Td 9142

Federal Register / Vol. 69, No. 140 / Thursday, July 22, 2004 / Rules and Regulations
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Food and Drug Administration
21 CFR Part 520
Oral Dosage Form New Animal Drugs;
Ivermectin Tablets and Chewables
AGENCY:

Food and Drug Administration,

HHS.
ACTION:

Final rule.

SUMMARY: The Food and Drug
Administration (FDA) is amending the
animal drug regulations to reflect
approval of an abbreviated new animal
drug application (ANADA) filed by
Phoenix Scientific, Inc. The ANADA
provides for veterinary prescription use
of chewable ivermectin tablets in dogs
to prevent canine heartworm disease by
eliminating the tissue stage of
heartworm larvae (Dirofilaria immitis)
for 1 month (30 days) after infection.
DATES: This rule is effective July 22,
2004.
FOR FURTHER INFORMATION CONTACT:
Lonnie W. Luther, Center for Veterinary
Medicine (HFV–104), Food and Drug
Administration, 7519 Standish Pl.,
Rockville, MD 20855, 301–827–8549, email: lluther@cvm.fda.gov.
SUPPLEMENTARY INFORMATION: Phoenix
Scientific, Inc., 3915 South 48th St.
Terrace, St. Joseph, MO 64503, filed
ANADA 200–297 that provides for
veterinary prescription use of
Ivermectin Chewable Tablets for Dogs to
prevent canine heartworm disease by
eliminating the tissue stage of
heartworm larvae (Dirofilaria immitis)
for 1 month (30 days) after infection.
Phoenix Scientific, Inc.’s Ivermectin
Chewable Tablets for Dogs are approved
as a generic copy of Merial Ltd.’s
HEARTGARD Chewables, approved
under NADA 140–886. The ANADA is
approved as of June 18, 2004, and the
regulations are amended in 21 CFR
520.1193 to reflect the approval. The
basis of approval is discussed in the
freedom of information summary.
In accordance with the freedom of
information provisions of 21 CFR part
20 and 21 CFR 514.11(e)(2)(ii), a
summary of safety and effectiveness
data and information submitted to
support approval of this application
may be seen in the Division of Dockets
Management (HFA–305), Food and Drug
Administration, 5630 Fishers Lane, rm.
1061, Rockville, MD 20852, between 9
a.m. and 4 p.m., Monday through
Friday.
The agency has determined under 21
CFR 25.33(a)(1) that this action is of a
type that does not individually or

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43735

cumulatively have a significant effect on
the human environment. Therefore,
neither an environmental assessment
nor an environmental impact statement
is required.
This rule does not meet the definition
of ‘‘rule’’ in 5 U.S.C. 804(3)(A) because
it is a rule of ‘‘particular applicability.’’
Therefore, it is not subject to the
congressional review requirements in 5
U.S.C. 801–808.

contains temporary regulations under
section 408(a) providing a special rule
for governmental units seeking approval
to serve as nonbank trustees of
individual retirement accounts for
purposes of section 408(q). These
regulations affect administrators of,
participants in, and beneficiaries of
qualified employer plans.
DATES: Effective Date: These regulations
are effective July 22, 2004.
Applicability Dates: For dates of
List of Subjects in 21 CFR Part 520
applicability, see §§ 1.408(q)–1(i) and
Animal drugs.
1.408–2T(e)(8)(iv).
■ Therefore, under the Federal Food,
FOR FURTHER INFORMATION CONTACT:
Drug, and Cosmetic Act and under
Linda Conway at (202) 622–6090 (not a
authority delegated to the Commissioner toll-free number).
of Food and Drugs and redelegated to the SUPPLEMENTARY INFORMATION:
Center for Veterinary Medicine, 21 CFR
Paperwork Reduction Act
part 520 is amended as follows:
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
■ 1. The authority citation for 21 CFR
accordance with the Paperwork
part 520 continues to read as follows:
Reduction Act of 1995 (44 U.S.C. 3507)
Authority: 21 U.S.C. 360b.
under control number 1545–1841.
Responses to this collection of
§ 520.1193 [Amended]
information are required for taxpayers
■ 2. Section 520.1193 is amended in
who want to include individual
paragraph (b)(2) by removing ‘‘No.
retirement plans as part of a qualified
051311’’ and by adding in its place ‘‘Nos. employer plan.
051311 and 059130’’.
An agency may not conduct or
Dated: July 13, 2004.
sponsor, and a person is not required to
respond to, a collection of information
Stephen Sundlof,
unless it displays a valid control
Director, Center for Veterinary Medicine.
number assigned by the Office of
[FR Doc. 04–16627 Filed 7–21–04; 8:45 am]
Management and Budget.
BILLING CODE 4160–01–S
The estimated annual burden per
respondent/recordkeeper is 50 hours.
Comments concerning the accuracy of
DEPARTMENT OF THE TREASURY
this burden estimate and suggestions for
reducing this burden should be sent to
Internal Revenue Service
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
26 CFR Parts 1 and 602
SE:W:CAR:MP:T:T:SP, Washington, DC
[TD 9142]
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
RIN 1545–BB58
Department of the Treasury, Office of
Information and Regulatory Affairs,
Deemed IRAs in Qualified Retirement
Washington, DC 20503.
Plans
Books or records relating to a
AGENCY: Internal Revenue Service (IRS),
collection of information must be
Treasury.
retained as long as their contents may
become material in the administration
ACTION: Final and temporary
of any internal revenue law. Generally,
regulations.
tax returns and tax return information
SUMMARY: This document contains final
are confidential, as required by 26
regulations providing guidance under
U.S.C. 6103.
section 408(q) regarding accounts or
Background
annuities that are part of qualified
This document contains amendments
employer plans but are to be treated as
to the Income Tax Regulations (26 CFR
individual retirement plans. These
Part 1) under section 408(q) of the
regulations reflect changes made to the
Internal Revenue Code (Code). On May
law by the Economic Growth and Tax
Relief Reconciliation Act of 2001 and by 20, 2003, a notice of proposed
rulemaking (REG–157302–02) was
the Job Creation and Worker Assistance
published in the Federal Register (68
Act of 2002. This document also
PART 520—ORAL DOSAGE FORM
NEW ANIMAL DRUGS

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Federal Register / Vol. 69, No. 140 / Thursday, July 22, 2004 / Rules and Regulations

FR 27493) under section 408(q). No
public hearing was requested or held.
Written comments responding to the
notice of proposed rulemaking were
received. After consideration of all the
comments, the proposed regulations are
adopted as amended by this Treasury
decision.
This document also contains an
amendment to the regulations under
section 408(a) regarding the approval of
nonbank trustees of individual
retirement accounts. Section 1.408–
2(e)(5)(v)(A) of the regulations currently
provides that a person seeking approval
to serve as a nonbank trustee must
demonstrate that, except for investments
pooled in a common investment fund,
the investments of each account will not
be commingled with any other property.
Because section 408(q)(1) expressly
provides that deemed IRAs need not
satisfy the requirements of section
408(a)(5) regarding the commingling of
IRA and plan assets, § 1.408–
2(e)(5)(v)(A) is modified to reflect the
statutory rule.
In addition, this document contains a
temporary amendment to the
regulations under section 408(a)
regarding the approval of nonbank
trustees. This temporary amendment
modifies the requirements for approval
as a nonbank trustee for certain
governmental units that intend to serve
as the trustees of individual retirement
accounts subject to section 408(q).
Explanation of Provisions and
Summary of Comments
A. Overview
Section 408(q) provides that, if a
qualified employer plan allows
employees to make voluntary employee
contributions to a separate account or
annuity established under the plan and
under the terms of the qualified
employer plan the account or annuity
meets the applicable requirements of
section 408 or section 408A for an
individual retirement account or
annuity, then the account or annuity is
treated for purposes of the Code in the
same manner as an individual
retirement plan rather than as a
qualified employer plan. It further
provides that contributions to such a
‘‘deemed IRA’’ are treated as
contributions to the deemed IRA rather
than to the qualified employer plan.
Section 408(q) also expressly provides
that the requirements of section
408(a)(5) regarding the commingling of
IRA assets with other property shall not
apply to deemed IRAs.
In general, the proposed regulations
provided that a qualified employer plan
and a deemed IRA would be treated as

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separate entities under the Code and
that each entity would be subject to the
rules generally applicable to that entity
for purposes of the Code. Thus, a
qualified employer plan (excluding the
deemed IRA portion of the plan),
whether it is a plan under section
401(a), 403(a), or 403(b), or a
governmental plan under section 457(b),
would be subject to the rules applicable
to that type of plan rather than to the
rules applicable to IRAs under section
408 or 408A. Similarly, the deemed IRA
portion of the qualified employer plan
would generally be subject to the rules
applicable to traditional and Roth IRAs
under sections 408 and 408A,
respectively, and not to the rules
applicable to plans under section 401(a),
403(a), 403(b), or 457.
B. Separate Trusts
Section 1.408(q)–1(f)(2) of the
proposed regulations provided that any
trust holding deemed individual
retirement account assets must be
separate from the trust holding the other
assets of the qualified employer plan.
The separate trust rule was intended to
ensure better compliance with the IRA
requirements and limit confusion of IRA
and plan assets. The proposed
regulations also provided a comparable
rule for deemed IRAs that are individual
retirement annuities.
Several commentators argued that a
separate trust for deemed individual
retirement accounts should not be
required where the assets of the
qualified employer plan are already
held in a trust. They argued the plan’s
trust could satisfy the requirement of
section 408 that the individual
retirement account be held in a trust
and that separate accounting would
ensure compliance with the IRA
requirements and avoid any confusion
of IRA and plan assets. They also argued
the requirement of a separate trust
would unduly complicate the
administration of the plan and lead to
potentially higher costs for the plan
sponsor. In response to these comments,
the final regulations provide that a
separate trust is not required in those
cases in which the qualified employer
plan maintains a trust but only if
separate accounting is maintained for
each deemed IRA. Revenue Procedure
2003–13 (2003–4 I.R.B. 317), which
includes sample amendments providing
for separate trusts for deemed IRAs,
does not apply to the extent it provides
to the contrary.
The regulations specify that if deemed
IRAs are held in a single trust that
includes the qualified employer plan,
the trustee must maintain a separate

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account for each deemed IRA and the
qualified employer plan.
Permitting deemed IRAs that are
individual retirement accounts to be
held in a single trust that includes the
qualified employer plan raises the issue
of whether, if the qualified employer
plan portion of the trust invests in life
insurance contracts, the deemed IRA
would be considered to have violated
section 408(a)(3), which provides that
‘‘no part of the trust funds will be
invested in life insurance contracts.’’
The regulations clarify that, in that case,
section 408(a)(3) is treated as satisfied if
no part of the separate account of any
of the deemed IRAs is invested in life
insurance contracts,
Section 408A(b) and the regulations
thereunder set forth rules under which
a Roth IRA must be clearly designated
as a Roth IRA. Pursuant to the
regulations under § 1.408A–2, Roth
IRAs that are individual retirement
accounts must be trusts separate from
traditional IRAs. These final regulations
permit a departure from these rules for
deemed Roth IRAs, allowing them to be
held in a single trust with deemed
traditional IRAs, provided that the
trustee maintains separate accounts for
the deemed Roth IRAs and deemed
traditional IRAs of each participant, and
each of those accounts is clearly
designated as such. Thus, the rules
under §§ 1.408A–2 and 1.408A–4 of the
regulations, regarding designation and
redesignation of IRAs as Roth IRAs,
apply to deemed IRAs as if the separate
accounts maintained for the deemed
Roth IRAs and deemed traditional IRAs
were separate trusts.
The requirements for separate
accounts within a trust as described
above are not meant to imply that a trust
that includes deemed IRAs and a
qualified employer plan (or Roth and
traditional IRAs) can be segmented for
other purposes. For example, where a
qualified employer plan and deemed
IRAs are included in the same trust,
there cannot be separate trustees for
each account, and the trustee for the
trust must be either a bank or a nonbank
trustee that satisfies the requirements of
section 408(a)(2) and the regulations
thereunder.
The proposed regulations included a
rule for individual retirement annuities
similar to that for individual retirement
accounts. Under the proposed
regulations, separate annuity contracts
were to be maintained for individual
retirement annuities when the qualified
employer plan also maintains annuity
contracts. However, unlike the rules
applicable to deemed individual
retirement accounts which provide for
separate accounts and not separate

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Federal Register / Vol. 69, No. 140 / Thursday, July 22, 2004 / Rules and Regulations
trusts, section 408(q)(1)(A) expressly
provides that a separate annuity is to be
established for a deemed individual
retirement annuity. Accordingly, these
final regulations retain the rule in the
proposed regulations that a separate
annuity is to be established under the
plan with respect to deemed individual
retirement annuities.
C. Disqualification
Section 1.408(q)–1(g) of the proposed
regulations provided that the failure of
any of the deemed IRAs maintained by
the plan to satisfy the applicable
requirements of section 408 or 408A
caused the plan as a whole to fail to
satisfy the plan’s qualification
requirements. The proposed regulations
further provided that, if the qualified
employer plan failed to satisfy its
qualification requirements, the deemed
IRA portion would no longer be a
deemed IRA because section 408(q) does
not apply if the plan is not a qualified
employer plan. The proposed
regulations provided, however, that
although the account or annuity that
was intended to be a deemed IRA was
no longer a deemed IRA, it could still
be treated as a traditional or a Roth IRA
if it satisfied the applicable
requirements of section 408 or 408A
(including the requirements regarding
the commingling of assets under section
408(a)(5)).
Several commentators objected to this
rule as inconsistent with the general
rule that the qualified employer plan
and the deemed IRA portion of the plan
are separate entities and with the
requirement that the deemed IRA assets
and the other assets of the qualified
employer plan must be maintained in
separate trusts. Some commentators
objected in particular to the rule that the
failure of the qualification of a deemed
IRA could result in the failure of the
qualification of the plan as a whole.
They stated that various aspects of the
operation of deemed IRAs are not
within the control of the employer.
The final regulations provide that the
failure of either the qualified employer
plan portion or the deemed IRA portion
of the plan to satisfy the applicable
qualification rules of each will not cause
the other portion to be automatically
disqualified. This rule applies, however,
only if the deemed IRA portion and the
qualified employer plan portion are
maintained as separate trusts (or
separate annuity contracts, as required
in the case of individual retirement
annuities). If both the deemed IRA
portion and the qualified plan portion
are included in separate trusts and the
qualified employer plan is disqualified,
the IRA portion cannot be a deemed IRA

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under section 408(q) but it will not fail
to satisfy the applicable requirements of
section 408 or 408A if it satisfies the
applicable requirements of those
sections, including, with respect to
individual retirement accounts, the
requirements of section 408(a)(5).
However, if the IRA assets and the nonIRA assets have been commingled
(except in a common trust fund or
common investment fund as permitted
by section 408(a)(5)), the IRA portion
will fail to satisfy the requirements of
section 408(a).1 Likewise, if the IRA
assets and the non-IRA assets are
commingled (except as permitted by
section 408(a)(5), and the IRA is
disqualified, the plan will also be
disqualified.
D. Governmental Units as Nonbank
Trustees
As noted above, the proposed
regulations provided that a qualified
employer plan and a related deemed
IRA are generally treated as separate
entities under the Code and each is
subject to the rules applicable to that
entity. Thus, under the proposed
regulations, an individual retirement
account that is a deemed IRA would be
required to satisfy the requirements of
section 408(a) except for the
commingling limitations of section
408(a)(5). Consistent with this general
rule, § 1.408(q)–1(f)(1) of the proposed
regulations provided that the trustee or
custodian of an individual retirement
account must be a bank or other person
that receives approval from the
Commissioner to serve as a nonbank
trustee pursuant to § 1.408–2(e) of the
regulations.
Several commentators noted that
because the nonbank trustee criteria
were designed to test private entities, it
is difficult, if not impossible, for most
state and local governments to satisfy
them. They also argued that, although it
1 The Department of Labor has advised the IRS
and Treasury that consistent with section 4(c) of the
Employee Retirement Income Security Act (ERISA),
accounts and annuities (and contributions thereto)
established in accordance with section 408(q) of the
Code are not to be treated as part of the pension
plan under which such accounts and annuities are
allowed (or as a separate pension plan) ‘‘for
purposes of any provision of [title I of ERISA] other
than § 403(c), 404, or 405 (relating to exclusive
benefit, and fiduciary and co-fiduciary
responsibilities) and part 5 (relating to
administration and enforcement).’’ Accordingly,
fiduciaries need to take appropriate steps to ensure
that they satisfy any fiduciary duties associated
with implementation and operation of a deemed
IRA feature that is related to a plan covered under
title I of ERISA. These duties may include, but are
not limited to, a duty to monitor the activities of
holders of deemed IRAs in order to prevent
disqualification of the deemed IRA feature and/or
the qualified employer plan where the plan is
intended to be maintained as a tax-qualified plan.

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43737

may be possible for a state or local
government to appoint a bank or an
approved nonbank trustee for the
deemed IRA portion of the plan, this
would impose unnecessary costs and
administrative hardships on these
governments that would outweigh any
corresponding benefit and that such an
appointment may contravene state law.
Several commentators argued that
governments should be exempt from the
nonbank trustee requirements, but the
IRS and Treasury continue to believe
that governments, like private entities,
must demonstrate to the satisfaction of
the Commissioner that the manner in
which the government will administer
the deemed IRA will be consistent with
the requirements of section 408(a).
Accordingly, the final regulations adopt
the rule of the proposed regulations that
the trustee of the deemed IRA must be
a bank or a nonbank trustee approved by
the Commissioner. The IRS and
Treasury acknowledge, however, that
§ 1.408–2(e) of the regulations sets forth
several criteria that governments may
have difficulty satisfying. Accordingly,
this document temporarily amends
§ 1.408–2(e) to provide that a
governmental unit may serve as the
trustee of any deemed IRA established
by that governmental unit as part of its
qualified employer plan if that
governmental unit establishes to the
satisfaction of the Commissioner that
the manner in which it will administer
the deemed IRA will be consistent with
the requirements of section 408. The
temporary amendment also provides
special rules regarding the application
of § 1.408–2(e) to governmental units.
E. Other Comments
Other comments included one noting
that the proposed regulations require
that the plan document of the qualified
employer plan must contain the deemed
IRA provisions and that Revenue
Procedure 2003–13 provides that the
deemed IRA provisions must address
every applicable point in the IRA
Listing of Required Modifications. The
commentator suggested that plan
sponsors be permitted to incorporate by
reference the terms of separate IRA
agreements or annuities. Although
incorporation by reference may be
possible in some circumstances, it is not
possible where the IRA document is
inconsistent with the provisions of the
plan. For example, assuming the
deemed IRA is to provide for
commingling as allowed under section
408(q), it is not possible to incorporate
an IRA document that prohibits such
commingling.
Various comments were received
relating to administrative issues such as

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Federal Register / Vol. 69, No. 140 / Thursday, July 22, 2004 / Rules and Regulations

reporting and withholding rules and
whether the separate rules applicable to
qualified employer plans and IRAs were
to be applied. As indicated in
§ 1.408(q)–1(c) of the proposed
regulations, except as otherwise
provided in the regulations, the
qualified employer plan and the deemed
IRA are treated as separate entities
under the Code and they are subject to
the separate rules applicable to qualified
employer plans and IRAs, respectively.
Accordingly, the reporting and
withholding rules on plan and IRA
distributions apply separately
depending on whether the distributions
are made from the deemed IRA or the
qualified employer plan. Thus, for
example, the reporting rules for required
minimum distributions apply separately
for the two portions of the plan.
Similarly, a total distribution of
amounts held in the qualified employer
plan portion and the deemed IRA
portion is reported on two Forms 1099–
R, ‘‘Distributions from Pensions,
Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.’’,
one for the distribution from the
deemed IRA portion and one for the rest
of the distribution. Also, the 20%
withholding rules of section 3405(c) do
not apply to a distribution from the
deemed IRA portion but would apply to
a distribution from the qualified
employer plan portion, and section 72(t)
applies separately to the two portions.
Questions were also raised regarding
who may participate in a deemed IRA.
For example, one commentator, noting
that the term employee is not defined by
section 408(q) or by the proposed
regulations, asked whether that term
includes self-employed individuals.
Although employee is not defined by
section 408(q), section 408(q)(3)(B)
defines a voluntary employee
contribution, in part, as a contribution
by an individual ‘‘as an employee under
a qualified employer plan which allows
employees’’ to elect to make
contributions to a separate account
under the plan. Thus, these regulations
provide that to the extent a selfemployed individual is an employee for
purposes of the qualified employer plan,
that individual will be treated as an
employee for purposes of section 408(q).
In the case of a qualified plan under
section 401(a) and a qualified annuity
plan under section 403(a), employee
includes self-employed individuals as
defined in section 401(c). The only
circumstance under which a selfemployed individual may participate in
a section 403(b) plan is when a selfemployed minister described in section
414(e)(5) participates in a retirement

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income account as described in section
403(b)(9). In contrast, section 457(e)(2)
permits independent contractors as well
as employees to participate in a section
457 plan. However, since section 408(q)
permits only employees to make
contributions to a deemed IRA, only
employees (including self-employed
individuals) may be permitted to
participate in a deemed IRA maintained
by a governmental section 457 plan.
Another commentator asked whether
an employee can participate in a
deemed IRA if he or she does not
participate in the qualified employer
plan, or even if the employee is not
eligible to participate in the qualified
employer plan. Again, as noted above,
the deemed IRA and the qualified
employer plan are generally treated as
separate entities under the Code.
Section 408(q) does not impose a
requirement that an employee must
participate in both portions of the plan
or that an employee must be eligible to
participate in both portions of the plan.
Accordingly, the two portions of the
plan may have different eligibility
requirements.
One commentator asked whether the
automatic enrollment principles
applicable to section 401(k), 403(b), and
457 plans under Revenue Rulings 2000–
8 (2000–1 C.B. 617); 2000–35 (2000–2
C.B. 138); and 2000–33 (2000–2 C.B.
142), apply to deemed IRAs. These
revenue rulings specify the criteria to be
met in order for an employee’s
compensation to be automatically
reduced by a certain amount where that
amount is contributed as an elective
deferral to these three types of plans.
The IRS and Treasury agree that the
automatic enrollment principles
applicable to section 401(k), 403(b), and
457 plans in the cited revenue rulings
may also be applied to deemed IRAs.
With respect to the requirements for
approval as a nonbank trustee, one
commentator noted that § 1.408–
2(e)(5)(v) requires that an applicant
must demonstrate that, except for
investments pooled in a common
investment fund, the investments of
each account will not be commingled
with any other property. The
commentator noted that this
requirement is inconsistent with the
provisions of section 408(q)(1), which
provide that the requirements of section
408(a)(5) regarding commingling do not
apply to deemed IRAs. Accordingly, this
document amends § 1.408–2(e)(5)(v) to
provide that an applicant that intends to
serve as a nonbank trustee need not
satisfy this requirement with respect to
any assets held in a deemed IRA.
Finally, these regulations provide that
neither the assets held in the deemed

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IRA portion of the qualified employer
plan, nor any benefits attributable
thereto, shall be taken into account for
purposes of determining the benefits of
employees and their beneficiaries under
the plan (within the meaning of section
401(a)(2)) or determining the plan’s
assets or liabilities for purposes of
section 404 or 412. The Pension Benefit
Guaranty Corporation (PBGC) has
advised the IRS and Treasury that a
deemed IRA feature that is related to a
qualified employer plan is not covered
by Title IV of ERISA. The PBGC has
further advised that the deemed IRA
feature is treated as a separate entity
from the qualified employer plan for
purposes of Title IV. For example,
neither the assets in, nor the benefits
attributable to, the deemed IRA are
taken into account in determining the
amount of the PBGC’s variable-rate
premium, and an individual who is a
participant in the deemed IRA but who
is not a participant in the qualified
employer plan is not included in the
PBGC’s flat-rate participant count. In
addition, for purposes of Title IV, the
deemed IRA will be treated as separate
from the qualified employer plan in the
event of termination of the qualified
employer plan, and the fiduciary of the
deemed IRA would continue to be
responsible for the continued operation,
transfer, or termination of the deemed
IRA. The PBGC would allocate the
assets of the qualified employer plan to
the priority categories under section
4044 of ERISA without regard to any
assets in, or benefits attributable to, the
deemed IRA, and the PBGC would not
serve as trustee of the deemed IRA.
Termination of a deemed IRA would not
be subject to the rules governing plan
termination under Title IV of ERISA.
Effective Date
The regulations apply to accounts or
annuities established under section
408(q) on or after August 1, 2003.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required.
It is hereby certified that the
collection of information in these final
regulations will not have a significant
economic impact on a substantial
number of small entities. The collection
of information in the regulations is in
§ 1.408(q)–1(f)(2) and consists of the
optional requirement that deemed IRAs
may be held in trusts or annuity
contracts separate from the trust or
annuity contract of the qualified
employer plan. This certification is

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Federal Register / Vol. 69, No. 140 / Thursday, July 22, 2004 / Rules and Regulations
based on the fact that the burden of
reporting these separate trusts and
annuity contracts is small, particularly
for small entities. Therefore, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, this notice
of proposed rulemaking will be
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
It has also been determined that
section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. For the
applicability of the Regulatory
Flexibility Act (5 U.S.C. chapter 6) to
the temporary regulations, refer to the
Special Analyses section of the
preamble to the cross-referencing notice
of proposed rulemaking published in
this issue of the Federal Register.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking
preceding the final regulations was
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business. The
temporary regulations will also be
submitted to the Chief Counsel for
Advocacy for such comment.
Drafting Information
The principal authors of these
regulations are Robert Walsh of the Tax
Exempt and Government Entities
Division and Linda Conway, Office of
Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel
from the IRS and Treasury participated
in the development of these regulations
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements
26 CFR Part 602
Reporting and recordkeeping
requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:

■

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as
follows:

■

Authority: 26 U.S.C. 7805 * * *
§ 1.408–2 also issued under 26 U.S.C.
408(a) and 26 U.S.C. 408(q). * * *

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§ 1.408(q)–1 also issued under 26 U.S.C.
408(q). * * *
■ Par. 2. In § 1.408–2, paragraph
(e)(5)(v)(A) is revised and (e)(8) is added
to read as follows:

§ 1.408–2

Individual retirement accounts

*

*
*
*
*
(e) * * *
(5) * * *
(v) Custody of investments. (A) Except
for investments pooled in a common
investment fund in accordance with the
provisions of paragraph (e)(5)(vi) of this
section and for investments of accounts
established under section 408(q) on or
after August 1, 2003, the investments of
each account will not be commingled
with any other property.
*
*
*
*
*
(8) [Reserved]. For further guidance,
see § 1.408–2T(e)(8).
■ Par. 3. Section 1.408–2T is added to
read as follows:
§ 1.408–2T Individual retirement accounts
(temporary).

(a) through (e)(7) [Reserved]. For
further guidance, see § 1.408–2(a)
through (e)(7).
(8) Special rules for governmental
units. (i) A governmental unit that seeks
to qualify as a nonbank trustee of a
deemed IRA that is part of its qualified
employer plan must demonstrate to the
satisfaction of the Commissioner that it
is able to administer the trust in a
manner that is consistent with the
requirements of section 408. The
demonstration must be made by written
application to the Commissioner.
Notwithstanding the requirement of
§ 1.408–2(e)(1) that a person must
demonstrate by written application that
the requirements of paragraphs (e)(2) to
(e)(6) of that section will be met in order
to qualify as a nonbank trustee, a
governmental unit that maintains a plan
qualified under section 401(a), 403(a),
403(b) or 457 need not demonstrate that
all of these requirements will be met
with respect to any individual
retirement accounts maintained by that
governmental unit pursuant to section
408(q). For example, a governmental
unit need not demonstrate that it
satisfies the net worth requirements of
§ 1.408–2(e)(3)(ii) if it demonstrates
instead that it possesses taxing authority
under applicable law. The
Commissioner, in his discretion, may
exempt a governmental unit from
certain other requirements upon a
showing that the governmental unit is
able to administer the deemed IRAs in
the best interest of the participants.
Moreover, in determining whether a
governmental unit satisfies the other

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43739

requirements of §1.408–2 (e)(2) to (e)(6),
the Commissioner may apply the
requirements in a manner that is
consistent with the applicant’s status as
a governmental unit.
(ii) Governmental unit. For purposes
of this special rule, the term
governmental unit means a State,
political subdivision of a State, and any
agency or instrumentality of a State or
political subdivision of a State.
(iii) Additional rules. The
Commissioner may in revenue rulings,
notices, or other guidance of general
applicability provide additional rules
for governmental units seeking approval
as nonbank trustees.
(iv) Effective date. This special rule is
applicable for written applications made
on or after August 1, 2003, or such
earlier application as the Commissioner
deems appropriate.
■ Par. 4. Section 1.408(q)–1 is added to
read as follows:
§ 1.408(q)–1 Deemed IRAs in qualified
employer plans.

(a) In general. Under section 408(q), a
qualified employer plan may permit
employees to make voluntary employee
contributions to a separate account or
annuity established under the plan. If
the requirements of section 408(q) and
this section are met, such account or
annuity is treated in the same manner
as an individual retirement plan under
section 408 or 408A (and contributions
to such an account or annuity are
treated as contributions to an individual
retirement plan and not to the qualified
employer plan). The account or annuity
is referred to as a deemed IRA.
(b) Types of IRAs. If the account or
annuity meets the requirements
applicable to traditional IRAs under
section 408, the account or annuity is
deemed to be a traditional IRA, and if
the account or annuity meets the
requirements applicable to Roth IRAs
under section 408A, the account or
annuity is deemed to be a Roth IRA.
Simplified employee pensions (SEPs)
under section 408(k) and SIMPLE IRAs
under section 408(p) may not be used as
deemed IRAs.
(c) Separate entities. Except as
provided in paragraphs (d) and (g) of
this section, the qualified employer plan
and the deemed IRA are treated as
separate entities under the Internal
Revenue Code and are subject to the
separate rules applicable to qualified
employer plans and IRAs, respectively.
Issues regarding eligibility,
participation, disclosure,
nondiscrimination, contributions,
distributions, investments, and plan
administration are generally to be
resolved under the separate rules (if

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any) applicable to each entity under the
Internal Revenue Code.
(d) Exceptions. The following
exceptions to treatment of a deemed IRA
and the qualified employer plan as
separate entities apply:
(1) The plan document of the
qualified employer plan must contain
the deemed IRA provisions and a
deemed IRA must be in effect at the
time the deemed IRA contributions are
accepted. Notwithstanding the
preceding sentence, employers that
provided deemed IRAs for plan years
beginning before January 1, 2004, (but
after December 31, 2002) are not
required to have such provisions in
their plan documents before the end of
such plan years.
(2) The requirements of section
408(a)(5) regarding commingling of
assets do not apply to deemed IRAs.
Accordingly, the assets of a deemed IRA
may be commingled for investment
purposes with those of the qualified
employer plan. However, the
restrictions on the commingling of plan
and IRA assets with other assets apply
to the assets of the qualified employer
plan and the deemed IRA.
(e) Application of distribution rules.
(1) Rules applicable to distributions
from qualified employer plans under the
Internal Revenue Code and regulations
do not apply to distributions from
deemed IRAs. Instead, the rules
applicable to distributions from IRAs
apply to distributions from deemed
IRAs. Also, any restrictions that a
trustee, custodian, or insurance
company is permitted to impose on
distributions from traditional and Roth
IRAs may be imposed on distributions
from deemed IRAs (for example, early
withdrawal penalties on annuities).
(2) The required minimum
distribution rules of section 401(a)(9)
must be met separately with respect to
the qualified employer plan and the
deemed IRA. The determination of
whether a qualified employer plan
satisfies the required minimum
distribution rules of section 401(a)(9) is
made without regard to whether a
participant satisfies the required
minimum distribution requirements
with respect to the deemed IRA that is
established under such plan.
(f) Additional rules—(1) Trustee. The
trustee or custodian of an individual
retirement account must be a bank, as
required by section 408(a)(2), or, if the
trustee is not a bank, as defined in
section 408(n), the trustee must have
received approval from the
Commissioner to serve as a nonbank
trustee or nonbank custodian pursuant
to § 1.408–2(e). For further guidance
regarding governmental units serving as

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18:51 Jul 21, 2004

Jkt 203001

nonbank trustees of deemed IRAs
established under section 408(q), see
§ 1.408–2T(e)(8).
(2) Trusts. (i) General rule. Deemed
IRAs that are individual retirement
accounts may be held in separate
individual trusts, a single trust separate
from a trust maintained by the qualified
employer plan, or in a single trust that
includes the qualified employer plan. A
deemed IRA trust must be created or
organized in the United States for the
exclusive benefit of the participants. If
deemed IRAs are held in a single trust
that includes the qualified employer
plan, the trustee must maintain a
separate account for each deemed IRA.
In addition, the written governing
instrument creating the trust must
satisfy the requirements of section
408(a) (1), (2), (3), (4), and (6).
(ii) Application of section 408(a)(3). If
deemed IRAs are held in a single trust
that includes the qualified employer
plan, section 408(a)(3) is treated as
satisfied if no part of the separate
accounts of any of the deemed IRAs is
invested in life insurance contracts,
regardless of whether the separate
account for the qualified employer plan
invests in life insurance contracts.
(iii) Separate accounts for traditional
and Roth deemed IRAs. The rules of
section 408A(b) and the regulations
thereunder, requiring each Roth IRA to
be clearly designated as a Roth IRA, will
not fail to be satisfied solely because
Roth deemed IRAs and traditional
deemed IRAs are held in a single trust,
provided that the trustee maintains
separate accounts for the Roth deemed
IRAs and traditional deemed IRAs of
each participant, and each of those
accounts is clearly designated as such.
(3) Annuity contracts. Deemed IRAs
that are individual retirement annuities
may be held under a single annuity
contract or under separate annuity
contracts. However, the contract must
be separate from any annuity contract or
annuity contracts of the qualified
employer plan. In addition, the contract
must satisfy the requirements of section
408(b) and there must be separate
accounting for the interest of each
participant in those cases where the
individual retirement annuities are held
under a single annuity contract.
(4) Deductibility. The deductibility of
voluntary employee contributions to a
traditional deemed IRA is determined in
the same manner as if they were made
to any other traditional IRA. Thus, for
example, taxpayers with compensation
that exceeds the limits imposed by
section 219(g) may not be able to make
contributions to deemed IRAs, or the
deductibility of such contributions may
be limited in accordance with sections

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408 and 219(g). However, section
219(f)(5), regarding the taxable year in
which amounts paid by an employer to
an individual retirement plan are
includible in the employee’s income, is
not applicable to deemed IRAs.
(5) Rollovers and transfers. The same
rules apply to rollovers and transfers to
and from deemed IRAs as apply to
rollovers and transfers to and from other
IRAs. Thus, for example, the plan may
provide that an employee may request
and receive a distribution of his or her
deemed IRA account balance and may
roll it over to an eligible retirement plan
in accordance with section 408(d)(3),
regardless of whether that employee
may receive a distribution of any other
plan benefits.
(6) Nondiscrimination. The
availability of a deemed IRA is not a
benefit, right or feature of the qualified
employer plan under § 1.401(a)(4)–4.
(7) IRA assets and benefits not taken
into account in determining benefits
under or funding of qualified employer
plan. Neither the assets held in the
deemed IRA portion of the qualified
employer plan, nor any benefits
attributable thereto, shall be taken into
account for purposes of:
(i) Determining the benefits of
employees and their beneficiaries under
the plan (within the meaning of section
401(a)(2)); or
(ii) Determining the plan’s assets or
liabilities for purposes of section 404 or
412.
(g) Disqualifying defects—(1) Single
trust. If the qualified employer plan fails
to satisfy the qualification requirements
applicable to it, either in form or
operation, any deemed IRA that is an
individual retirement account and that
is included as part of the trust of that
qualified employer plan does not satisfy
section 408(q). Accordingly, any
account maintained under such a plan
as a deemed IRA ceases to be a deemed
IRA at the time of the disqualifying
event. In addition, the deemed IRA also
ceases to satisfy the requirements of
sections 408(a) and 408A. Also, if any
one of the deemed IRAs fails to satisfy
the applicable requirements of sections
408 or 408A, and the assets of that
deemed IRA are included as part of the
trust of the qualified employer plan,
section 408(q) does not apply and the
plan will fail to satisfy the plan’s
qualification requirements.
(2) Separate trusts and annuities. If
the qualified employer plan fails to
satisfy its qualification requirements,
either in form or operation, but the
assets of a deemed IRA are held in a
separate trust (or where a deemed IRA
is an individual retirement annuity),
then the deemed IRA does not

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automatically fail to satisfy the
applicable requirements of section 408
or 408A. Instead, its status as an IRA
will be determined by considering
whether the account or the annuity
satisfies the applicable requirements of
sections 408 and 408A (including, in the
case of individual retirement accounts,
the prohibition against the commingling
of assets under section 408(a)(5)). Also,
if a deemed IRA fails to satisfy the
requirements of a qualified IRA and the
assets of the deemed IRA are held in a
separate trust (or where the deemed IRA
is an individual retirement annuity), the
qualified employer plan will not fail the
qualification requirements applicable to
it under the Code solely because of the
failure of the deemed IRA.

(3) Employee. An employee includes
any individual who is an employee
under the rules applicable to the
qualified employer plan under which
the deemed IRA is established.
(i) Effective date. This section applies
to accounts or annuities established
under section 408(q) on or after August
1, 2003.

(h) Definitions. The following
definitions apply for purposes of this
section:
(1) Qualified employer plan. A
qualified employer plan is a plan
described in section 401(a), an annuity
plan described in section 403(a), a
section 403(b) plan, or a governmental
plan under section 457(b).
(2) Voluntary employee contribution.
A voluntary employee contribution is
any contribution (other than a
mandatory contribution within the
meaning of section 411(c)(2)(C)) which
is made by an individual as an
employee under a qualified employer
plan that allows employees to elect to
make contributions to deemed IRAs and
with respect to which the individual has
designated the contribution as a
contribution to which section 408(q)
applies.

PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
■ Par. 5. The authority citation for part
602 continues to read as follows:

Authority: 26 U.S.C. 7805. * * *

Par. 6. In § 602.101, paragraph (b) is
amended by adding the following entry
in numerical order to the table to read as
follows:

■

Current OMB
control no.

CFR Part or section where identified and described

*
*
*
*
*
*
*
1.408(q)–1 ......................................................................................................................................................................................
*

*

Approved: July 14, 2004.
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04–16594 Filed 7–21–04; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100
[CGD05–04–013]

Special Local Regulations for Marine
Events; Maryland Swim for Life,
Chester River, Chestertown, MD
Coast Guard, DHS.
Final rule.

AGENCY:

18:51 Jul 21, 2004

*

This action is intended to restrict vessel
traffic in portions of the Chester River
during the event.
DATES:

This rule is effective August 23,

2004.
Comments and material
received from the public, as well as
documents indicated in this preamble as
being available in the docket, are part of
docket CGD05–04–013 and are available
for inspection or copying at Commander
(oax), Fifth Coast Guard District, 431
Crawford Street, Portsmouth, Virginia
23704–5004 between 9 a.m. and 2 p.m.,
Monday through Friday, except Federal
holidays.

ADDRESSES:

S.L.
Phillips, Project Manager, Auxiliary and
Recreational Boating Safety Branch, at
(757) 398–6204.

Jkt 203001

SUPPLEMENTARY INFORMATION:

Regulatory Information

The Coast Guard is
establishing permanent special local
regulations for the ‘‘Maryland Swim for
Life’’, an annual marine event held on
the waters of the Chester River near
Chestertown, Maryland. This action is
necessary to provide for the safety of life
on navigable waters during the event.
SUMMARY:

VerDate jul<14>2003

*

FOR FURTHER INFORMATION CONTACT:

RIN 1625–AA08

ACTION:

*

On April 6, 2004, we published a
notice of proposed rulemaking (NPRM)
entitled ‘‘Special Local Regulations for
Marine Events; Maryland Swim for Life,
Chester River, Chestertown, MD’’ in the
Federal Register (69 FR 18002). We
received no letters commenting on the
rule. No public hearing was requested,
and none was held.

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*

1545–1841

*

Background and Purpose
The Maryland Swim for Life
Association annually sponsors the
‘‘Maryland Swim for Life’’, an open
water swimming competition held on
the waters of the Chester River, near
Chestertown, Maryland. The event is
held each year on the second Saturday
in July. Approximately 120 swimmers
start from Rolph’s Wharf and swim
upriver 3 miles then swim down river
returning back to Rolph’s Wharf. A fleet
of approximately 25 support vessels
accompanies the swimmers. To provide
for the safety of participants and
support vessels, the Coast Guard will
restrict vessel traffic in the event area
during the swim.
Regulatory Evaluation
This rule is not a ‘‘significant
regulatory action’’ under section 3(f) of
Executive Order 12866, Regulatory
Planning and Review, and does not
require an assessment of potential costs
and benefits under section 6(a)(3) of that
Order. The Office of Management and
Budget has not reviewed it under that
Order. It is not ‘‘significant’’ under the
regulatory policies and procedures of
the Department of Homeland Security
(DHS).
We expect the economic impact of
this rule to be so minimal that a full

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