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.  

Interested in learning more about the SECURE Act? Download the SECURE Act eBook from the Schneider Downs Retirement Solutions team for a full overview of provisions and highlights at www.schneiderdowns.com/secure-act-ebook.

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.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

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.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on

The Cares Act and Its Effect on Retirement Plans
The Impact of COVID-19 on Your 401(k)
SECURE Act: Lifetime Income Options (Sections 109, 203 and 204)
SECURE Act: Combined Annual Report for Group of Plans
SECURE Act: Lifetime Income Options (Sections 109, 203 and 204)
SECURE Act: Combined Annual Report for Group of Plans

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contactsd@schneiderdowns.com
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

contactsd@schneiderdowns.com
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102