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Wednesday, December 21, 2011

IRS Offers Relief Pending DOL Action on IRA Indemnification Agreements

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Sometimes brokers seek indemnification from IRA owners to cover losses in IRA accounts. However, DOL and IRS have indicated that these agreements violate prohibited transaction rules under ERISA and the Code. The IRS offered temporary relief from the prohibited transaction tax consequences of these arrangements while DOL considers a possible class exemption.

DOL recently addressed a situation in which an individual who opened an IRA futures trading account with a broker was required to sign an indemnification agreement before establishing the account. In DOL Adv. Op. 2011-09A, DOL found that Prohibited Transaction Exemption 80-26 does not provide relief from prohibited transaction rules in this situation, or for agreements under which an IRA owner grants a security interest in his non-IRA accounts to cover losses in the individual's IRA (“cross-collateralization agreements”).

The IRS offered relief from the prohibited transaction tax consequences of IRA indemnification agreements in Announcement 2011-81. DOL indicated that it is considering further guidance, and it expects and will consider a class exemption request. In the meantime, the IRS will not impose prohibited transaction tax consequences, so long as the problematic indemnification clause is not enforced against IRA assets.

Will brokers continue to insist on indemnification clauses in IRA agreements, despite the possibility of prohibited transaction consequences? Should IRA owners refuse to sign?



--Vanessa Walts

Tax Law Editor (Compensation Planning) 
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