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SECURE ACT – Provisions Unique to
403(b) Plans, Governmental 457(b) Plans, and IRAs

February 12, 2020

Third in a Series

On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020, which includes the Setting Every Community Up for Retirement Enhancement Act (the “SECURE” Act).   The SECURE Act represents the most significant retirement legislation in more than a decade (i.e., since the Pension Protection Act of 2006).

This is the third in a series of articles describing key provisions of the SECURE Act.  Our focus in this article is on the provisions that are unique to Section 403(b) tax-sheltered annuity plans, governmental Section 457(b) plans, and Individual Retirement Accounts/Annuities (IRAs).  Many of the SECURE Act provisions that are broadly applicable to retirement plans (such as the increase in the age at which required minimum distributions must begin, and the new rules curtailing the ability to “stretch” post-death minimum distributions under defined contribution plans over the life expectancy of the participant’s designated beneficiary) also apply to 403(b) plans, 457(b) plans, and IRAs.  Because we addressed those provisions in the second article in this series, we will not do so again here.


There are two SECURE Act changes that apply solely to tax-sheltered annuity plans under Code Section 403(b):

Treatment of Section 403(b)(7) Custodial Accounts Upon Plan Termination

Prior to the SECURE Act (pursuant to Rev. Rul. 2011-7), employers wishing to terminate a Section 403(b) tax-sheltered annuity arrangement only had three options for making “distributions” upon termination of the plan:  (i) delivery of a fully-paid (individual) annuity contract, (ii) delivery of a certificate of fully paid benefits under a group annuity contract, or (iii) distributions (in cash or in kind) of the investments held in a Section 403(b)(7) custodial account (an account that is expressly limited to investment in mutual funds, and that is treated as an annuity contract for purposes of Code Section 403(b)).  Unfortunately, under most individual custodial accounts (as opposed to group custodial accounts), the employer 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 (b)(7) custodial account, the plan cannot be terminated.

Under the SECURE Act, the Secretary of the Treasury is directed to issue guidance (within six months of the date of enactment) providing that, if an employer terminates a 403(b) plan funded in whole or in part with individual (b)(7) custodial accounts, the plan administrator or custodian may distribute or deliver the actual custodial account to the participant or beneficiary, and the account shall thereafter be maintained by the custodian on a tax-deferred basis as a 403(b)(7) custodial account (i.e., similar to the treatment of fully-paid individual annuity contracts under Rev. Rul. 2011-7) until the amounts held in the account are actually paid to the participant or beneficiary (in cash or in kind).  The guidance is to provide that (i) the custodial account will maintain its tax-favored status so long as the account adheres to the requirements of Code Section 403(b) that were in effect at the time of the distribution of the account (from the plan to the participant), and (ii) the custodial account will not be considered to be “distributed” if the employer retains any material rights under the contract.

  • Plans Affected: Section 403(b) plans that are funded, in whole or in part, with individual 403(b)(7) custodial accounts.
  • Optional or Required: Optional.
  • Effective Date: Applies retroactively to taxable years beginning on or after January 1, 2009 (which is generally when the final Section 403(b) regulations became effective).
  • Comments and Recommendations: 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 (b)(7) custodial accounts (or to those who previously distributed fully paid-up accounts notwithstanding the guidance in Rev. Rul. 2011-7).  Plans intending to distribute individual custodial accounts should be amended to allow such distributions, and distribution paperwork should be revised accordingly.

Retirement Income Accounts – Clarification of Participation by Church-Controlled Organizations

Under Code Section 403(b)(9), churches and certain church-controlled organizations are allowed to fund their 403(b) plans through a “retirement income account” (as an alternative to 403(b)(1) annuity contracts or 403(b)(7) custodial accounts invested solely in mutual funds).    A retirement income account may hold investments other than annuity contracts and mutual funds, and the assets of a retirement income account may be commingled with the general assets of the church sponsoring the plan (so long as they are accounted for separately).   Church plan sponsors (and their advisors) have for years assumed that both “qualified” and “non-qualified” church-controlled organizations (also known as “QCCOs” and “non-QCCOs”) could participate in a church 403(b) plan funded with a (b)(9) retirement income account.  However, when the IRS developed its program of “pre-approved” 403(b) plans (which must generally be adopted during a 3-year period ending on March 31, 2020), it took the position that a non-QCCO could not participate in a 403(b)(9) retirement income account.  And, because a QCCO could, under certain circumstances, become a non-QCCO (for example, if there was a significant change in its source of funding), the IRS took the position that a pre-approved 403(b) plan (such as a prototype or volume submitter plan) funded with a (b)(9) retirement income account could not allow participation by either a QCCO or a non-QCCO.

The SECURE Act amends Code Section 403(b)(9) to specifically provide that a retirement income account may cover both employees of the church (or convention of churches) sponsoring the arrangement and employees of any organization which is exempt from federal income tax under Code Section 501 and which is controlled by or associated with the church or a convention of churches.  Thus, this minor change to the Tax Code clarifies that both QCCOs and non-QCCOs may participate in a 403(b)(9) retirement income account maintained by a church.

  • Plans Affected: Section 403(b) church plans that are structured as “retirement income accounts” under Code Section 403(b)(9), and that allow participation by employees of church-controlled organizations.
  • Optional or Required:  Optional (church plans are not required to extend participation to their church-controlled affiliates).
  • Effective Date: Effective for all tax years (both before or after the date of enactment).
  • Comments and Recommendations:  This legislative clarification is welcome relief to sponsors of church plans that are structured as 403(b)(9) retirement income accounts.    Due to the IRS’ pre-SECURE Act interpretation, churches wishing to sponsor a pre-approved 403(b) plan have had to either (i) adopt a retirement income account but prohibit participation by church-controlled organizations, or (ii) limit investments by participating church-controlled organizations to (b)(1) annuity contracts or (b)(7) custodial accounts.   Hopefully, the IRS will issue guidance (before the March 31, 2020 deadline mentioned above) allowing QCCOs and non-QCCOs to participate in Section 403(b)(9) retirement income accounts maintained by a church (or a convention or association of churches) that uses a “pre-approved” 403(b) plan document.


There is one SECURE Act change that applies solely to governmental 457(b) plans:

In-Service Distributions Now Permitted at Age 59 ½ (rather than 70 ½)

Prior to the legislation which includes the SECURE Act, distributions under governmental Section 457(b) “eligible deferred compensation plans” could only be made upon the participant’s death, disability, severance of employment, or attainment of a relatively advanced age (age 70 ½).   As a result, many governmental 457(b) plans do not allow “in-service” distributions (other than distributions of small, inactive accounts, as specifically permitted under Code Section 457).  Those plans that allow in-service distributions may do so only after the participant attains age 70 ½.

Under the Miners Act portion of the legislation that includes the SECURE Act, governmental 457(b) plans may now allow in-service distributions as early as age 59 ½.  This allows participants who remain employed after 59 ½ the option of taking a distribution at any time (which distribution may be rolled over, tax-free, to an eligible retirement plan, if the participant so elects).  This new rule does not extend to unfunded Section 457(b) plans maintained by tax-exempt organizations for a select group of management or highly compensated employees.

  • Plans Affected: Section 457(b) eligible deferred compensation arrangements maintained by state or local governments.
  • Optional or Required: Optional (457(b) plans are not required to allow in-service distributions at any age).
  • Effective Date: Effective for distributions in plan years beginning on or after January 1, 2020.
  • Comments and Recommendations: Plan amendments will be required, and distribution paperwork must be updated, if an employer chooses to allow in-service distributions at this new age.


There are two SECURE Act changes that apply solely to IRAs:

No Age Limit on Contributions to a Traditional IRA

Prior to the SECURE Act, individuals could not make contributions to a traditional IRA after attaining age 70 ½, even if they still had eligible income.   This prohibition applied to both deductible and non-deductible IRA contributions.

The SECURE Act amends Code Section 219 to remove the 70 ½ age limit on contributions to a traditional IRA.  Consequently, taxpayers who have reached age 70 ½ may continue to make contributions to a traditional IRA so long as they have eligible income.

  • Plans Affected: Traditional Individual Retirement Accounts and Individual Retirement Annuities (IRAs)
  • Optional or Required: Optional (although most providers will likely amend their IRA documents to allow contributions beyond age 70 ½).
  • Effective Date: Contributions made in tax years beginning on or after January 1, 2020.
  • Comments and Recommendations: Investment providers will need to amend their IRA trust or custodial agreements (or their annuity contracts) to allow for contributions after age 70 ½.   Taxpayers who make contributions after age 70 ½ must keep in mind that required minimum distributions (RMDs) must commence by April 1 after the year they attain age 72 (unless they attained age 70 ½ before 2020, in which case RMDs must commence by April 1 after the year they attain age 70 ½).  In addition, there are special rules under the SECURE Act for coordinating post-age 70 ½ contributions with “qualified charitable distributions” (which are otherwise excludible from gross income under Section 408(d)(8)(A)).

Certain Fellowship and Stipend Payments Treated as Compensation for IRA Purposes

In order to contribute to an IRA, a taxpayer must have “earned income.”  Prior to the SECURE Act, “earned income” for purposes of Code Section 219 did not include certain taxable non-tuition fellowship payments or stipend payments that graduate students often receive.   For example, unless these students had other eligible income, they could not contribute to a traditional or Roth IRA.

The SECURE Act amends Code Section 219(f) to provide that “compensation” (for purposes of eligibility to contribute to an IRA) includes any amount that is paid to an individual to aid in the pursuit of a graduate or postdoctoral degree, so long as the amount is otherwise includible in the individual’s gross income for federal income tax purposes.  Thus, for example, an individual receiving a $3,000 stipend (but no other income) may contribute up to $3,000 to an IRA.

  • Plans Affected: Traditional or Roth Individual Retirement Accounts and Individual Retirement Annuities (traditional and Roth IRAs)
  • Optional or Required: Optional (although most providers will likely amend their IRA documents to provide that such payments are eligible “compensation”).
  • Effective Date: Tax years beginning on or after January 1, 2020.
  • Comments and Recommendations Investment providers may need to amend their IRA trust or custodial agreements (or annuity contracts) to provide that these sources of income are eligible “compensation“ for IRA purposes.  Taxpayers in graduate programs (particularly those with no other sources of income) now have an opportunity to start saving for retirement at an earlier age.

This post was drafted by Rob Browning, an attorney in the Kansas City, MO office of Spencer Fane LLP. For more information, visit