New guidance has been issued by the Department of the Treasury and the Internal Revenue Service for employers and employees with terminating 403(b) plans. The guidance is aimed specifically at plans that fund benefits through 403(b)(7) custodial accounts.
This new guidance was driven by changes provided in the Setting Every Community Up for Retirement Enhancement Act of 2019—also known as the SECURE Act.
Details are laid out in Revenue Ruling 2020-23. It provides that 403(b) retirement plans funded through individual or group 403(b)(7) custodial accounts can be terminated through the distribution of individual custodial accounts.
If a distributed custodial account continues to comply with certain requirements, then no portion of the distributed custodial account can be included in gross income until amounts are actually paid out of the account to a participant or a beneficiary.
The IRS has also issued Notice 2020-80, which requests comments on the application of annuity and spousal rights provisions that relate to distributions in certain plans described in Revenue Ruling 2020-23.
Source: IR-2020-251
Trussell Tax