation and (if desired) submitting it for an IRS opinion letter. To receive a favorable letter from the IRS, a prototype IRA must include every applicable issue from the IRS List of Required Modifications, and use of the LRM language is strongly encouraged.  
  • Additional and significant procedural relief is provided for prototype IRA annuities described in Code § 408(b). For prototype approval applications submitted to the IRS after December 13, 2010, prototype sponsors must only submit one application for each IRA endorsement, regardless of the number of associated annuity contract forms. Among other things, the endorsement must provide explicitly that the terms of the endorsement supersede any conflicting terms of the associated contract. Opinion letters will be issued with respect to the endorsement rather than the contract form. The IRS expects to reduce the number of opinion letters issued and the amount of fees paid by issuers.  
    • It is unclear from the Revenue Procedure whether prior approvals for IRA endorsements now extend beyond the specific contract form for which the endorsement was approved.  
    • This new procedure is reflected in the revised Form 5306, which may also be used for opinions on single-contract endorsements and by those providers that prefer to have separate opinion letters for each contract.

Revised model IRAs are expected shortly. The IRS also plans to issue new model IRAs for traditional individual retirement annuities and SIMPLE individual retirement annuities.  

Prototype IRA providers should revise their IRA disclosure statements to update both (i) any disclosures affected by the recent legislation, and (ii) if applicable, any statement about IRS approval of the prototype IRA that is affected by the new guidance.  

Statutory Changes for IRAs

The statutory developments expressly covered by the Revenue Procedure (which also serves as a helpful checklist for IRA administration) include:

Click here to view table