4032 / What are the tax benefits of a tax sheltered annuity?

A tax sheltered annuity is a deferred tax arrangement expressly granted by Congress in IRC Section 403(b). An employee can exclude from gross income, within limits, the contributions paid to an annuity for the employee’s retirement or amounts paid to a custodian for the purchase of stock in regulated investment companies ( Q 4034). The plan may be used by only certain employers ( Q 4033). An employee generally must report the payments received under the contract or custodial account as taxable income ( Q 4088).

A plan must meet specific requirements ( Q 4035, Q 4038), although some but not all failures to meet these requirements may be subject to correction under the Employee Plans Compliance Resolution System (“EPCRS”).¹

---

Planning Point: Most common problems can now be corrected under EPCRS, but many corrections are slightly different than for similar problems under 401(a) plans.

---

Final 403(b) Regulations. Final regulations concerning tax sheltered annuity contracts were released and became effective on July 26, 2007, and generally apply for tax years beginning after December 31, 2008.²