rr-20-23.pdf

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Rev. Rul. 2020-23

Distribution of individual custodial accounts in kind upon termination of a
§ 403(b) plan

ISSUES
Whether a § 403(b) retirement plan funded through the use of § 403(b)(7) custodial
accounts that takes the actions described in this revenue ruling has been terminated in
accordance with the rules of § 1.403(b)-10(a), and whether distributions made to
participants or beneficiaries in connection with termination of the plan are includible in
gross income.
FACTS
Situation 1. Plan A is a defined contribution plan that includes both nonelective
employer contributions and elective deferrals. Section 205 of the Employee Retirement
Income Security Act of 1974, P.L. 93-406, 88 Stat. 829, as amended (ERISA), applies
neither to Plan A generally nor to any participant under Plan A.
1
Plan A satisfies the
requirements of § 403(b) and §§ 1.403(b)-2 through 1.403(b)-10. Plan A permits
benefits to be paid only after termination from employment or upon plan termination.
Plan A is funded solely through the use of § 403(b)(7) custodial accounts maintained
under individual agreements.
2
All amounts held under Plan A are attributable to
employer contributions, including elective deferrals as defined in § 1.403(b)-2(b)(7), and
no amounts held under Plan A are attributable to designated Roth contributions or after-

1
Section 205 of ERISA includes annuity and spousal rights provisions that are parallel to the annuity and
spousal rights provisions under §§ 401(a)(11) and 417 of the Internal Revenue Code. Section 205(a) of
ERISA generally provides that a distribution must be provided either as a qualified joint and survivor
annuity in the case of a participant who does not die before the annuity starting date, or as a qualified
preretirement survivor annuity in the case of a participant who dies before the annuity starting date.
Because section 205 of ERISA does not apply to Plan A generally or to any participant under Plan A, this
revenue ruling does not address any annuity and spousal rights issues that may arise under section 205
of ERISA in connection with distributions of individual custodial accounts in kind. Notice 2020-80,
2020-47 I.R.B., issued contemporaneously with this revenue ruling, requests comments relating to these
annuity and spousal rights issues.
2
Pursuant to § 8 of Rev. Proc. 2007-71, 2007-51 I.R.B. 1184, certain contracts issued before 2009 are
not required to be covered by the terms of a § 403(b) plan document. This revenue ruling does not apply
to those contracts.

2

tax contributions. Neither the sponsoring employer, nor any other entity that is treated
as the same employer under § 414(b), (c), (m), or (o) on the date of plan termination,
makes contributions to any § 403(b) contract that is not part of Plan A, including during
the period beginning on January 1, 2021, and ending on the date that is 12 months after
distribution of all assets from Plan A.
On January 1, 2021, the employer sponsoring Plan A takes action to terminate
Plan A. That action includes the employer executing a binding resolution to cease
future contributions to custodial accounts under Plan A and to terminate Plan A,
effective January 1, 2021 (the date of plan termination). The resolution also provides
that all benefits held under Plan A are fully vested and nonforfeitable as of
January 1, 2021, and directs that all benefits be distributed as soon as practicable
thereafter. Participants and beneficiaries in Plan A are notified of the plan termination.
Distributions pursuant to the terms of Plan A and the termination resolution are made
as soon as administratively practicable after the date of plan termination. For a
participant or beneficiary who affirmatively elects to receive a distribution, depending on
the participant’s or beneficiary’s election, a distribution equal to that participant’s or
beneficiary’s account balance is made either to that participant or beneficiary, or to an
individual retirement account or annuity under § 408 (an IRA) established for that
participant or beneficiary, or another eligible retirement plan (in accordance with the
rules of § 1.403(b)-7(b)(1) under which an eligible rollover distribution may be made to
an IRA established for the participant or beneficiary or to another eligible retirement
plan). Each custodial account provider permits any distribution that is an eligible
rollover distribution (as described in § 402(c)(4)) to be paid by a direct transfer to an IRA
or other eligible retirement plan (as defined in § 401(a)(31)(E)) in a manner that satisfies
§ 401(a)(31), including to an IRA established by the same provider that permits
investment in the same mutual funds in which the participant's or beneficiary's custodial
account is or may be invested. The plan administrator provides a notice to each
participant describing the participant’s rollover rights, as required by § 402(f) and
§ 1.403(b)-7(b)(3), withholds in accordance with § 3405 and § 1.403(b)-7(g), and
reports the distribution on Form 1099-R, Distributions From Pensions, Annuities,

3

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., as required by
§ 6047(d).
For a participant or beneficiary who does not affirmatively elect to receive a
distribution, so that a distribution of the participant’s or beneficiary’s account balance is
not made as described in the preceding paragraph, a distribution pursuant to the terms
of Plan A and the termination resolution is made as soon as administratively practicable
after the date of plan termination and is effectuated by the distribution of an individual
custodial account (ICA) in kind to the participant, beneficiary who is an alternate payee,
or beneficiary of a deceased participant.
As part of the process of distributing an ICA in kind to a participant or beneficiary,
the plan administrator notifies the participant or beneficiary that, after the distribution of
the ICA in kind, the custodial account is being maintained as an ICA of the participant or
beneficiary and is no longer part of Plan A. The distributed ICA is maintained by the
custodian as a § 403(b)(7) custodial account that adheres to the requirements of
§ 403(b) in effect at the time of the distribution of the ICA until amounts are actually paid
to the participant or beneficiary. Additionally, the employer has no material retained
rights under the distributed ICA after it has been distributed.
Situation 2. The facts are the same as in Situation 1, except that Plan A is funded
not only by custodial accounts maintained under individual agreements, but also by
custodial accounts maintained under group agreements. With respect to custodial
accounts maintained under individual agreements, the facts are the same as in
Situation 1.
With respect to custodial accounts maintained under group agreements, distributions
pursuant to the terms of Plan A and the termination resolution are made as soon as
administratively practicable after the date of plan termination. For a participant or
beneficiary who affirmatively elects to receive a distribution, depending on the
participant’s or beneficiary’s election, a distribution equal to the participant’s or
beneficiary’s account balance is made either to the participant or beneficiary or to an
IRA established for the participant or beneficiary or another eligible retirement plan (in
accordance with the rules of § 1.403(b)-7(b)(1)).

4

For a participant or beneficiary whose account balance is held all or in part in
custodial accounts maintained under a group agreement and who does not affirmatively
elect to receive a distribution described in the prior paragraph, a distribution of an
amount from the custodial accounts maintained under the group agreement is made as
soon as administratively practicable after the date of plan termination and is effectuated
by the distribution of an ICA in kind to each participant, beneficiary who is an alternate
payee, or beneficiary of a deceased participant in the custodial accounts maintained
under a group agreement. Distribution of an ICA in kind from the custodial accounts
maintained under a group agreement is accomplished by distributing a document that
evidences the ICA, including the accumulated nonforfeitable value of the participant’s or
beneficiary’s interest in the custodial accounts maintained under a group agreement,
and associated rights and responsibilities of the participant or beneficiary and custodian.
A distributed ICA is maintained by the custodian as a § 403(b)(7) custodial account that
adheres to the requirements of § 403(b) in effect at the time of the distribution of the ICA
until amounts are actually paid to the participant or beneficiary. Additionally, the
employer has no material retained rights under an ICA after it has been distributed.
LAW
Section 403(b) – In General
Section 403(b) applies to contributions made for employees who are performing
services for a public school of a State or a local government or for employees of
employers that are tax-exempt organizations under § 501(c)(3). Section 403(b) also
applies to contributions made for certain ministers. Under § 403(b)(1), (7), and (9),
contributions are excluded from gross income only if made to one or more of the
following funding arrangements: (1) contracts issued by an insurance company qualified
to issue annuities in a State that includes payment in the form of an annuity, (2)
custodial accounts that are exclusively invested in stock of a regulated investment
company (as defined in § 851(a) relating to mutual funds), or (3) retirement income
accounts for employees of a church-related organization (as defined in § 1.403(b)-2)
(collectively referred to as § 403(b) contracts). Additionally, under § 403(b)(1)(C), an
employee’s rights under the § 403(b) contract must be nonforfeitable.

5

Final regulations under § 403(b) (TD 9340) were published in the Federal Register
(72 FR 41128) on July 26, 2007. Subject to a number of special applicability date rules,
§ 1.403(b)-11(a) provides that those final regulations generally apply for taxable years
beginning after December 31, 2008.
Freezing and Terminating § 403(b) Plans
Section 1.403(b)-10(a) provides that an employer may amend its § 403(b) plan to
eliminate future contributions for existing participants or to limit participation to existing
participants and employees (to the extent consistent with § 1.403(b)-5). A § 403(b) plan
also may include provisions that provide for plan termination and that allow accumulated
benefits to be distributed on plan termination.
Under § 1.403(b)-10(a), in the case of a § 403(b) contract that is subject to the
distribution restrictions in § 1.403(b)-6(c) or (d) (relating to custodial accounts and
§ 403(b) elective deferrals), termination of a § 403(b) plan and distribution of
accumulated benefits is permitted only if the employer (taking into account all entities
that are treated as the same employer under § 414(b), (c), (m), or (o) on the date of
termination) does not make contributions to any § 403(b) contract that is not part of the
plan (these contracts are referred to in this revenue ruling as "another § 403(b) plan").
For rules relating to entities that are treated as the same employer under § 414(c), see
§ 1.414(c)-5; for controlled group rules relating to governmental entities, see
Notice 89-23 (1989-1 CB 654), as modified by Rev. Rul. 2009-18, 2009-2 C.B. 1; and,
for special rules applicable to church plans for entities under common control, see
§ 414(c)(2).
For purposes of the requirement that, after plan termination, the employer make no
contributions to any other § 403(b) plan, the employer makes contributions to another
§ 403(b) plan only if the employer makes contributions to a § 403(b) contract during the
period beginning on the date of plan termination and ending 12 months after distribution
of all assets from the terminated plan. However, if at all times during the period
beginning 12 months before the plan termination and ending 12 months after
distribution of all assets from the terminated plan, fewer than two percent of the
employees who were eligible under the terminating § 403(b) plan as of the date of plan
termination are eligible under another § 403(b) plan, that other § 403(b) plan is

6

disregarded. To the extent a contract fails to satisfy the nonforfeitability requirement of
§ 1.403(b)-3(a)(2) as of the date of plan termination, the contract is not, and cannot later
become, a § 403(b) contract.
For a § 403(b) plan to be terminated under § 1.403(b)-10(a), all accumulated
benefits under the plan must be distributed to all participants and beneficiaries as soon
as administratively practicable after termination of the plan.
3
For this purpose, delivery
of a fully paid individual insurance annuity contract is treated as a distribution. The
mere provision for, and making of, benefit distributions to participants or beneficiaries
upon plan termination does not cause a contract to cease to be a § 403(b) contract.
Section 1.403(b)-7 provides rules regarding the tax treatment of benefit distributions,
including rules in § 1.403(b)-7(b)(1) under which an eligible rollover distribution is not
included in gross income if paid in a direct rollover to an eligible retirement plan or if
transferred to an eligible retirement plan within 60 days.
Rev. Rul. 2011-7, 2011-10 I.R.B. 534, provides that a plan may be terminated in
accordance with the rules of § 1.403(b)-10(a) by the delivery to participants or
beneficiaries of a fully paid individual annuity contract or an individual certificate
evidencing fully paid benefits under a group annuity contract. Rev. Rul. 2011-7 further
provides that the delivery of a fully paid individual annuity contract to a participant or
beneficiary, or of an individual certificate evidencing fully paid benefits under a group
annuity contract, is not included in gross income until amounts are actually paid to the
participant or beneficiary out of the contract, so long as the contract maintains its status
as a § 403(b) contract. Finally, Rev. Rul. 2011-7 provides that any other distribution to
a participant or beneficiary to effectuate plan termination is included in gross income,
except to the extent the amount is rolled over to an IRA or other eligible retirement plan
by a direct rollover or by a transfer made within 60 days.
Section 110 of the SECURE Act
Section 110 of Division O of the Further Consolidated Appropriations Act, 2020,
Pub. L. 116-94, 133 Stat. 2534 (2019) known as the Setting Every Community Up for

3
For rules relating to the requirement that distributions to all participants and beneficiaries be made as
soon as administratively practicable after plan termination in the case of a plan qualified under § 401(a),
see Rev. Rul. 89-87, 1989-2 C.B. 81.

7

Retirement Enhancement Act of 2019 (SECURE Act), provides that the Secretary of the
Treasury shall issue guidance providing that, if an employer terminates a plan under
which amounts are contributed to a custodial account under § 403(b)(7), the plan
administrator or custodian may distribute an ICA in kind to a participant or beneficiary of
the plan. It also provides that the distributed custodial account will be maintained by the
custodian on a tax-deferred basis as a § 403(b)(7) custodial account, similar to the
treatment of fully paid individual annuity contracts under Rev. Rul. 2011-7, until amounts
are actually paid to the participant or beneficiary. The legislation further directs that the
guidance provide (1) that the § 403(b)(7) status of the distributed custodial account
generally is maintained if the custodial account thereafter adheres to the requirements
of § 403(b) that are in effect at the time of the distribution of the account, and (2) that a
custodial account is not considered distributed to the participant or beneficiary if the
employer has any material retained rights under the account (but the employer is not
treated as retaining material rights merely because the custodial account was originally
opened under a group contract). Finally, the legislation directs that the guidance be
retroactively effective for taxable years beginning after December 31, 2008.
4

ANALYSIS
The employer in Situation 1 adopts a resolution to cease contributions and terminate
the plan at a specified date, including full vesting for all benefits as of that date.
Because the plan satisfies the applicable requirements under § 403(b) and the
employer takes action to fully vest any participants with respect to amounts not
otherwise fully vested as of the date of plan termination, all custodial accounts under the
plan are § 403(b) contracts upon plan termination. See § 1.403(b)-10(a)(1).
Distributions of accumulated benefits under the plan in Situation 1 are made either
(1) by payment to the participant or beneficiary, or to an IRA established by the
participant or beneficiary or another eligible retirement plan (in accordance with
§ 1.403(b)-7(b)); or (2) by distribution of an ICA in kind to each participant or beneficiary
as soon as administratively practicable after the date of plan termination. Because the

4
Because SECURE Act section 110 provides that the guidance is retroactively effective only for taxable
years beginning after December 31, 2008, this revenue ruling does not apply to any action that occurred
in taxable years beginning on or before December 31, 2008.

8

plan is funded solely through custodial accounts maintained under individual
agreements, no further action is required to be taken in order to distribute the ICA in
kind. In addition, neither the sponsoring employer nor any other entity that is treated as
the same employer under § 414(b), (c), (m), or (o) on the date of plan termination
makes contributions to any § 403(b) contract that is not part of Plan A, including during
the period beginning on the date of plan termination and ending 12 months after
distribution of all assets from the terminated plan. Accordingly, the employer’s actions
to terminate the plan and distribute accumulated benefits satisfy the requirements of
§ 403(b) and § 1.403(b)-10(a) for plan termination. Following termination of the plan, a
participant or beneficiary who holds an ICA is entitled to payments in accordance with
the terms of the ICA (which may permit single-sum payments in connection with plan
termination).
In Situation 2, the same actions are taken, except that the employer distributes an
ICA in kind to a participant or beneficiary whose accumulated benefits are funded by a
custodial account maintained under a group agreement by providing a document to the
participant or beneficiary that evidences the ICA, including the accumulated
nonforfeitable value of the participant’s or beneficiary’s interest in the custodial accounts
maintained under the group agreement, and associated rights and responsibilities of the
participant or beneficiary and custodian. The distribution of the ICA in kind to the
participant or beneficiary constitutes a distribution of the participant's or beneficiary's
accumulated benefit in the custodial accounts maintained under a group agreement for
purposes of § 1.403(b)-10(a).
In both Situation 1 and Situation 2, the employer has no material retained rights
under an ICA after it has been distributed (and the employer is not treated as retaining
material rights merely because the ICA was originally opened under a group contract).
Accordingly, with respect to Situation 1 and Situation 2, the distribution of an ICA in kind
to a participant or beneficiary is not immediately includible in gross income, but rather
amounts are includible in income only when actually paid to the participant or
beneficiary from the custodial account, so long as the ICA maintains its status as a
§ 403(b)(7) custodial account; the § 403(b)(7) custodial account status of the ICA
generally is maintained if the ICA continues to adhere to the requirements of § 403(b)

9

that are in effect at the time of the distribution of the ICA. Any other amount paid to a
participant or beneficiary, such as a single-sum payment, is includible in the gross
income of the participant or beneficiary, except to the extent the amount is rolled over to
an IRA or other eligible retirement plan by a direct rollover or by a transfer made within
60 days.
HOLDING
In Situation 1 and Situation 2, Plan A is terminated in accordance with the rules of
§ 1.403(b)-10(a). Distribution of an ICA in kind to a participant or beneficiary is not
includible in gross income until amounts are actually paid to the participant or
beneficiary out of the ICA, so long as the ICA maintains its status as a § 403(b)(7)
custodial account. Any other amount distributed from a custodial account to a
participant or beneficiary to effectuate plan termination is includible in gross income,
except to the extent the amount is rolled over to an IRA or other eligible retirement plan
by a direct rollover or by a transfer made within 60 days.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 2011-7 is modified.
DRAFTING INFORMATION
The principal author of this revenue ruling is Patrick T. Gutierrez of the Office of
Associate Chief Counsel, Employee Benefits, Exempt Organizations, and Employment
Taxes. For further information regarding this revenue ruling, please contact Patrick T.
Gutierrez at (202) 317-4148 (not toll-free).