partner and co-founder
LifeHealthPro.com/author/jason-jenkins BUILDING VALUE
Have you thought about
the tax consequences
of the DOL rule?
Go to this article on
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
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 firstname.lastname@example.org. RA