Relief Offered by DOL for Cross-Collateral Agreements Impacting IRAs and ERISA Retirement Plans

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The Department of Labor (DOL) has proposed retroactive relief and a limited repair period for certain common extensions of credit found in agreements between financial institutions and the accountholders of individual retirement accounts (IRAs) and sponsors of other retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). The proposed amendment to Prohibited Transaction Exemption 80-26 (published at 78 Federal Register 31584, on May 24, 2013, on the Federal Register website), is good news to financial services providers, as well as to unwitting accountholders.

Unless exempted, loans or other extensions of credit between ERISA-governed retirement plans or IRAs and related persons may constitute "prohibited transactions" under ERISA and the Internal Revenue Code, resulting in penalties, fiduciary liability exposure, and, in the case of an IRA, loss of tax-advantaged treatment. Previously, in Advisory Opinion 2009-03A, the DOL had indicated that cross-collateral agreements, where assets in a non-retirement account (such as a traditional brokerage account or investment account) may be used by the broker or other financial institution to cover investment losses and expenses within an IRA or an account holding the assets of an ERISA-governed retirement plan, would constitute an impermissible extension of credit and a prohibited transaction.

The 2009 Advisory Opinion and subsequent similar pronouncements brought about widespread alarm within the financial services industry because of the prevalence of cross-collateral arrangements, particularly between IRA accounts and personal brokerage accounts. These developments have also been of concern to self-employed individuals and others who have used IRAs as vehicles to protect assets from the claims of potential creditors. More than one aggressive collection attorney has suggested that this cross collateral language should automatically disqualify an IRA and negate the IRA asset protection generally available under bankruptcy law.

The exemption, once finalized, would provide retroactive relief so that an existing or previous cross-collateralization arrangement would not be treated as a forbidden extension of credit to an IRA or other ERISA retirement plan. In addition, the exemption would extend relief for a six-month period following the finalization to permit financial institutions and accountholders to remove cross-collateralization from agreements that relate to IRAs and other ERISA retirement plans. The class exemption, as proposed, would not provide permanent prospective relief.

Interested parties should keep track of this proposed prohibited transaction exemption as it moves through the finalization process. In the meantime, financial institutions, individual accountholders and sponsors of ERISA retirement plans should use this opportunity to review their account agreement language that relates to IRAs and retirement plans to ensure compliance with the DOL's stated limitations on extensions of credit.