Are IRA Amendments Required for 2020-2021?
Yes, IRA amendments are required from a customer service viewpoint and also from an IRS compliance viewpoint. The law changes made by the SECURE Act and the CARES Act are not minor changes. They are major changes. Some would call them historic changes. Certainly, the change in the required distribution rules applying to inheriting beneficiaries are major. In general, a non-spouse beneficiary who is more than 10 years younger than the IRA owner will be required to close an inherited IRA under the 10-year rule and no longer can stretch out distributions over his or her life expectancy.
On September 8, 2020, the IRS issued Notice 2020-68. The IRS discussed the topic of IRA Amendments. IRA account-holders and beneficiaries must be informed of the new beneficiary RMD rules. The IRS stated that in order to accept contributions by eligible individuals over age 70 1/2, the IRA plan agreement must be amended.
The governing IRA regulation requires an IRA custodian/trustee to furnish an IRA amendment when the IRA plan agreement provisions are changed or when one or more of the topics discussed in the IRA disclosure statement is no longer correct and it needs to be revised or amended to set forth a current and correct explanation. Regulation 1.408-6(4)(ii)(C) requires that an IRA amendment be furnished no later than the 30th day after the amendment is adopted or becomes effective.
A cardinal rule of IRA and pension law is, the terms of the IRA plan agreement control and in order for a person to benefit from a law change the plan document must be revised to set forth the new law. Individuals have the right to be informed and understand current laws and the particulars of the specific IRA plan agreement. Many individuals and possibly many IRA custodians might wish the law to be, since federal tax law authorizes a certain tax benefit, then a person should be able to realize a tax benefit regardless of what the IRA plan agreement provides. The law does not adopt this approach. For example, in order for a person age 74 to make an IRA contribution in 2020 or subsequent years to his or her traditional IRA, the IRA plan agreement must be revised to authorize the person to make such a contribution. A person who wants to make an IRA contribution after April 15th under the special disaster contribution rules must be authorized to do so by the IRA plan agreement. In order for an IRA owner who attains age 70 1/2 in 2020 to not take a required distribution for 2020, the IRA plan agreement must be amended.
When is it necessary for an IRA custodian/trustee to furnish an IRA amendment? Is it necessary or required to furnish one in 2021?
Each institution must make its own determination because one needs to understand when was the IRA agreement last amended and how is it being amended. A primary question is, “when is the last time the financial institution furnished an amendment?” What do the current IRA plan agreements provide? Are there some IRAs set up with one certain plan agreement and others with a different plan agreement?
One may learn a tax lesson the hard way, if he or she adopts the position that an amendment is not required because the IRS has not said one is required.
A long time ago (1986/1987) the IRS acknowledged that there are times that even though the IRA plan agreement has not been changed, a disclosure statement amendment must still be furnished. Example, when the deductible/nondeductible rules were first authorized in 1986/1987, such rules did not require the IRA form to be rewritten because the IRA form discusses the maximum contribution amount limit, but does not discuss the deductible/nondeductible rules. The IRS stated there needed to be a disclosure statement amendment discussing or explaining the deductible/ nondeductible rules.
In summary, answering a question whether or not an amendment is required is not simple. Each financial institution will need to make its own decision to furnish one or both amendments.
It is true that the IRS has not been very active in auditing whether or not IRA custodian/trustees are furnishing IRA amendments as required by the IRA regulation. We at CWF believe it is in the best interest of a financial institution to furnish the amendments. The governing IRA regulation provides that a $50 fine may be assessed an institution for each time it fails to furnish the IRA plan agreement and $50 each time it fails to furnish the IRA disclosure amendment.