SECURE Act – Treatment of Custodial Accounts on Termination Of Section 403(b) Plans

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) includes a provision that makes it easier for plan sponsors to terminate a 403(b) plan.

Contributions to a 403(b) are typically held in one of two types of annuity contract: a group contract, issued in the name of the plan to hold assets attributable to multiple plan participants, or an individual contract, issued in the name of an individual participant. Assets held under an individual contract are effectively beyond the control of the plan administrator, particularly in the case of former employees, who may have transferred the assets to a different provider.

Terminating a 403(b) has historically been challenging for plans utilizing individual contracts. Because a plan is not considered formally terminated until all assets have been distributed, sponsors of a terminated 403(b) faced the risk that until all holders of individual contracts have been identified and provided with distribution paperwork, the plan might still be treated by the IRS as an ongoing plan that remains subject to applicable reporting rules and other administrative burdens.

Section 110 of the SECURE Act directs the Department of the Treasury to issue regulations providing that in the case of a terminated 403(b) plan, any holder of an individual contract would be treated as having received a distribution of their account for purposes of effectuating the termination of the plan. Guidance is to be published within six months of the passage of the SECURE Act and would be retroactive as far back as 2008.

This change comes as welcome news to sponsors of 403(b) plans. Keep an eye out for further updates when the Treasury guidance is released.  

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.