[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.408-2]

[Page 480-490]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.408-2  Individual retirement accounts.

    (a) In general. An individual retirement account must be a trust or 
a custodial account (see paragraph (d) of this section). It must satisfy 
the requirements of paragraph (b) of this section in order to qualify as 
an individual retirement account. It may be established and maintained 
by an individual, by an employer for the benefit of his employees (see 
paragraph (c) of this section), or by an employee association for the 
benefit of its members (see paragraph (c) of this section).
    (b) Requirements. An individual retirement account must be a trust 
created or organized in the United States (as defined in section 
7701(a)(9)) for the exclusive benefit of an individual or his 
beneficiaries. Such trust must be maintained at all times as a domestic 
trust in the United States. The instrument creating the trust must be in 
writing and the following requirements must be satisfied.
    (1) Amount of acceptable contributions. Except in the case of a 
contribution to a simplified employee pension described in section 
408(k) and a rollover contribution described in section 408(d)(3), 
402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8) or 409(b)(3)(C), the trust 
instrument must provide that contributions may not be accepted by the 
trustee for the taxable year in excess of $1,500 on behalf of any 
individual for whom the trust is maintained. An individual retirement 
account maintained as a simplified employee pension may provide for the 
receipt of up to $7,500 for a calendar year.
    (2) Trustee. (i) The trustee must be a bank (as defined in section 
408(n) and the regulations thereunder) or another person who 
demonstrates, in the manner described in paragraph (e) of this section, 
to the satisfaction of the Commissioner, that the manner in which the 
trust will be administered will be consistent with the requirements of 
section 408 and this section.
    (ii) Section 11.408(a)(2)-1 of the Temporary Income Tax Regulations 
under the Employee Retirement Income Security Act of 1974 is superseded 
by this subparagraph (2).
    (3) Life insurance contracts. No part of the trust funds may be 
invested in life insurance contracts. An individual retirement account 
may invest in annuity contracts which provide, in the case of death 
prior to the time distributions commence, for a payment equal to the sum 
of the premiums paid or, if greater, the cash value of the contract.

[[Page 481]]

    (4) Nonforfeitability. The interest of any individual on whose 
behalf the trust is maintained in the balance of his account must be 
nonforfeitable.
    (5) Prohibition against commingling. (i) The assets of the trust 
must not be commingled with other property except in a common trust fund 
or common investment fund.
    (ii) For purposes of this subparagraph, the term ``common investment 
fund'' means a group trust created for the purpose of providing a 
satisfactory diversification or investments or a reduction of 
administrative expenses for the individual participating trusts, and 
which group trust satisfies the requirements of section 408(c) (except 
that it need not be established by an employer or an association of 
employees) and the requirements of section 401(a) in the case of a group 
trust in which one of the individual participating trusts is an 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a).
    (iii) For purposes of this subparagraph, the term ``individual 
participating trust'' means an employees' trust described in section 
401(a) which is exempt from tax under section 501(a) or a trust which 
satisfies the requirements of section 408(a) provided that in the case 
of such an employees' trust, such trust would be permitted to 
participate in such a group trust if all the other individual 
participating trusts were employees' trusts described in section 401(a) 
which are exempt from tax under section 501(a).
    (6) Distribution of interest. (i) The trust instrument must provide 
that the entire interest of the individual for whose benefit the trust 
is maintained must be distributed to him in accordance with paragraph 
(b)(6)(ii) or (iii) of this section.
    (ii) Unless the provisions of paragraph (b)(6)(iii) of this section 
apply, the entire interest of the individual must be actually 
distributed to him not later than the close of his taxable year in which 
he attains age 70\1/2\.
    (iii) In lieu of distributing the individual's entire interest as 
provided in paragraph (b)(6)(ii) of this section, the interest may be 
distributed commencing not later than the taxable year described in such 
paragraph (b)(6)(ii). In such case, the trust must expressly provide 
that the entire interest of the individual will be distributed to the 
individual and the individual's beneficiaries, in a manner which 
satisfies the requirements of paragraph (b)(6)(v) of this section, over 
any of the following periods (or any combination thereof)--
    (A) The life of the individual,
    (B) The lives of the individual and spouse,
    (C) A period certain not extending beyond the life expectancy of the 
individual, or
    (D) A period certain not extending beyond the joint life and last 
survivor expectancy of the individual and spouse.
    (iv) The life expectancy of the individual or the joint life and 
last survivor expectancy of the individual and spouse cannot exceed the 
period computed by use of the expected return multiples in Sec. 1.72-9, 
or, in the case of payments under a contract issued by an insurance 
company, the period computed by use of the mortality tables of such 
company.
    (v) If an individual's entire interest is to be distributed over a 
period described in paragraph (b)(6)(iii) of this section, beginning in 
the year the individual attains 70\1/2\ the amount to be distributed 
each year must be not less than the lesser of the balance of the 
individual's entire interest or an amount equal to the quotient obtained 
by dividing the entire interest of the individual in the trust at the 
beginning of such year (including amounts not in the individual 
retirement account at the beginning of the year because they have been 
withdrawn for the purpose of making a rollover contribution to another 
individual retirement plan) by the life expectancy of the individual (or 
the joint life and last survivor expectancy of the individual and spouse 
(whichever is applicable)), determined in either case as of the date the 
individual attains age 70 in accordance with paragraph (b)(6)(iv) of 
this section, reduced by one for each taxable year commencing after the 
individual's attainment of age 70\1/2\. An annuity or endowment contract 
issued by an insurance company which provides for non-increasing 
payments over one of

[[Page 482]]

the periods described in paragraph (b)(6)(iii) of this section beginning 
not later than the close of the taxable year in which the individual 
attains age 70\1/2\ satisfies this provision. However, no distribution 
need be made in any year, or a lesser amount may be distributed, if 
beginning with the year the individual attains age 70\1/2\ the aggregate 
amounts distributed by the end of any year are at least equal to the 
aggregate of the minimum amounts required by this subdivision to have 
been distributed by the end of such year.
    (vi) If an individual's entire interest is distributed in the form 
of an annuity contract, then the requirements of section 408(a)(6) are 
satisfied if the distribution of such contract takes place before the 
close of the taxable year described in subdivision (ii) of this 
subparagraph, and if the individual's interest will be paid over a 
period described in subdivision (iii) of this subparagraph and at a rate 
which satisfies the requirements of subdivision (v) of this 
subparagraph.
    (vii) In determining whether paragraph (b)(6)(v) of this section is 
satisfied, all individual retirement plans maintained for an 
individual's benefit (except those under which he is a beneficiary 
described in section 408(a)(7)) at the close of the taxable year in 
which he reaches age 70\1/2\ must be aggregated. Thus, the total 
payments which such individual receives in any taxable year must be at 
least equal to the amount he would have been required to receive had all 
the plans been one plan at the close of the taxable year in which he 
attained age 70\1/2\.
    (7) Distribution upon death. (i) The trust instrument must provide 
that if the individual for whose benefit the trust is maintained dies 
before the entire interest in the trust has been distributed to him, or 
if distribution has been commenced as provided in paragraph (b)(6) of 
this section to the surviving spouse and such spouse dies before the 
entire interest has been distributed to such spouse, the entire interest 
(or the remaining part of such interest if distribution thereof has 
commenced) must, within 5 years after the individual's death (or the 
death of the surviving spouse) be distributed or applied to the purchase 
of an immediate annuity for this beneficiary or beneficiaries (or the 
beneficiary or beneficiaries of the surviving spouse) which will be 
payable for the life of such beneficiary or beneficiaries (or for a term 
certain not extending beyond the life expectancy of such beneficiary or 
beneficiaries) and which annuity contract will be immediately 
distributed to such beneficiary or beneficiaries. A contract described 
in the preceding sentence is not includible in gross income upon 
distribution. Section 1.408-4(e) provides rules applicable to the 
taxation of such contracts. The first sentence of this paragraph (b)(7) 
shall have no application if distributions over a term certain commenced 
before the death of the individual for whose benefit the trust was 
maintained and the term certain is for a period permitted under 
paragraph (b)(6)(iii) (C) or (D) of this section.
    (ii) Each such beneficiary (or beneficiary of a surviving spouse) 
may elect to treat the entire interest in the trust (or the remaining 
part of such interest if distribution thereof has commenced) as an 
account subject to the distribution requirements of section 408(a)(6) 
and paragraph (b)(6) of this section instead of those of section 
408(a)(7) and paragraph (b)(7) of this section. Such an election will be 
deemed to have been made if such beneficiary treats the account in 
accordance with the requirements of section 408(a)(6) and paragraph 
(b)(6) of this section. An election will be considered to have been made 
by such beneficiary if either of the following occurs: (A) any amounts 
in the account (including any amounts that have been rolled over, in 
accordance with the requirements of section 408(d)(3)(A)(i), into an 
individual retirement account, individual retirement annuity, or 
retirement bond for the benefit of such individual) have not been 
distributed within the appropriate time period required by section 
408(a)(7) and paragraph (b)(7) of this section; or (B) any additional 
amounts are contributed to the account (or to the account, annuity, or 
bond to which the beneficiary has rolled such amounts over, as described 
in (1) above) which are subject, or deemed to be subject, to the 
distribution requirements

[[Page 483]]

of section 408(a)(6) and paragraph (b)(6) of this section.
    (8) Definition of beneficiaries. The term ``beneficiaries'' on whose 
behalf an individual retirement account is established includes (except 
where the context indicates otherwise) the estate of the individual, 
dependents of the individual, and any person designated by the 
individual to share in the benefits of the account after the death of 
the individual.
    (c) Accounts established by employers and certain association of 
employees--(1) In general. A trust created or organized in the United 
States (as defined in section 7701(a)(9)) by an employer for the 
exclusive benefit of his employees or their beneficiaries, or by an 
association of employees for the exclusive benefit of its members or 
their beneficiaries, is treated as an individual retirement account if 
the requirements of paragraphs (c)(2) and (c)(3) of this section are 
satisfied under the written governing instrument creating the trust. A 
trust described in the preceding sentence is for the exclusive benefit 
of employees or members even though it may maintain an account for 
former employees or members and employees who are temporarily on leave.
    (2) General requirements. The trust must satisfy the requirements of 
paragraphs (b) (1) through (7) of this section.
    (3) Special requirement. There must be a separate accounting for the 
interest of each employee or member.
    (4) Definitions--(i) Separate accounting. For purposes of paragraph 
(c)(3) of this section, the term ``separate accounting'' means that 
separate records must be maintained with respect to the interest of each 
individual for whose benefit the trust is maintained. The assets of the 
trust may be held in a common trust fund, common investment fund, or 
common fund for the account of all individuals who have an interest in 
the trust.
    (ii) Employee association. For purposes of this paragraph and 
section 408(c), the term ``employee association'' means any organization 
composed of two or more employees, including but not limited to, an 
employee association described in section 501(c)(4). Such association 
may include employees within the meaning of section 401(c)(1). There 
must be, however, some nexus between the employees (e.g., employees of 
same employer, employees in the same industry, etc.) in order to qualify 
as an employee association described in this subdivision (ii).
    (d) Custodial accounts. For purposes of this section and section 
408(a), a custodial account is treated as a trust described in section 
408(a) if such account satisfies the requirements of section 408(a) 
except that it is not a trust and if the assets of such account are held 
by a bank (as defined in section 401(d)(1) and the regulations 
thereunder) or such other person who satisfies the requirements of 
paragraph (b)(2)(ii) of this section. For purposes of this chapter, in 
the case of a custodial account treated as a trust by reason of the 
preceding sentence, the custodian of such account will be treated as the 
trustee thereof.
    (e)(1) In general. The trustee of a trust described in paragraph (b) 
of this section may be a person other than a bank if the person 
demonstrates to the satisfaction of the Commissioner that the manner in 
which the person will administer trusts will be consistent with the 
requirements of section 408. The person must demonstrate by written 
application that the requirements of paragraph (e)(2) to (e)(6) of this 
section will be met. The written application must be sent to address 
prescribed by the Commissioner in revenue rulings, notices, and other 
guidance published in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2)(ii)(b) of this chapter). For procedural and administrative 
rules, see paragraph (e)(7) of this section.
    (2) Fiduciary ability. The applicant must demonstrate in detail its 
ability to act within the accepted rules of fiduciary conduct. Such 
demonstration must include the following elements of proof:
    (i) Continuity. (A) The applicant must assure the uninterrupted 
performance of its fiduciary duties nonwithstanding the death or change 
of its owners. Thus, for example, there must be sufficient diversity in 
the ownership of the applicant to ensure that the death or change of its 
owners will not interrupt

[[Page 484]]

the conduct of its business. Therefore, the applicant cannot be an 
individual.
    (B) Sufficient diversity in the ownership of an incorporated 
applicant is demonstrated in the following circumstances:
    (1) Individuals each of whom owns more than 20 percent of the voting 
stock in the applicant own, in the aggregate, no more than 50 percent of 
such stock;
    (2) The applicant has issued securities registered under section 12 
(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78l (b)) or 
required to be registered under section 12(g) (1) of that Act (15 U.S.C. 
78l (g)(1)); or
    (3) The applicant has a parent corporation within the meaning of 
section 1563 (a) (1) that has issued securities registered under section 
12 (b) of the Securities Exchange Act of 1934 (15 U.S.C. 78l (b)) or 
required to be registered under Section 12 (g) (1) of that Act (15 
U.S.C. 78l (g)(1)).
    (C) Sufficient diversity in the ownership of an applicant that is a 
partnership means that--
    (1) Individuals each of whom owns more than 20 percent of the 
profits interest in the partnership own, in the aggregate, no more than 
50 percent of such profits interest, and
    (2) Individuals each of whom owns more than 20 percent of the 
capital interest in the partnership own, in the aggregate, no more than 
50 percent of such capital interest.
    (D) For purposes of this subdivision, the ownership of stock and of 
capital and profits interests shall be determined in accordance with the 
rules for constructive ownership of stock provided in section 1563 (e) 
and (f) (2). For this purpose, the rules for constructive ownership of 
stock provided in section 1563(e) and (f) (2) shall apply to a capital 
or profits interest in a partnership as if it were a stock interest.
    (ii) Established location. The applicant must have an established 
place of business in the United States where it is accessible during 
every business day.
    (iii) Fiduciary experience. The applicant must have fiduciary 
experience or expertise sufficient to ensure that it will be able to 
perform its fiduciary duties. Evidence of fiduciary experience must 
include proof that a significant part of the business of the applicant 
consists of exercising fiduciary powers similar to those it will 
exercise if its application is approved. Evidence of fiduciary expertise 
must include proof that the applicant employs personnel experienced in 
the administration of fiduciary powers similar to those the applicant 
will exercise if its application is approved.
    (iv) Fiduciary responsibility. The applicant must assure compliance 
with the rules of fiduciary conduct set out in paragraph (e)(5) of this 
section.
    (v) Financial responsibility. The applicant must exhibit a high 
degree of solvency commensurate with the obligations imposed by this 
paragraph. Among the factors to be taken into account are the 
applicant's net worth, its liquidity, and its ability to pay its debts 
as they come due.
    (3) Capacity to account. The applicant must demonstrate in detail 
its experience and competence with respect to accounting for the 
interests of a large number of individuals (including calculating and 
allocating income earned and paying out distributions to payees). 
Examples of accounting for the interests of a large number of 
individuals include accounting for the interests of a large number of 
shareholders in a regulated investment company and accounting for the 
interests of a large number of variable annuity contract holders.
    (4) Fitness to handle funds--(i) In general. The applicant must 
demonstrate in detail its experience and competence with respect to 
other activities normally associated with the handling of retirement 
funds.
    (ii) Examples. Examples of activities normally associated with the 
handling of retirement funds include:
    (A) To Receive, issue receipts for, and safely keep securities;
    (B) To collect income;
    (C) To execute such ownership certificates, to keep such records, 
make such returns, and render such statements as are required for 
Federal tax purposes;
    (D) To give proper notification regarding all collections;
    (E) To collect matured or called principal and properly report all 
such collections;

[[Page 485]]

    (F) To exchange temporary for definitive securities;
    (G) To give proper notification of calls, subscription rights, 
defaults in principal or interest, and the formation of protective 
committees;
    (H) To buy, sell, receive, or deliver securities on specific 
directions.
    (5) Rules of fiduciary conduct. The applicant must demonstrate that 
under applicable regulatory requirements, corporate or other governing 
instruments, or its established operating procedures:
    (i) Administration of fiduciary powers. (A)(1) The owners or 
directors of the applicant will be responsible for the proper exercise 
of fiduciary powers by the applicant. Thus, all matters pertinent 
thereto, including the determination of policies, the investment and 
disposition of property held in a fiduciary capacity, and the direction 
and review of the actions of all employees utilized by the applicant in 
the exercise of its fiduciary powers, will be the responsibility of the 
owners or directors. In discharging this responsibility, the owners or 
directors may assign to designated employees, by action duly recorded, 
the administration of such of the applicant's fiduciary powers as may be 
proper to assign.
    (2) A written record will be made of the acceptance and of the 
relinquishment or closing out of all fiduciary accounts, and of the 
assets held for each account.
    (3) If the applicant has the authority or the responsibility to 
render any investment advice with regard to the assets held in or for 
each fiduciary account, the advisability of retaining or disposing of 
the assets will be determined at least once during each period of 12 
months.
    (B) All employees taking part in the performance of the applicant's 
fiduciary duties will be adequately bonded. Nothing in this subdivision 
(i)(B) shall require any person to be bonded in contravention of section 
412(d) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1112(d)).
    (C) The applicant will employ or retain legal counsel who will be 
readily available to pass upon fiduciary matters and to advise the 
applicant.
    (D) In order to segregate the performance of its fiduciary duties 
from other business activities, the applicant will maintain a separate 
trust division under the immediate supervision of an individual 
designated for that purpose. The trust division may utilize the 
personnel and facilities of other divisions of the applicant, and other 
divisions of the applicant may utilize the personnel and facilities of 
the trust division, as long as the separate identity of the trust 
division is preserved.
    (ii) Adequacy of net worth--(A) Initial net worth requirement. In 
the case of applications received after January 5, 1995, no initial 
application will be accepted by the Commissioner unless the applicant 
has a net worth of not less than $250,000 (determined as of the end of 
the most recent taxable year). Thereafter, the applicant must satisfy 
the adequacy of net worth requirements of paragraph (e)(5)(ii)(B) and 
(C) of this section.
    (B) No fiduciary account will be accepted by the applicant unless 
the applicant's net worth (determined as of the end of the most recent 
taxable year) exceeds the greater of--
    (1) $100,000, or
    (2) Four percent (or, in the case of a passive trustee described in 
paragraph (e)(6)(i)(A) of this section, two percent) of the value of all 
of the assets held by the applicant in fiduciary accounts (determined as 
of the most recent valuation date).
    (C) The applicant will take whatever lawful steps are necessary 
(including the relinquishment of fiduciary accounts) to ensure that its 
net worth (determined as of the close of each taxable year) exceeds the 
greater of--
    (1) $50,000, or
    (2) Two percent (or, in the case of a passive trustee described in 
paragraph (e)(6)(i)(A) of this section, one percent) of the value of all 
of the assets held by the applicant in fiduciary accounts (determined as 
of the most recent valuation date).
    (D) Assets held by members of SIPC--(1) For purposes of satisfying 
the adequacy-of-net-worth requirement of this paragraph, a special rule 
is provided for nonbank trustees that are members of

[[Page 486]]

the Securities Investor Protection Corporation (SIPC) created under the 
Securities Investor Protection Act of 1970 (SIPA)(15 U.S.C. 78aaa et 
seq., as amended). The amount that the net worth of a nonbank trustee 
that is a member of SIPC must exceed is reduced by two percent for 
purposes of paragraph (e)(5)(ii)(B)(2), and one percent for purposes of 
paragraph (e)(5)(ii)(C)(2), of the value of assets (determined on an 
account-by-account basis) held for the benefit of customers (as defined 
in 15 U.S.C. 78fff-2(e)(4)) in fiduciary accounts by the nonbank trustee 
to the extent of the portion of each account that does not exceed the 
dollar limit on advances described in 15 U.S.C. 78fff-3(a), as amended, 
that would apply to the assets in that account in the event of a 
liquidation proceeding under the SIPA.
    (2) The provisions of this special rule for assets held in fiduciary 
accounts by members of SIPC are illustrated in the following example.

    Example: (a) Trustee X is a broker-dealer and is a member of the 
Securities Investment Protection Corporation. Trustee X also has been 
approved as a nonbank trustee for individual retirement accounts (IRAs) 
by the Commissioner but not as a passive nonbank trustee. Trustee X is 
the trustee for four IRAs. The total assets of each IRA (for which 
Trustee X is the trustee) as of the most recent valuation date before 
the last day of Trustee X's taxable year ending in 1995 are as follows: 
the total assets for IRA-1 is $3,000,000 (all of which is invested in 
securities); the value of the total assets for IRA-2 is $500,000 
($200,000 of which is cash and $300,000 of which is invested in 
securities), the value of the total assets for IRA-3 is $400,000 (all of 
which is invested in securities); and the value of the total assets of 
IRA-4 is $200,000 (all of which is cash). The value of all assets held 
in fiduciary accounts, as defined in Sec. 1.408-2(e)(6)(viii)(A), is 
$4,100,000.
    (b) The dollar limit on advances described in 15 U.S.C. Sec. 78fff-
3(a) that would apply to the assets in each account in the event of a 
liquidation proceeding under the Securities Investor Protection Act of 
1970 in effect as of the last day of Trustee X's taxable year ending in 
1995 is $500,000 per account (no more than $100,000 of which is 
permitted to be cash). Thus, the dollar limit that would apply to IRA-1 
is $500,000; the dollar limit for IRA-2 is $400,000 ($100,000 of the 
cash and the $300,000 of the value of the securities); the dollar limit 
for IRA-3 is $400,000 (the full value of the account because the value 
of the account is less than $500,000 and no portion of the account is 
cash); and the dollar limit for IRA-4 is $100,000 (the entire account is 
cash and the dollar limit per account for cash is $100,000). The 
aggregate dollar limits of the four IRAs is $1,400,000.
    (c) For 1996, the amount determined under Sec. 1.408-2(e)(5)(ii)(B) 
is determined as follows for Trustee X: (1) four percent of $4,100,000 
equals $164,000; (2) two percent of $1,400,000 equals $28,000; and (3) 
$164,000 minus $28,000 equals $136,000. Thus, because $136,000 exceeds 
$100,000, the minimum net worth necessary for Trustee X to accept new 
accounts for 1996 is $136,000.
    (d) For 1996, the amount determined under Sec. 1.408-2(e)(5)(ii)(C) 
for Trustee X is determined as follows: (1) two percent of $4,100,000 
equals $82,000; (2) one percent of $1,400,000 equals $14,000; and (3) 
$82,000 minus $14,000 equals $68,000. Thus, because $68,000 exceeds 
$50,000, the minimum net worth necessary for Trustee X to avoid a 
mandatory relinquishment of accounts for 1996 is $68,000.

    (E) The applicant will determine the value of the assets held by it 
in trust at least once in each calendar year and no more than 18 months 
after the preceding valuation. The assets will be valued at their fair 
market value, except that the assets of an employee pension benefit plan 
to which section 103(b)(3)(A) of the Employee Retirement Income Security 
Act of 1974 (29 U.S.C. 1023(b)(3)(A)) applies will be considered to have 
the value stated in the most recent annual report of the plan.
    (iii) Audits. (A) At least once during each period of 12 months, the 
applicant will cause detailed audits of the fiduciary books and records 
to be made by a qualified public accountant. At that time, the applicant 
will ascertain whether the fiduciary accounts have been administered in 
accordance with law, this paragraph, and sound fiduciary principles. The 
audits shall be conducted in accordance with generally accepted auditing 
standards, and shall involve whatever tests of the fiduciary books and 
records of the applicant are considered necessary by the qualified 
public accountant.
    (B) In the case of an applicant which is regulated, supervised, and 
subject to periodic examination by a State or Federal agency, such 
applicant may adopt an adequate continuous audit system in lieu of the 
periodic audits required by paragraph (e)(5)(iii)(A) of this section.

[[Page 487]]

    (C) A report of the audits and examinations required under this 
subdivision, together with the action taken thereon, will be noted in 
the fiduciary records of the applicant.
    (iv) Funds awaiting investment or distribution. Funds held in a 
fiduciary capacity by the applicant awaiting investment or distribution 
will not be held uninvested or undistributed any longer than is 
reasonable for the proper management of the account.
    (v) Custody of investments. (A) Except for investments pooled in a 
common investment fund in accordance with the provisions of paragraph 
(e)(5)(vi) of this section, the investments of each account will not be 
commingled with any other property.
    (B) Assets of accounts requiring safekeeping will be deposited in an 
adequate vault. A permanent record will be kept of assets deposited in 
or withdrawn from the vault.
    (vi) Common investment funds. The assets of an account may be pooled 
in a common investment fund (as defined in paragraph (e)(5)(viii)(C) of 
this section) if the applicant is authorized under applicable law to 
administer a common investment fund and if pooling the assets in a 
common investment fund is not in contravention of the plan documents or 
applicable law. The common investment fund must be administered as 
follows:
    (A) Each common investment fund must be established and maintained 
in accordance with a written agreement, containing appropriate 
provisions as to the manner in which the fund is to be operated, 
including provisions relating to the investment powers and a general 
statement of the investment policy of the applicant with respect to the 
fund; the allocation of income, profits and losses; the terms and 
conditions governing the admission or withdrawal of participations in 
the funds; the auditing of accounts of the applicant with respect to the 
fund; the basis and method of valuing assets held by the fund, setting 
forth specific criteria for each type of asset; the minimum frequency 
for valuation of assets of the fund; the period following each such 
valuation date during which the valuation may be made (which period in 
usual circumstances may not exceed 10 business days); the basis upon 
which the fund may be terminated; and such other matters as may be 
necessary to define clearly the rights of participants in the fund. A 
copy of the agreement must be available at the principal office of the 
applicant for inspection during all business hours, and upon request a 
copy of the agreement must be furnished to the employer, the plan 
administrator, any participant or beneficiary of an account, or the 
individual for whose benefit the account is established or that 
individual's beneficiary.
    (B) All participations in the common investment fund must be on the 
basis of a proportionate interest in all of the investments.
    (C) Not less frequently than once during each period of 3 months the 
applicant must determine the value of the assets in the fund as of the 
date set for the valuation of assets. No participation may be admitted 
to or withdrawn from the fund except (1) on the basis of such valuation 
and (2) as of such valuation date. No participation may be admitted to 
or withdrawn from the fund unless a written request for or notice of 
intention of taking such action has been entered on or before the 
valuation date in the fiduciary records of the applicant. No request or 
notice may be canceled or countermanded after the valuation date.
    (D)(1) The applicant must at least once during each period of 12 
months cause an adequate audit to be made of the common investment fund 
by a qualified public accountant.
    (2) The applicant must at least once during each period of 12 months 
prepare a financial report of the fund which, based upon the above 
audit, must contain a list of investments in the fund showing the cost 
and current value of each investment; a statement for the period since 
the previous report showing purchases, with cost; sales, with profit or 
loss; any other investment changes; income and disbursements; and an 
appropriate notation as to any investments in default.
    (3) The applicant must transmit and certify the accuracy of the 
financial report to the administrator of each plan participating in the 
common investment fund within 120 days after the end of the plan year.

[[Page 488]]

    (E) When participations are withdrawn from a common investment fund, 
distributions may be made in cash or ratably in kind, or partly in cash 
and partly in kind: Provided, That all distributions as of any one 
valuation date must be made on the same basis.
    (F) If for any reason an investment is withdrawn in kind from a 
common investment fund for the benefit of all participants in the fund 
at the time of such withdrawal and such investment is not distributed 
ratably in kind, it must be segregated and administered or realized upon 
for the benefit ratably of all participants in the common investment 
fund at the time of withdrawal.
    (vii) Books and records. (A) The applicant must keep its fiduciary 
records separate and distinct from other records. All fiduciary records 
must be so kept and retained for as long as the contents thereof may 
become material in the administration of any internal revenue law. The 
fiduciary records must contain full information relative to each 
account.
    (B) The applicant must keep an adequate record of all pending 
litigation to which it is a party in connection with the exercise of 
fiduciary powers.
    (viii) Definitions. For purposes of this paragraph (e)(5), and 
paragraph (e)(2)(v), and paragraph (e)(7) of this section--
    (A) The term ``account'' or ``fiduciary account'' means a trust 
described in section 401(a) (including a custodial account described in 
section 401(f)), a custodial account described in section 403(b)(7), or 
an individual retirement account described in section 408(a) (including 
a custodial account described in section 408(h)).
    (B) The term ``plan administrator'' means an administrator as 
defined in Sec. 1.414(g)-1.
    (C) The term ``common investment fund'' means a trust that satisfies 
the following requirements:
    (1) The trust consists of all or part of the assets of several 
accounts that have been established with the applicant, and
    (2) The trust is described in section 401(a) and is exempt from tax 
under section 501(a), or is a trust that is created for the purpose of 
providing a satisfactory diversification of investments or a reduction 
of administrative expenses for the participating accounts and that 
satisfies the requirements of section 408(c).
    (D) The term ``fiduciary records'' means all matters which are 
written, transcribed, recorded, received or otherwise come into the 
possession of the applicant and are necessary to preserve information 
concerning the acts and events relevant to the fiduciary activities of 
the applicant.
    (E) The term ``qualified public accountant'' means a qualified 
public accountant, as defined in section 103(a)(3)(D) of the Employee 
Retirement Income Security Act of 1974, 29 U.S.C. 1023(a)(3)(D), who is 
independent of the applicant.
    (F) The term ``net worth'' means the amount of the applicant's 
assets less the amount of its liabilities, as determined in accordance 
with generally accepted accounting principles.
    (6) Special rules--(i) Passive trustee. (A) An applicant that 
undertakes to act only as a passive trustee may be relieved of one or 
more of the requirements of this paragraph upon clear and convincing 
proof that such requirements are not germane, under all the facts and 
circumstances, to the manner in which the applicant will administer any 
trust. A trustee is a passive trustee only if under the written trust 
instrument the trustee has no discretion to direct the investment of the 
trust funds or any other aspect of the business administration of the 
trust, but is merely authorized to acquire and hold particular 
investments specified by the trust instrument. Thus, for example, in the 
case of an applicant that undertakes merely to acquire and hold the 
stock of regulated investment companies, the requirements of paragraph 
(e)(5)(i)(A)(3) in its place, and (i)(D), and (vi) of this section shall 
not apply and no negative inference shall be drawn from the applicant's 
failure to demonstrate its experience of competence with respect to the 
activities described in paragraph (e)(4)(ii)(E) to (H) of this section.
    (B) The notice of approval issued to an applicant that is approved 
by reason of this subdivision shall state that the

[[Page 489]]

applicant is authorized to act only as a passive trustee.
    (ii) Federal or State regulation. Evidence that an applicant is 
subject to Federal or State regulation with respect to one or more 
relevant factors shall be given weight in proportion to the extent that 
such regulatory standards are consonant with the requirements of section 
401. Such evidence may be submitted in addition to, or in lieu of, the 
specific proofs required by this paragraph.
    (iii) Savings account. (A) An applicant will be approved to act as 
trustee under this subdivision if the following requirements are 
satisfied:
    (1) The applicant is a credit union, industrial loan company, or 
other financial institution designated by the Commissioner;
    (2) The investment of the trust assets will be solely in deposits in 
the applicant;
    (3) Deposits in the applicant are insured (up to the dollar limit 
prescribed by applicable law) by an agency or instrumentality of the 
United States, or by an organization established under a special statute 
the business of which is limited to insuring deposits in financial 
institutions and providing related services.
    (B) Any applicant that satisfies the requirements of this 
subdivision is hereby approved, and (notwithstanding subparagraph (2) of 
this paragraph) is not required to submit a written application. This 
approval takes effect on the first day after December 22, 1976, on which 
the applicant satisfies the requirements of this subdivision, and 
continues in effect for so long as the applicant continues to satisfy 
those requirements.
    (C) If deposits are insured, but not in the manner provided in 
paragraph (e)(6)(iii)(A)(3) of this section, the applicant must submit 
an application. The application, notwithstanding subparagraph (2) of 
this paragraph, will be limited to a complete description of the 
insurance of applicant's deposits. The applicant will be approved if the 
Commissioner approves of the applicant's insurance.
    (iv) Notification of Commissioner. The applicant must notify the 
Commissioner in writing of any change that affects the continuing 
accuracy of any representation made in the application required by this 
paragraph, whether the change occurs before or after the applicant 
receives a notice of approval. The notification must be addressed to 
address prescribed by the Commissioner in revenue rulings, notices, and 
other guidance published in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2)(ii)(b) of this chapter.
    (v) Substitution of trustee. No applicant will be approved unless 
the applicant undertakes to act as trustee only under trust instruments 
which contain a provision to the effect that the grantor is to 
substitute another trustee upon notification by the Commissioner that 
such substitution is required because the applicant has failed to comply 
with the requirements of this paragraph or is not keeping such records, 
or making such returns, or rendering such statements as are required by 
forms or regulations.
    (7) Procedure and administration--(i) Notice of approval. If the 
applicant is approved, a written notice of approval will be issued to 
the applicant. The notice of approval will state the day on which it 
becomes effective, and (except as otherwise provided therein) will 
remain effective until revoked. This paragraph does not authorize the 
applicant to accept any fiduciary account before such notice of approval 
becomes effective.
    (ii) Notice of disapproval. If the applicant is not approved, a 
written notice will be furnished to the applicant containing a statement 
of the reasons why the applicant has not been approved.
    (iii) Copy to be furnished. The applicant must not accept a 
fiduciary account until after the plan administrator or the person for 
whose benefit the account is to be established is furnished with a copy 
of the written notice of approval issued to the applicant. This 
provision is effective six months after April 20, 1979 for new accounts 
accepted thereafter. For accounts accepted before that date, the 
administrator must be notified before the later of the effective date of 
this provision or six months after acceptance of the account.
    (iv) Grounds for revocation. The notice of approval issued to an 
applicant will

[[Page 490]]

be revoked if the Commissioner determines that the applicant is 
unwilling or unable to administer fiduciary accounts in a manner 
consistent with the requirements of this paragraph. Generally, the 
notice will not be revoked unless the Commissioner determines that the 
applicant has knowingly, willfully, or repeatedly failed to administer 
fiduciary accounts in a manner consistent with the requirements of this 
paragraph, or has administered a fiduciary account in a grossly 
negligent manner.
    (v) Procedures for revocation. The notice of approval issued to an 
applicant may be revoked in accordance with the following procedures:
    (A) If the Commissioner proposes to revoke the notice of approval 
issued to an applicant, the Commissioner will advise the applicant in 
writing of the proposed revocation and of the reasons therefor.
    (B) Within 60 days after the receipt of such written advice, the 
applicant may protest the proposed revocation by submitting a written 
statement of facts, law, and arguments opposing such revocation to 
address prescribed by the Commissioner in revenue rulings, notices, and 
other guidance published in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2)(ii)(b) of this chapter. In addition, the applicant may 
request a conference in the National Office.
    (C) If the applicant consents to the proposed revocation, either 
before or after a National Office conference, or if the applicant fails 
to file a timely protest, the Commissioner will revoke the notice of 
approval that was issued to the applicant.
    (D) If, after considering the applicant's protest and any 
information developed in conference, the Commissioner determines that 
the applicant is unwilling or unable to administer fiduciary accounts in 
a manner consistent with the requirements of this paragraph, the 
Commissioner will revoke the notice of approval that was issued to the 
applicant and will furnish the applicant with a written statement of 
findings on which the revocation is based.
    (E) If at any time the Commissioner determines that immediate action 
is necessary to protect the interest of the Internal Revenue Service or 
of any fiduciary account, the notice of approval issued to the applicant 
will be suspended at once, pending a final decision to be based on the 
applicant's protest and any information developed in conference.

[T.D. 7714, 45 FR 52791, Aug. 8, 1980, as amended by T.D. 8635, 60 FR 
65549, Dec. 20, 1995; 61 FR 11307, Mar. 20, 1996]