DOL Advisory Opinion Has Potential to Adversely Impact IRA Owners: Common Indemnification and Security Arrangements Could Cause IRAs to Lose Their Tax-Exempt Status

Sullivan & Cromwell LLP - December 2, 2011

In Advisory Opinion 2011-09A (the “DOL Opinion”), released to the public on November 29, 2011, the Department of Labor (the “DOL”) opined that common indemnification arrangements covering IRA brokerage accounts are not permitted under Prohibited Transaction Exemption 80-26 (“PTE 80-26”). While the full impact of the DOL Opinion will depend on how it is implemented by the Department of the Treasury (“Treasury”), the Internal Revenue Service (the “IRS”) and the DOL, it is important to note that the DOL Opinion could ultimately result in many IRAs losing their tax-exempt status and other related adverse tax consequences.

We understand that Treasury and the IRS are working with the DOL to prevent the DOL Opinion from having adverse tax impacts on IRA owners. Until the effect of the DOL Opinion is clarified, however, IRA sponsors should consider whether it would be prudent to restrict new arrangements of the type covered by the DOL Opinion and to change the terms of existing IRA indemnification and security arrangements.