4034 / How may a tax sheltered annuity plan be funded?
Annuity Contracts. IRC Section 403(b) provides that the tax sheltered annuity rules apply if an annuity contract is purchased for an employee. Final regulations provide that an annuity contract means a contract that is issued by an insurance company qualified to issue annuities in a state and that includes payment in the form of an annuity.1 A custodial account also is treated as an annuity contract.2 In addition, retirement income accounts are treated as annuity contracts.3
An individual or group insurance company annuity contract that provides fixed retirement benefits may be used. A single group annuity contract that pools the assets of an employer’s tax sheltered annuity plan and defined contribution plan also may be used where the assets of each plan are separately accounted for at the plan level and at the participant level through the use of sub-accounts.4
The IRS has ruled that a variable annuity contract will qualify.5 A variable annuity contract in which the contract holder directs the investments in publicly available securities (i.e., mutual funds) will be treated as an annuity contract and the contract holder will not be treated as owning the underlying assets if certain conditions are met.