(b)lines Ask the Experts – Church Plans and Group Trusts

David Powell, Groom Law Group, answers:  

If a church 403(b) plan is not a church 403(b)(9) plan, it generally must be invested in annuity contracts under Code section 403(b)(1) or mutual funds held in custodial accounts under Code section 403(b)(7).    

The IRS recently updated its group trust guidance in Rev. Rul. 2011-1 to provide that the assets of a custodial account under section 403(b)(7) generally may be commingled in a group trust provided that the group trust otherwise meets the requirements of that revenue ruling. Importantly, one of those requirements is that if assets of a custodial account under 403(b)(7) are invested in the group trust, all assets of the group trust must be solely permitted to invest in stock of regulated investment companies.  

Incidentally, the ruling also states that retirement income accounts under 403(b)(9) may participate in such a group trust, though the ruling does not appear to allow 403(b)(1) annuity contracts in the group trust and asks for comments as to whether that should be permitted.    

Securities laws are also a concern, however, and many practitioners have interpreted Securities Act section 3(a)(2) to mean that a collective trust should generally not permit participation by 403(b) plans, including 403(b)(9) plans.  Thus, some such trusts may still not allow church 403(b) plans to participate.  Legislation to amend the Securities Act to remove that issue for 403(b)(9) plans recently passed the House (H.R. 33).  

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.