The Department of Labor (DOL) grants exemptions to some prohibited transactions related to individual retirement accounts (IRAs), such as an IRA buying investment property from the IRA owner. As such, the Government Accountability Office (GAO) examined these exemptions and concluded that the Department of Labor (DOL) and the IRS should work closer together to establish a formal means to oversee these IRA prohibited transaction exemptions.
“With regard to DOL’s application review process, GAO found that DOL has not sufficiently documented internal policies and procedures to help ensure effective internal control of its process,” GAO says in a new report, “Individual Retirement Accounts: Formalizing Labor’s and IRS’ Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions.”
GAO goes on to say: “Documenting procedures could increase transparency about how applications are handled, reduce the risk of DOL employees carrying out their duties inconsistently, and provide a means to retain organizational knowledge should key personnel leave unexpectedly.”
GAO notes that while DOL and IRS share some information on IRA prohibited transactions, it is not a formal process. Of the 124 IRA prohibited transaction exemption applications that GAO examined, in only eight cases did DOL contact the IRS. Further, DOL has information about why it denies some of these applications, which it fails to share with the IRS.
The report says that prohibited transactions tend to arise when IRA owners make unconventional investments outside of publicly traded stocks, bonds or mutual funds—and seek to invest in real estate, virtual currency or private equity. If the IRS finds that a person has engaged in a prohibited transaction, that person could face severe tax consequences. In some cases, the IRA could entirely lose its tax-favored status.
Typically, DOL only grants an exemption when it finds it is administratively feasible, in the interest of the IRA owner, and protective of the rights of the participant and beneficiaries. IRA owners and their fiduciaries can file applications for exemptions with DOL’s Office of Exemption Determinations, which is part of the Employee Benefit Security Administration (EBSA). They can research information about past exemptions on EBSA’s website. If an applicant finds that their application is similar to others that DOL has approved, they can expedite the process with an “EXPRO” application.
DOL typically takes between a few months to more than a year to review normal applications and as little as 78 days for an EXPRO application.
GAO found that most of the applications it reviewed, 88 of the 124, concerned the sale of IRA assets, followed by the purchase of assets (21 applications).
In conclusion, GAO says, documenting such procedures would provide greater transparency about how applications and handled, reducing the risk of employees carrying out their duties inconsistently.
As far as coordinating with the IRS, GAO says IRS officials say they would like more information from the DOL on requested exemptions. GAO also says that the two agencies do coordinate sufficiently on employer-sponsored retirement plans.
The DOL had put forth a significant expansion of the fiduciary rule to apply to all advisers and brokers, which the 5th Circuit vacated. Subsequently, the Securities and Exchange Commission passed Regulation Best Interest, which would require financial professionals to act in their clients’ best interest, but stops short of requiring all brokers to serve as fiduciaries.