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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The payment of wrap fees by IRA and Roth IRA owners to the IRAs' nonbank custodian for investment planning and advice and related financial services would not be deemed contributions to the accountholders' IRAs and Roth IRAs, according to IRS Letter Ruling 201104061.
A company that was a securities broker/dealer and investment adviser offered IRAs and Roth IRAs to it clients and served as the nonbank custodian for the IRAs. The company provided the IRA owners with the choice of three types of "investment advisory accounts" with different investment options. Under these "investment advisory accounts," the owners received, among other things, investment advice and trade execution services for a quarterly fee, a "wrap fee." The wrap fees were being paid out of the IRA assets on a quarterly basis. The company wanted to offer the IRA owners the option of paying the wrap fees with non-IRA funds, without the payments being "deemed" contributions to the IRAs.
In IRS Rev. Rul. 84-146, the IRS held that amounts paid by an IRA owner for trustee's fees were deductible under Code Sec. 212 (expenses for the production of income) to the extent that the amounts satisfy the requirements of that section, including being ordinary and necessary expenses. However, in IRS Rev. Rul. 86-142, the IRS determined that broker's commissions charged for the purchase and sale of securities for a qualified plan or IRA were not recurring administrative or overhead expenses incurred in connection with the maintenance of the plan trust or IRA. Instead, the broker's commissions were intrinsic to the value of the trust or account assets.
Commissions were part of the cost of securities being purchased or sold. Thus, IRA contributions to pay broker's commissions and direct payments by an IRA owner to a broker for commissions were not deductible under Code Sec. 162 (trade or business expenses) or Code Sec. 212. These contributions (and payments treated as IRA contributions) were deductible, subject to the limits of Code Sec. 219 (deductions for contributions to IRAs).
The IRS noted that the services provided to the IRA owners included investment advice, performance monitoring and review, trade execution, money management, and custodial services. The wrap fee for these services was a percentage of assets under management and not related to the number of trades executed in any account, according to the IRS. These fees were recurring administrative or overhead expenses incurred in connection with the maintenance of the owners' IRAs, the IRS determined.
The IRS concluded that the payment of wrap fees by IRA owners who participated in the investment advisory accounts would not deemed contributions to the owners' IRAs, if the payments were made directly from funds that were not part of the owners' IRAs.
For more information, visit http://www.wolterskluwerlb.com/rbcs.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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