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Issue Snapshot - Investments in Collectibles in Individually-Directed Qualified Plan Accounts

This Snapshot examines the consequences if an individually-directed account under an IRC Section 401(a) qualified plan invests in collectibles.

IRC Sections and Treas. Regulations

Resources

Analysis

The acquisition by an individually-directed account under a qualified plan of a “collectible” is treated as an immediate distribution from such account in an amount equal to the cost to the plan of such collectible. See IRC Section 408(m). Exceptions apply for specific collectibles, as discussed below. A plan’s tax qualification under IRC Section 401(a) is not affected by an investment in a collectible unless the plan’s provisions preclude such an investment.

Plan provisions establishing individually-directed accounts may allow plan participants to choose how the account balance will be invested or may limit investments to options that are offered by the plan. Such accounts are also referred to as participant-directed accounts or self-directed accounts.

Generally, an account “acquires” a collectible when it is obtained through purchase, exchange, contribution, or any direct or indirect acquisition method.

Collectibles acquired by individually-directed accounts before January 1, 1982, are grandfathered and not subject to IRC Section 408(m). See Economic Recovery Tax Act of 1981, P.L. 97-34, sec. 314(b)(2).

Definition of a Collectible

Collectibles under IRC Sectioin 408(m)(2) include:

  • Any work of art,
  • Any rug or antique,
  • Any metal or gem (with limited exceptions, below),
  • Any stamp or coin (with limited exceptions, below)
  • Any alcoholic beverage, or
  • Any other tangible personal property that the IRS determines is a "collectible" under IRC Section 408(m).

Gold, silver, platinum, palladium, and coins

The following coins and metals are not included in the definition of “collectible” under IRC Section 408(m):

  • Certain gold, silver, or platinum coins described in 31 USC Section 5112. See IRC Section 408(m)(3)(A) for the full definition.
  • Any coin issued under the laws of any state.
  • Any gold, silver, platinum, or palladium bullion of a certain fineness if a bank or approved non-bank trustee keeps physical possession of it. See IRC Section 408(m)(3).

Consequence of investing in collectibles

A plan participant whose account acquires a collectible is deemed to receive a distribution in the year the collectible is acquired. The amount of the distribution is the cost of the collectible at the time it is acquired. The amount should be reported to the participant on Form 1099-R. The distribution is generally taxed as ordinary income and the 10% additional tax on early withdrawals may apply if the participant is under age 59½, pursuant to IRC Section 72(t).  See corresponding treatment for IRAs described in Publication 590-B.

When the collectible is actually distributed by the plan, the amount previously reported as a taxable distribution is not included in income again (the participant has basis in the amount of the distribution). See corresponding treatment for IRAs described in Publication 590-B.

Prohibited transactions

Acquiring a collectible may also be a prohibited transaction under IRC Section 4975(c). For example, the purchase of a collectible with plan funds for the personal use of a disqualified person could be a prohibited transaction under IRC Section 4975(c)(1)(D). An example could be the acquisition of artwork or rugs by an individually-directed account for use in the participant’s own home. If questions arise concerning a potential prohibited transaction, contact TEGE Division Counsel.

IRAs

The restrictions applicable to collectibles also apply to IRAs. See Publication 590-B; IRA FAQs - Investments. A complete discussion of the application of the rules to IRAs is beyond the scope of this Snapshot.

Audit tips

  • Does the plan allow individually-directed participant accounts?
  • Does the plan prohibit participants from investing their individually-directed accounts in collectibles?
  • If the plan allows (or doesn’t prohibit) investments in collectibles, are any of the accounts invested in “collectibles,” as defined in IRC Section 408(m)(2), and not excluded from the definition of “collectibles” under IRC Section 408(m)(3)?
  • If the individually-directed account did acquire “collectibles” within the meaning of IRC Section 408(m), did the plan issue a Form 1099-R to participants whose accounts purchased the collectibles?
    • Confirm that the amount on the Form 1099-R is equal to the cost of the collectible. If the amount on the Form 1099-R is incorrect, advise the plan administrator to issue a corrected Form 1099-R to the participant.
    • Confirm the participant has reported such amount as a taxable distribution.
  • If the plan does not allow investments in collectibles, but a participant caused his or her account to do so, then there may be an operational error. Consider the Employee Plans Compliance Resolution System (EPCRS). See Rev. Proc. 2016-51.
  • If the participant did not report the deemed distribution as a taxable distribution, for any reason, including the fact that an incorrect amount was reported on the Form 1099-R, consider making a discrepancy adjustment. If the three-year statute of limitation has expired, consider the six-year statute of limitation under IRC Section 6501(e). See IRM 4.71.9.5, Determining the Statute of Limitations Expiration Date. Consult TEGE Division Counsel regarding whether the six-year statute of limitation applies.
  • If investments in collectibles are permitted, does the plan allow all participants to invest their individually-directed accounts in collectibles?  If not, this could indicate that access to these investments is not currently or effectively available to non-highly compensated employees, in violation of the benefits, rights and features requirements of Treas. Reg. Section 1.401(a)(4)-4. Consider EPCRS. See Rev. Proc. 2016-51.