Temporary Regs Modify Net Worth Requirements for Nonbank Trustees
T.D. 8570; 59 F.R. 62570-62571
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AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains temporary regulations that provide guidance to nonbank trustees with respect to the adequacy of net worth requirements of section 1.401-12(n)(6) and (7) of the Income Tax Regulations. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.
DATES: These regulations are effective December 6, 1994.
FOR FURTHER INFORMATION CONTACT: Judith E. Alden, (202) 622-6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
BACKGROUND
This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 401(d)(1). Sections 1022(c), 1022(d), and 2002(a)(2) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406 (1974), amended sections 401(d), 401(f), and 408 of the Internal Revenue Code (Code) to permit an entity that is not a bank to be a trustee or a custodian for purposes of those Code sections if such entity demonstrates to the satisfaction of the Secretary of the Treasury that it will administer the trust and hold assets in a manner consistent with the law. Although section 401(d)(1) was repealed by section 237(a) of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248 (1982), the regulations under section 401(d)(1) remain in force and effect to the extent that they govern the determination of whether an entity can be a nonbank trustee or custodian for purposes of Treasury Regulation sections 1.401(f)-1 and 1.408-2(d). Section 1.401-12(n)(6)(ii) of the regulations, proposed in 1975 and finalized in 1979 under section 401(d)(1) of the Code, sets forth net worth requirements for nonbank trustees based on the greater of a specified dollar amount or a percentage of the value of all assets held by the nonbank trustee in fiduciary accounts. A primary objective of this adequacy of net worth requirement has been to ensure that nonbank trustees maintain a level of solvency commensurate with their financial and fiduciary responsibilities. Pursuant to the existing net worth requirements, nonbank trustees may not accept new accounts unless their net worth exceeds the greater of $100,000 or four percent of the value of all assets held in fiduciary accounts. Additionally, nonbank trustees must take whatever steps are necessary (including the relinquishment of fiduciary accounts) to ensure that their net worth exceeds the greater of $50,000 or two percent of the value of assets held in their fiduciary accounts. While similar requirements apply to passive nonbank trustees (qualified nonbank entities that have no discretion to direct the investment of assets), the percentage requirements for these trustees are lower. Specifically, passive nonbank trustees may not accept new accounts unless their net worth exceeds the greater of $100,000 or two percent of the value of all assets held in fiduciary accounts and they must take appropriate action (including the relinquishment of fiduciary accounts) to ensure that their net worth exceeds the greater of $50,000 or one percent of the value of assets held in their fiduciary accounts.
The IRS has received comments that this requirement is unduly restrictive in the case of passive trustees who are broker-dealers regulated by the Securities and Exchange Commission (SEC) and who are required to have their fiduciary accounts protected by the Securities Investor Protection Corporation (SIPC). SIPC, established by Congress in 1970, insures customer assets and funds held by a U.S. broker-dealer in the case of an insolvency in an amount of up to $500,000 per customer, of which $100,000 may be cash. Thus, with respect to SIPC protected assets, the on-going net worth requirement provides little if any increase in protection of assets held in fiduciary accounts. Accordingly, these temporary regulations provide that SIPC protected assets will be disregarded in determining the value of assets held in fiduciary accounts by passive trustees for purposes of the percentage prong of the net worth requirement.
These temporary regulations also increase the initial net worth requirement for all nonbank trustees to better assure that enterprises are sound and well-funded during their start-up period. Under the existing net worth requirements, every nonbank trustee must have an initial net worth that exceeds $100,000. Under these temporary regulations, all entities applying for nonbank trustee status must have a net worth of not less than $250,000 for the most recent taxable year preceding the applicant's initial application. The existing net worth requirements, as modified for SIPC protected assets, will continue to apply on an on-going basis after a nonbank trustee has obtained the approval of the IRS.
In the absence of evidence that the on-going net worth requirements fail to meet the underlying objectives, these requirements (except with respect to SIPC protected assets) remain unchanged. However, the IRS recognizes that the nonbank trustee requirements have been in effect since 1979. Accordingly, the IRS and Treasury would welcome comments concerning the net worth requirements generally, as well as other aspects of the 1979 regulations.
SPECIAL ANALYSES
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.
DRAFTING INFORMATION
The principal author of these regulations is Judith E. Alden, Office of the Associate Chief Counsel, (Employee Benefits and Exempt Organizations). However, other personnel from the IRS and Treasury Department participated in their development.
LIST OF SUBJECTS IN 26 CFR PART 1
Income taxes, Reporting and recordkeeping requirements.
Treasury Decision 8570
ADOPTION OF AMENDMENTS TO THE REGULATIONS
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1 -- INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.401-12T is added to read as follows:
SECTION 1.401-12T REQUIREMENTS FOR QUALIFICATION OF TRUSTS AND PLANS BENEFITING OWNER-EMPLOYEES. (TEMPORARY).
(a) through (n)(6)(i) For guidance, see section 1.401-12(a) through (n)(6)(i).
(n)(6)(ii) ADEQUACY OF NET WORTH.
(A) INITIAL NET WORTH REQUIREMENT. In the case of applications received after January 5, 1995, no initial application will be accepted by the Commissioner unless the applicant has a net worth of not less than $250,000 (determined as of the end of the most recent taxable year). Thereafter, the applicant must satisfy the adequacy of net worth requirements of paragraph (n)(6)(ii)(B), of this section.
(B) ON-GOING NET WORTH REQUIREMENT. For guidance, see section 1.401-12(n)(6)(ii).
(7) SPECIAL RULES -- (i) PASSIVE TRUSTEE.
(A) through (B) For guidance, see section 1.401-12(n)(7)(A) through (B).
(C) For purposes of determining whether a passive nonbank trustee who is a broker or dealer within the meaning of 15 U.S.C. section 78lll satisfies the net worth requirements of subparagraph (n)(6)(ii)(B), assets held by the passive trustee in fiduciary accounts and protected by the Securities Investor Protection Corporation (SIPC) created under the Securities Investor Protection Act of 1970 (15 U.S.C. section 78aaa et seq, as amended) will not be included in determining the value of assets held in fiduciary accounts by the passive nonbank trustee. Such assets are only disregarded, however, in determining the value of assets held in fiduciary accounts by the passive trustee to the extent the assets are protected by SIPC.
(ii) [Reserved]
Commissioner of Internal Revenue
Approved: November 3, 1994
Leslie Samuels
Assistant Secretary of the Treasury
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Electronic CitationTD 8570