Source: http://www.retirementadvisordigital.com/retirementadvisor/july_2016?pg=20
Timestamp: 2018-12-11 19:45:42
Document Index: 631153508

Matched Legal Cases: ['§ 102', '§ 4975', '§ 4975', '§ 408', '§ 408', '§ 408']

Jason Jenkins partner and co-founder of Denver-based Jenkins Wealth Management Group LifeHealthPro.com/author/jason-jenkins BUILDING VALUE
Have you thought about the tax consequences of the DOL rule?
LifeHealthPro.com to read the extended version of this column and share your thoughts on the rule’s impacts.
The entire financial industry is quickly becoming more and more familiar with the three letters “DOL,” but the question at the end of the day is what does it mean for the future of giving advice?
I recently spoke with Peter Gulia, a lawyer who advises fiduciaries, including investment advisors. During our conversation, he explained a point that shocked me.
If an advisor recommends a prospect move retirement plan money to a commission-based IRA, the advisor and broker-dealer or other financial institution must meet the conditions of the new Best Interest Contract exemption (BICE). If the IRS later audits the investor, they might be required to produce a completed BICE form. If this form is not complete or is inaccurate, the IRS can make the entire IRA a taxable event to your client. YES! That’s right. Your client could end up having a major taxable event on their hands.
I asked Peter to explain what law imposes tax consequence on an IRA if the BICE or another prohibited-transaction exemption is not met. Following is part of Peter’s reply (published with permission).
“In legislating the Employee Retirement Income Security Act of 1974, Congress granted powers to several government agencies, including the labor and treasury departments.
Congress enacted ERISA’s participation, vesting, funding, and some fiduciary-responsibil-ity provisions in two sets of provisions – in ERISA’s title I for non-tax provisions, and in ERISA’s title II for provisions that amended the Internal Revenue Code. Further, in ERISA’s title III, Congress directed the agencies to coordinate their interpretations and enforcement. Many rules required collaborations between or among two or more agencies, and required executive approval from every agency involved.
The labor and treasury departments’ people
found this cumbersome. They designed a plan
under which authority to interpret specified
statute sections rests with one department,
even if this means that the tax agency inter-
prets a labor statute, or that the labor agency
interprets a tax statute. President Carter
adopted this plan, and transmitted it to both
bodies of Congress.
The Reorganization Plan’s § 102 transfers to the Secretary of Labor the Secretary of the Treasury’s authority to interpret Internal Revenue Code § 4975, with some exceptions (none of which constrains what the invest-ment-advice fiduciary rule does).
Internal Revenue Code § 4975 defines a prohibited transaction, and imposes an excise tax on each prohibited transaction. Internal Revenue Code § 408(e)( 2)(A) provides: ‘If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year.’ Internal Revenue Code § 408(e) ( 2)(B) provides: ‘In any case in which any account ceases to be an individual retirement account by reason of subparagraph (A) as of the first day of any taxable year, paragraph ( 1) of subsection (d) applies as if there were a distribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day).’ Internal Revenue Code § 408(d)( 1) includes in a taxpayer’s gross income previously untaxed amounts paid or distributed from an IRA.
Although the [IRS] administers the federal excise and income taxes, the labor department’s new rule governs whether a person is a fiduciary, which affects whether a transaction is a prohibited transaction.”
Read the full text of this article on LifeHealthPro.com. Peter can be reached directly at peter@petergulia.com. RA