The Deemed or Sidecar IRAs -- Are you Ready?

The "Deemed IRA" (also called a "Sidecar IRA") was part of "The Economic Growth and Tax Reconciliation Act of 2001" (EGTRRA), although the concept has been around since the early 1980’s. Basically, if your 401k plan adopts this provision of EGTRRA, for plan years beginning on or after January 1, 2003, a 401k plan may allow employees to make voluntary employee contributions to a "Deemed IRA" which is a separate account established under the plan.

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.

Additional Resources and Information

Deemed IRAs – Deemed IRAs face an uphill battle in gaining acceptance by employers and employees alike. Regulations regarding these elusive IRAs offer clarification and guidance which may increase their popularity. This article summarizes the requirements for Deemed IRAs.

Treasury and the IRS Finalize "Deemed IRA" Rules - According to the Treasury announcement, "These regulations will enhance the willingness of employers to offer deemed IRAs to employees as well as the interest of service providers in offering these products to employers."

IRS Issues Final Deemed IRA Regulations - One of the most controversial aspects of the proposed regulations was the rule that if a Deemed IRA failed to satisfy the qualification requirements applicable to IRAs, the entire qualified retirement plan of which the Deemed IRA was a part would be disqualified. This was perceived by many as a significant impediment to a general adoption of Deemed IRAs because compliance with the qualification requirements applicable to IRAs is, in some respects, solely within the control of the individual for whom the account is maintained, and not the employer.

IRS Proposed Regulations on Deemed IRAs in Qualified Retirement Plans - This document contains proposed regulations that provide guidance regarding accounts or annuities added to qualified employer plans where such accounts or annuities are to be treated as individual retirement plans. These regulations reflect changes made to the law by the Economic Growth and Tax Relief Reconciliation Act of 2001 and by the Job Creation and Worker Assistance Act of 2002. These regulations will affect administrators of, participants in, and beneficiaries of qualified employer plans.

Deemed IRAs – A Welcomed New Plan Design Feature that promise to become an important plan design feature because they offer benefits to the entire employee benefits community.

Deemed individual retirement accounts ("Deemed IRAs" sometimes also referred to as "Sidecar IRAs"), which will become effective on January 1, 2003 and which are the focus of this Alert.

IRS Issues Guidance on Plan Amendments for Deemed IRAs - The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added section 408(q) of the Internal Revenue Code (Code), which allows qualified retirement plan sponsors to offer "Deemed IRAs" under their plans beginning on January 1, 2003. In Rev. Proc. 2003-13, which the IRS released on January 2, 2003, the IRS provided guidance regarding amendments needed to include a Deemed IRA in a qualified retirement plan.