To become a nonbank trustee or custodian, an entity must:
Apply to the IRS using Revenue Procedure 2020-4, Section 3.07; and
Demonstrate that it will meet the requirements of Treasury Regulation Sections 1.408-2(e)(2) through 1.408-2(e)(8).
Applicants should provide clear and convincing proof that the requirements of the regulations are met or, if a requirement is not applicable, why it does not apply.
There is no application form for an entity to request to become a nonbank trustee or custodian. The prospective trustee or custodian must file a written application with the IRS demonstrating its ability to act as trustee or custodian by complying with the requirements in Treasury Regulation Sections 1.408-2(e)(2) through 1.408-2(e)(8) on an item-by-item basis.
2. Continuity – the applicant must assure its uninterrupted performance of fiduciary duties notwithstanding the death or change of owners. Diversity of ownership is a key factor in satisfying the continuity requirement. Treasury Regulation Section 1.408-2(e)(2)(i)(B)(1) provides three safe harbors for diversity of ownership.
For corporate applicants, the safe harbors are:
Individuals each of whom owns more than 20% of the voting stock of the corporation own, in the aggregate, no more than 50% of such stock;
The corporation has issued securities registered or required to be registered under Section 12(b) of the Securities Exchange Act of 1934; or
The corporation has a parent corporation within the meaning of Internal Revenue Code Section 1563(a)(1) that has issued securities registered or required to be registered under Section 12(b) of the Securities Exchange Act of 1934.
For partnership applicants, the safe harbor is:
Individuals each of whom owns more than 20% of the profits interest in a partnership own, in the aggregate, no more than 50% of such profits interest, and
Individuals each of whom owns more than 20% of the capital interest in a partnership own, in the aggregate, no more than 50% of such capital interest.
If the applicant doesn’t meet one of the corporate or partnership safe harbors, the following criteria are used in a facts and circumstances test:
Concentration of Ownership
Overall Financial Condition
Substantial Business Operation
Number of Years of Operation, and
Circumstances Unique to the Applicants
4. Fiduciary experience – the applicant must demonstrate that it has fiduciary experience or expertise with retirement plans.
(a) The owners or directors will be responsible for the proper exercise of fiduciary powers;
(b) A written record will be made of the acceptance or relinquishment of fiduciary accounts;
(c) If the applicant has authority to render investment advice, the advisability of holding or selling assets will be determined once a year;
(d) All employees are adequately bonded;
(e) Legal counsel is retained and readily available to pass upon fiduciary matters;
(f) The applicant maintains a separate trust division;
(g) The applicant values trust assets once in a calendar year and at least every 18 months between valuation;
(h) No fiduciary accounts will be accepted unless the applicant’s net worth is greater than a specified level;
(i) The applicant will maintain a minimum level of net worth;
(j) Once every 12 months, a detailed audit is performed by a qualified public accountant; and
(k) Fiduciary records are kept separate from all other records of the applicant.
Send your application to:
Internal Revenue Service
Attn: Nonbank Trustee
7940 Kentucky Drive
TE/GE Stop MS 31A Team 105
Florence, KY 41042
A nonbank trustee or custodian application requires a user fee based on the schedule in Revenue Procedure 2020-4, Appendix A .01(4) - all other letter rulings under jurisdiction of the Employee Plans Office.