Custodial Account vs. Trust

[Guest Penelope]

I've been asked to review the documents setting up a new 401(k) plan for a non-profit. One of these is a custodial agreement with a bank. I know the Code permits such a funding arrangement in lieu of a trust for qualified plans, but in practice I've seen it used only for IRAs and 403(b) accounts. I assume the bank would prefer to be a custodian, and not a directed trustee, to avoid fiduciary liability, although I'm not sure that works in all cases. Other than that, why use a custodial account instead of a trust?

[Guest Sieve]

I'm not so sure you can use just a custodial account for a 401(k) plan, because ERISA permits bank custodial accounts only if there are self-employed individuals in the plan (ERISA Section 403(b)(3)). I think you'd have to establish a trust, with individuals as Trustee, which holds assets in trust under a custodial agreement with the bank. (But, then, WDIK??--or is WDIK copyrighted?)

[WDIK]

or is WDIK copyrighted?

In my case that would be copywronged.

[masteff]

I'm not so sure you can use just a custodial account for a 401(k) plan, because ERISA permits bank custodial accounts only if there are self-employed individuals in the plan (ERISA Section 403(b)(3)). I think you'd have to establish a trust, with individuals as Trustee, which holds assets in trust under a custodial agreement with the bank. (But, then, WDIK??--or is WDIK copyrighted?)

So I'd think the OP should go back to the custodial document and verify the parties at hand... namely I, also, think it's the Trust that should be the account holder of the custodial bank account. Even if it's not the primary holder of the assets, the trust may need its own bank account if contributions/distributions are being processed thru a bank account (ie distribution check clearing, etc.). This is necessary to avoid comingling of funds (brings back memories of hours arguing w/ our company's treasury dept when they changed banks and messed up the TIN on the pension disbursement account). Alternatively, some financial institutions maintain their own clearing account which eliminates the need for the plan to have one.