The Deemed or Sidecar IRAs -- Are you Ready?
IRA rules apply to all contributions to the Deemed IRA. For example, contributions to a Deemed Roth IRA will be after-tax. Contributions rules, including deductibility if applicable, for traditional and Roth IRAs apply to all contributions to Deemed IRAs, so income thresholds and phase-outs must be taken into consideration when making contributions.
During 2004 a 401k participant using a Deemed IRA arrangement will have the potential to contribute as much as $16,000 - $13,000 in pre-tax 401k contributions and $3,000 in Deemed IRA (traditional or Roth) contributions.
The distribution rules for the Deemed IRAs are also the same as traditional and Roth IRAs.
EGTRRA provided that the Deemed IRA and the contributions to it would be subject to the exclusive benefit and fiduciary rules of ERISA, but not ERISA's reporting and disclosure, participation, vesting, funding, and enforcement requirements applicable to the qualified retirement plan.
Assets of the 401k and any Deemed IRA can be commingled for investment purposes. However, the Deemed IRA contributions and earnings credited to them must be separately accounted for.
Plan sponsors interested in offering Deemed IRAs should contact their plan vendor and plan attorney before proceeding.