Spousal, Annuity Rights for 403(b) Distributions

The IRS has issued Notice 2020-80, which requests comments on spousal and annuity rights that may potentially apply to 403(b) custodial accounts that are distributed to participants in-kind upon termination of a 403(b) plan.

The request in Notice 2020-80 was issued in conjunction with IRS Revenue Ruling (Rev. Rul.) 2020-23, which describes the status and tax treatment of in-kind distributions to participants of 403(b) custodial accounts in the event of a plan termination. Rev. Rul. 2020-23 states that if such custodial accounts comply with certain conditions after an in-kind distribution, they will retain their tax-deferred status as 403(b) custodial accounts until such time as the assets are paid out of the account to the participant or a beneficiary.

Notice 2020-80 points out that, while 403(b) plans in general are not subject to the annuity and spousal rights provisions of the Internal Revenue Code, those 403(b) plans that are subject to ERISA requirements—e.g., plans providing employer contributions—must comply with parallel annuity and spousal rights provisions of ERISA Section 205.

Notice 2020-80 specifically requests comments on the following.

• Information on current practices with respect to termination of ERISA-governed 403(b) plans that are funded through custodial accounts.
• Administrative or other burdens that might be associated with annuity or spousal rights when applied to such in-kind distributions.
• Timing for applying a requirement that protects annuity or spousal rights, such as, upon a plan’s termination versus when an account is ultimately distributed.
• Whether—as an alternative to in-kind distribution—custodial accounts of terminating 403(b) plans subject to spousal and annuity requirements should instead be forwarded to the Pension Benefit Guaranty Corporation defined contribution plan missing participants program.
• Transition relief that could aid in protecting spousal and annuity rights of terminating 403(b) plans funded through custodial accounts.

Comments in response to Notice 2020-80’s request must be received by the IRS on or before February 3, 2021, preferably submitted by electronic means.