On May 24, 2013, the U.S. Department of Labor (DOL) proposed to amend ERISA Prohibited Transaction Class Exemption 80-26 (PTE 80-26) to allow an indemnity, security interest or other cross-collateralization agreement with a financial institution involving an individual retirement account (IRA), or an employee benefit plan subject to the prohibited transaction rules of ERISA or the Internal Revenue Code (IRC), but only on a retrospective and temporary basis. Under the proposed amendment, this relief would expire six months after publication of a final amendment in the Federal Register.
It is common practice for the account opening documentation for brokerage, futures, options and similar accounts to provide in effect that, in the event a liability arising in the account (e.g., a trading loss, fee or tax) exceeds its assets, that liability may be satisfied from “related” accounts maintained at that financial institution. In advisory opinions issued in 2009 and 2011, DOL concluded, generally, that such a cross-collateralization agreement committing non-IRA assets of an IRA owner to cover indebtedness of, or arising from, the IRA to a bank or other financial institution:
- Is an ERISA prohibited transaction–specifically, a prohibited extension of credit from the IRA owner as “disqualified person” to the IRA–for which
- PTE 80-26–the exemption permitting interest-free loans or extensions of credit between a plan and disqualified person/party in interest in certain circumstances–does not provide exemptive relief.
These conclusions were inconsistent with widely held views in the regulated community.
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