Rev. Rul. 71-392

Advice has been requested whether, under the circumstances described below, a custodial account will be treated as a qualified trust for purposes of section 401 of the Internal Revenue Code of 1954.

An employer established a pension plan that is funded through the use of a custodial account. The plan provides that all contributions must initially be invested in regulated investment company stock. The plan further provides that a participant may elect, just prior to retirement, to have the custodian sell a portion of the stock held for his benefit and apply the amount realized to purchase bonds meeting the requirements of section 405 of the Code (United States Retirement Plan Bonds), to the extent permitted within a single year. These bonds will then be distributed to the participant upon his retirement.

Section 401(f) of the Code provides that a custodial account shall be treated as a qualified trust under section 401 if, among other requirements, the investment of the funds in the account must be made solely in regulated investment company stock with respect to which the employee is the beneficial owner or solely in annuity, endowment, or life insurance contracts issued by an insurance company.

In this case, although the contributions to the custodial account will initially be invested in regulated investment company stock, the plan permits the later investment of a participant's account interest in a manner not described in section 401(f) of the Code, i.e., United States Retirement Plan Bonds.

Accordingly, it is held that this custodial account may not be treated as a qualified trust for purposes of section 401 of the Code.

Under the authority granted by section 7805(b) of the Code, this conclusion will not be applied to deny qualified status prior to August 31, 1971, to plans with respect to which favorable determination letters have been issued or to plans established by adopting a master or prototype plan previously approved as to form. If the qualified status of such a plan is to continue after August 30, 1971, (1) no U.S. Retirement Plan Bonds may be purchased after September 30, 1971, and (2) the plan must be amended to remove the authorization for the custodian to purchase such bonds no later than the end of the first taxable year of the employer beginning after August 30, 1971. Where the employer has adopted a master or prototype plan that provides for the purchase of U.S. Retirement Plan Bonds by the custodian, his plan will not fail to qualify because of that provision if the master or prototype plan is amended to remove the provision no later than August 30, 1972.