Skip Navigation or Skip to Content

New IRS Guidance under the SECURE Act on Terminating a 403(b) Plan

Terminating a 403(b) plan has historically been challenging for plans utilizing individual contracts. In order for a 403(b) plan (or any 401(a) or 457(b) plan) to be terminated, accumulated benefits under the plan must be distributed to participants and beneficiaries. However, because 403(b) plans are typically funded either by individual or group annuity contracts and individual or group custodial accounts, distribution in a 403(b) plan can be much more problematic, since the plan sponsor may not have ultimate control of the amounts distributed.

Prior to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, plan sponsors had only three options for making distributions upon termination of the plan:

  • Delivery of a fully paid (individual) annuity contract.
  • Delivery of a certificate of fully paid benefits under a group annuity contract.
  • Distributions in cash or in kind of the investments held in 403(b)(7) custodial account.

Under most individual custodial accounts (as opposed to group custodial accounts), the plan sponsor does not have the right to “force” a distribution upon termination of the plan. Consequently, if one or more participants do not consent to a liquidating distribution from their individual custodial account, the plan cannot be terminated.

Individual Custodial Account Agreements

In November 2020, the IRS issued guidance to satisfy the SECURE Act’s directive providing that if the plan sponsor terminates 403(b) plans that fund benefits through custodial accounts, the plan administrator or custodian may distribute an individual custodial account (ICA) in-kind to a participant or beneficiary, generally where the participant or beneficiary does not affirmatively elect a distribution. The guidance is retroactively effective for taxable years beginning after December 31, 2008 (Revenue Ruling 2020-23).

An individual custodial account distributed in-kind under these rules is not included in the gross income of the participant or beneficiary until amounts are actually paid to the participant or beneficiary, so long as the custodial account remains compliant with applicable 403(b) rules through the date it is actually paid out, and it will maintain its tax-deferred status until payment to the participant (even after the employer terminates the plan).

Group Custodial Account Agreements

In the case of custodial accounts that are held as part of a group custodial agreement, the in-kind distribution is accomplished by distributing a document that evidences the new individual custodial account and notifying the participant and funding vendor that the employer has no material retained rights under the individual custodial account after it has been so distributed. There is no need that actual money be transferred to the participant.

The participant maintains the right to take a cash distribution by liquidating the individual custodial account or portion of a group custodial account and have it transferred to an IRA. However, new guidance allows plan sponsors in situations where participants do not make an election to have the money transferred to an IRA or otherwise fail to communicate with the plan sponsor, an approach they can use to fully and finally distribute all assets, thereby formally terminating the plan and ending the plan sponsor’s responsibilities with that plan.
This guidance should be welcome relief to those 403(b) plan sponsors who have been unable to terminate their 403(b) arrangements solely because they lack the authority to mandate distributions from individual custodial accounts.

If you have questions or would like more information, please contact Connie Lee at or 844.4WINDES (844.494.6337).


Connie Lee, CPC, QPA, QKA

Senior Manager, Employee Benefit Services
Payments OnlineTaxCaddy
Secure File TransferWindes Portal