Investment firms holding 403(b) assets say they are not custodians

[katieinny]

A small 501©(3) with only a couple of participants in the plan has asked us to help them get a written plan document in place (yes, we know it's late). The assets are invested in mutual funds at a couple of well known, big investment firms. When it comes to naming them as custodians under the plan and getting them to sign, they say they are not a custodian or trustee. They just hold the assets. Must the plan have a custodian or trustee?

[Kevin C]

The plan must have proper custodial accounts. See 1.403(b)-8(d). Just because they are a mutual fund company does not mean they can hold 403(b) custodial accounts.

1.403(b)-8(d)(2)Custodial account defined.—

A custodial account means a plan, or a separate account under a plan, in which an amount attributable to section 403(b) contributions (or amounts rolled over to a section 403(b) contract, as described in §1.403(b)-10(d)) is held by a bank or a person who satisfies the conditions in section 401(f)(2), if—

(i) All of the amounts held in the account are invested in stock of a regulated investment company (as defined in section 851(a) relating to mutual funds);

(ii) The requirements of §1.403(b)-6© (imposing restrictions on distributions with respect to a custodial account) are satisfied with respect to the amounts held in the account;

(iii) The assets held in the account cannot be used for, or diverted to, purposes other than for the exclusive benefit of plan participants or their beneficiaries (for which purpose, assets are treated as diverted to the employer if the employer borrows assets from the account); and

(iv) The account is not part of a retirement income account.

[K2retire]

And just in case it is not clear, a mutual fund company and/or their recordkeeper are NOT banks. Therefore they cannot qualify under this definition of "custodian" even though they have physical custody of the money.

[mbozek]

A small 501©(3) with only a couple of participants in the plan has asked us to help them get a written plan document in place (yes, we know it's late). The assets are invested in mutual funds at a couple of well known, big investment firms. When it comes to naming them as custodians under the plan and getting them to sign, they say they are not a custodian or trustee. They just hold the assets. Must the plan have a custodian or trustee?

You need to find out who is the actual custodian for the participant's accounts. Under prior IRS regs a participant could have maintained an account with a stock brokerage that acted as the legal custodian for the 403b7 account. However most full service firms discontinued this practice after the IRS regs went into effect in 2009. It may be possible that the accounts are still held by a broker/dealer for the participant which is information only the participant will have. It is also possible that the accounts were transferred to an IRA whcih would have a custodian.

[katieinny]

For the most part, except in the case of terminated participants, the 403(b) assets have remained in the plan, at the same 3 brokerage firms that were in place years ago. The agency is trying to terminate the plan so that the remaining 2 participants (still working for the agency) can roll the assets over to IRAs. If the full service firms that acted as custodians prior to 2009 have discontinued that practice, who does that leave as a custodian to sign under the new written document requirement? They are willing to do what needs to be done, which includes showing the IRS that they have adopted a plan now, but can they do it without getting anyone to sign as custodian?

[mbozek]

For the most part, except in the case of terminated participants, the 403(b) assets have remained in the plan, at the same 3 brokerage firms that were in place years ago. The agency is trying to terminate the plan so that the remaining 2 participants (still working for the agency) can roll the assets over to IRAs. If the full service firms that acted as custodians prior to 2009 have discontinued that practice, who does that leave as a custodian to sign under the new written document requirement? They are willing to do what needs to be done, which includes showing the IRS that they have adopted a plan now, but can they do it without getting anyone to sign as custodian?

In order for an employee to have a 403b7 account there must be a custodian who holds title to the mutual funds for the participant. When the custodian withdrew as a custodian of the 403b7 account in 2009 the participant would have received a notice of withdrawal and what he or she had to do, e.g., rollover the funds in the custodial account to an IRA or another 403b annuity. I cant tell you what needs to be done. You need to contact the brokerage firms to find out how the 403b7 accounts were to be distributed under the terms of the custodial agreement when the custodians discontinued their services on behalf of the 403b plan.

[Kevin C]

Under prior IRS regs a participant could have maintained an account with a stock brokerage that acted as the legal custodian for the 403b7 account. However most full service firms discontinued this practice after the IRS regs went into effect in 2009.

MJB,

Are you referring to brokerage firms on the IRS approved non-bank trustees and custodians list? Or, something else? I'm hoping that what you are referring to might help us with an issue in a client's IRS audit.

[mbozek]

Under prior IRS regs a participant could have maintained an account with a stock brokerage that acted as the legal custodian for the 403b7 account. However most full service firms discontinued this practice after the IRS regs went into effect in 2009.

MJB,

Are you referring to brokerage firms on the IRS approved non-bank trustees and custodians list? Or, something else? I'm hoping that what you are referring to might help us with an issue in a client's IRS audit.

I am referring to the transfer of a participant's 403b mutuul fund investments to a custodial account with a brokerage firm authorized to hold the participant's directed investment in a 403b plan even though the brokerage firm was not an authorized option under a 403b plan. The custodial agreement was between the participant and the broker dealer. The employer was not involved. These arrangements were permitted for participants who had terminated employment under the 403b plan but wanted their funds to remain under a 403b7 arrangement. This arrangement may have been authorized under Rev Rul 90-24 until it was curtailed under the IRS regs.