"The Pension Specialists" Blog

Warning – Determine if Your IRA Processor Has Prepared Some of Your Institution’s 5498 Forms Incorrectly

An IRA custodian called CWF with the following situation/question. Jane Doe has her own personal traditional IRA and she has an inherited traditional IRA arising from her mom. The IRA processor prepared just one combined 2015 Form 5498. Is this correct or permissible?

It is incorrect. Two 5498 forms must be prepared. It is understandable why a software engineer would think that it is better and simpler if just one form 5498 record is prepared rather than multiple forms. It is not simpler. The IRS rules do not permit aggregation of the data when there are multiple IRA plan agreements. The IRS has had the rule for a long time that contributions, distributions and fair market value statements are prepared and reported on a per plan agreement basis.

IRA tax data may be aggregated on a per IRA plan agreement basis, but it is not permissible to aggregate data from multiple IRA plan agreements. For example, Jane Doe age 53 has IRA Plan #1 and makes three $2,000 contributions for tax year 2015 on 3/10/15, 9/10/15 and 3/1/16 and she made a rollover contribution from a 401(k) plan to IRA Plan #1 of $12,000 on 6/10/15 and another rollover contribution from her 401(k) plan of $23,000 on 10/10/15. Box 1 will be completed with $6,000 and box 2 will be completed with $35,000.

As the discussion below illustrates, there is tax logic to the rule that there must be a separate IRA reporting form prepared on a per IRA plan agreement basis rather than allowing the reporting entity to aggregate the information and then furnish one form.

For example, Jane Doe has her own traditional IRA and she has has also inherited her mom’s traditional IRA. There must be two also separate 5498 forms prepared for her. For income taxation purposes she does not aggregate her IRA with the inherited IRA from her mother.

Preparation of a combined Form 5498 is a violation of IRS requirements. The IRS has the authority to assess a fine of $50 for each incorrect form and $50 for each missed form. Remember, the fines are doubled in the sense that one form goes to the IRS and one copy to the individual. Most likely the processor in its contract tries to have the IRA custodian be liable for this type of mistake. It’s CWF opinion that if the processor has written its software to not comply, it should be liable for any IRS fines.

What tax harm is being caused by such impermissible aggregation?

A person must do separate tax calculations for distributions from personal IRAs and inherited IRAs. This capability is lost if the data is aggregated.

If two 5498 forms both show a rollover contribution, most likely the IRS will determine that only one of them qualifies to be a rollover contribution because of the once per year rule and the other would be a taxable distribution. This audit capability is lost if there is just one combined Form 5498 prepared. The IRS prepares many statistical studies based on the info set forth on the 5498 forms. Many analytic capabilities are lost if there is not one Form 5498 prepared for each plan agreement.

IRS Announces 2013 Limits for IRAs and Pension Plans

IRS Announces 2013 Limits For IRAs and Pension Plans

Today, the IRS announced to 2013 limits applying to IRAs and pension plans by issuing IRS news release 2012-77.

The IRA contribution limits are changed - $5,500 (up from $5,000) if the individual is younger than age 50 in 2013, and $6,500 (up from $6,000) if he or she attains age 50 or older in 2013.

The maximum SEP contribution for 2013 will increase to $51,000 from $50,000.

The SIMPLE IRA contribution limits are also changed for 2013. The maximum elective deferral contribution amount is $12,000 for a person who is younger than age 50 in 2013 and $14,500 if he or she attains age 50 or older in 2013.

The 401(k) elective deferral contribution limits also changed for 2013. The maximum elective deferral contribution amount is $17,500 (up from $17,000) for a person who is younger than age 50 in 2013 and $23,000 (up from $22,500) if he or she attains age 50 or older in 2013.

The compensation ranges applying to deductible IRA contributions do increase.

• The 2013 compensation range applying to a person whose filing status is single, head of household or qualifying widower is ($59,000 - $69,000) (up from $58,000 - $68,000}
• The 2013 compensation range applying to a person whose filing status is married/joint return and an active participant is ($95,000 - $115,000) (up from $92,000 - $112,000}
• The 2013 compensation range applying to a person whose filing status is married/joint return but not an active participant is ($178,000 - $188,000) (up from $173,000 - $183,000}
• The 2013 compensation range applying to a person whose filing status is married but filing a separate return is unchanged at ($0 - $10,000).

The compensation ranges applying to Roth IRA contributions have increased for 2013.

• The 2013 compensation range applying to a person whose filing status is single, head of household or qualifying widower is ($112,000 - $127,000) up from ($110,000 - $115,000)
• The 2013 compensation range applying to a person whose filing status is married/joint return is ($178,000 - $188,000) up from ($173,000 - $183,000)
• The 2013 compensation range applying to a person whose filing status is married but filing a separate return is unchanged at ($0 - $10,000).

The compensation ranges applying to a savers tax credit also will increase.

Changes Between the 2010 and 2011 Instructions for Form 1099-R

1. IRS Ends Pilot or Trial Truncation Program Effective for 2011 Forms. The 2011 Form 1099-R is required to be completed to show the recipient’s complete identifying number (SSN) on all copies of the forms.
2. Box 7 has two boxes. In the first box, the IRA custodian will insert the reason code describing the distribution. The second box is to be checked if the distribution is from a traditional, SEP, or SIMPLE IRA
3. After receiving a suggestion from CWF, the IRS changed the last sentence to read, “Do not check the box for a distribution from a Roth IRA or for an IRA recharacterization.” Before it read, “it is not necessary to check the box for a distribution from a Roth IRA or for an IRA recharacterization.” The fact is – if this box was checked for a Roth IRA distribution, the IRS still sent a tax assessment letter asking why the recipient had not included Roth IRA distribution amount “as taxable”on their tax return
4. The IRS has chosen to increase the discussion of prohibited transactions. This is an indication that the IRS expects IRA custodians to report prohibited transactions when they happen on account of the accountholder or the inheriting beneficiary. The new paragraph on page 2 reads, “Prohibited transactions. If an IRA tion with respect to an IRA, the assets of the IRA are treated as distributed on the first day of the tax year in which the prohibited transaction occurs. lRAs that include, or consist of, non-marketable securities and/or closely held investments, in which the IRA owner effectively controls the underlying assets of such securities or investments, have a greater potential for resulting in a prohibited transaction. Report the distribution as you normally would for the IRA that has engaged in the prohibited transaction. Enter Code 5 in box 7
5. With the extension of Qualified Charitable Distributions for 2010 and 2011, the 2011 1099-R instructions again state the reporting rule that there is no special reporting by the IRA custodian for qualified charitable distributions or for qualified HSA funding distributions
6. A new paragraph has been added discussing special distributions arising from distributions under the Employee Plans Compliance Resolution System(EPCRS). In some situations. the IRS has ruled that it will be permissible for an IRA custodian to return certain excess employer contributions (but not elective deferrals), and the earnings on them, under SEP, SAR-SEP or SIMPLE-IRA plans to the employer. In such case, the gross distribution is to be entered in box 1, 0 in box 2a and enter Code E in box 7.

Added a new paragraph for payments to covered expatriates (i.e. individuals who have given up U.S. citizenship). The IRA custodian is to follow the guidance provided by Notice 2009-85.

If you have any questions please call us at 800.346.3961.