Guidance issued on termination of 403(b) plans

Tax Hot Topics newsletter The IRS released Rev. Rul. 2020-23 to provide guidance on whether certain actions taken by an employer to terminate a 403(b) plan funded through 403(b)(7) custodial accounts constitutes a termination of the plan. The IRS previously issued Rev. Rul. 2011-7 to provide guidance regarding the actions that should be taken to terminate a 403(b) plan funded through annuity contracts (as opposed to custodial accounts). In that guidance, the IRS ruled that a plan may be terminated in accordance with the rules of Treas. Reg. Sec. 1.403(b)-10(a) by (among other requirements) delivery to the participants or beneficiaries of a fully paid individual annuity contract (IAC) or an individual certificate evidencing fully paid benefits under a group annuity contract. That ruling also provided that the delivery of the IAC or certificate is not included in the participant’s gross income until amounts are actually paid under the contract, so long as the contract maintains its status as a 403(b) contract.

Rev. Rul. 2011-7 does not address the termination of 403(b) plans funded through custodial accounts. However, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) directed the IRS to issue similar guidance with respect to 403(b) plans funded through custodial accounts, which Rev. Rul. 2020-23 does — ruling that such plans can be terminated by (among other requirements) distributing fully paid individual custodial accounts (ICA), or documents that evidence the ICA, including the accumulated value of a participant’s interest in the custodial account maintained under a group agreement.

In accordance with the SECURE Act direction, Rev. Rul. 2020-23 is retroactively effective for taxable years beginning after Dec. 31, 2008.

Jeff Martin
Partner, Washington National Tax Office
T +1 202 521 1526

Keith Mong
Managing Director
Washington National Tax Office
T +1 202 521 1554

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