Custodial Agreement

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Custodial Agreement

A Custodial Agreement is a legal contract between a company and a third party who undertakes the responsibility of a particular asset on behalf of the company for a specified duration. An example of such agreements can be found in the California custodial agreement template. Companies normally entrust state agencies or companies with the responsibility of benefits’ administration such as retirement plans. The third party has to collect the contributions from both the employer and the employees, invest the funds into an authorized instrument and disburse the benefits when they are due. The responsibility of the company retirement plan lies with the third party, who is a custodian for the funds. The responsibility of ensuring that the employer makes a matching contribution lies with the employee, not the custodians.

When Do You Need A Custodial Agreement

A custodial agreement is required when a company wants to provide a benefit plan for its employees as per statutory regulations. The purpose of a custodial agreement is to appoint a third party who will take responsibility for the disbursal of benefits to the employees as and when the benefits are due. The custodian of the funds is responsible for ensuring that the funds are properly invested as per a mandate in instruments suggested by the statutory regulators. The custodian is not liable if the employer does not make a matching contribution along with the employee. Any taxes which need to be paid during the disbursement of funds is the responsibility of the employee. A custodial agreement for business is required to comply with the laws of the state under whose jurisdiction the agreement is being drafted.

Inclusions In A Custodial Agreement

A custodial agreement must include the names of the organization and the third party as it is a bipartite agreement. A custodial agreement template should also include the effective date of the agreement, the asset whose custody is being entrusted by the employer, the duration of the custody, the benefits to be administered on the due date, the rights and responsibilities of the employer and the custodian. A Company Custodial Agreement ICCA is an example of a custodial agreement where the depositor entrusts the custodian with establishing an individual retirement account. In the event of the death of the depositor, the disbursement of benefits to the beneficiary will also be mentioned. The instrument in which the funds will be invested also needs to be mentioned in the custodial agreement document. 

How To Draft A Custodial Agreement

While drafting a custodial agreement, the following points need to be kept in mind:

  • The names of the parties and the relationship shared between them needs to be clearly mentioned.
  • The responsibilities of the custodian and the depositor need to be stated
  • It should be clear that the depositor’s interest balance in the account cannot be forfeited
  • The instruments in which the funds with the custodian cannot be invested are also mentioned
  • The beginning date on which the interest in the custodial account of the depositor must be mentioned
  • The distribution of the interest in the depositors account in the event of death to the beneficiary needs to be clearly stated
  • The minimum amount which should be distributed each year should be mentioned

Benefits Of A Custodial Agreement

The benefits of having a custodial agreement are:

  • The entire responsibility of the retirement benefit plan lies with the custodian. The employer is assured of professional services at a very nominal cost as compared to what they would have to pay if each individual account had to be handled separately.
  • The employees are ensured that the contributions made by them as well as the employer are secure. They will also be assured that the benefits will be received by them as and when they accrue. The investments are made into regulated products by the custodian, which is normally a state agency
  • The rights of both the employer and employee are protected

Types Of Custodial Agreement

The types of custodial agreement are mentioned below: 

  • Custodian Bank agreement: In these agreements, the bank is the custodian for the customer’s securities. The securities may be held in physical or electronic form. Banks offer specialized services like account administration, interest and dividend collection, tax advice, and transaction settlements. The fees charged would depend on the services provided
  • Retirement benefit agreements: Such agreements are made by employers with state agencies for creating a retirement benefit plan. The third-party agency is responsible for ensuring that the funds are invested in authorized securities and the payment of benefits to the employees on the date of accrual is made promptly.

Key Terms Of A Custodial Agreement

The key terms of a custodial agreement are mentioned here:

  • Depositor: The depositor in the agreement, is the party who has entrusted the custodian with the responsibility of managing their funds
  • Custodian: This is a company which has accepted the responsibility to invest the funds according to certain regulations
  • Permissible investments: These are the investment products in which the custodian is permitted to make investments
  • Beneficiary: The beneficiary is the person who will be entitled to the proceeds of the retirement benefit plan in the event of the death of the depositor.
  • Termination of agreement: This agreement may be terminated by a notice from either party in the required format

Download Custodial Agreement

If you want to provide employee benefits plans through a third party, then a custodial agreement is mandatory. 

You can download a custodial agreement sample here.

Sample Custodial Agreement

Download Custodial Agreement Template

Custodial Agreement

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