Recommendations Sent to IRS for 403(b) Custodial Accounts

ASPPA and the National Tax Sheltered Accounts Association (NTSAA) have submitted a letter to the IRS regarding the termination of a 403(b) plan which is funded, in whole or in part, by 403(b)(7) custodial accounts.

The American Society of Pension Professionals and Actuaries (ASPPA) said in its comment letter that the treatment of 403(b)(7) custodial accounts on plan termination should be consistent with the treatment of distributed annuity contracts as outlined in Revenue Ruling 2011-7. In particular, the letter said, this treatment is needed for individual custodial accounts (which are contracts directly between the plan participant and the custodian) where the plan sponsor has no right under the contract to disburse assets on plan termination and where the custodian has no legal obligation under the contract to unilaterally amend the account to provide to a plan sponsor that right of disbursement upon plan termination.  

The letter contends that the distribution of the 403(b)(7) custodial accounts will be consistent with state law as well as private letter rulings previously issued by the IRS.  

The letter said: “Often custodial accounts are direct contracts between the participant and the custodian and thus it is appropriate that they be distributable “in-kind” assets of a 403(b) plan.  As an “in-kind” asset, the plan sponsor has the legal ability to distribute the custodial account upon termination of the plan. The distribution of assets of a 403(b)(7) custodial account is subject to the terms and conditions of the employer’s plan, which alleviates the potential for abuse.” 

In an effort to demonstrate how this would lead to a reasonable termination process, the groups included a set of fact patterns that are based on those contained in Revenue Ruling 2011-7, but have been modified to address the relevant issues in the context of a plan with 403(b)(7) custodial accounts.  

In February, the IRS released 403(b) plan termination guidance, but some questions remained unanswered (see (b)lines Ask the Experts – Plan Termination Unknowns).