4035 / What nine requirements must a tax sheltered annuity contract meet in order for contributions to be excluded from the employee’s gross income?
Editor’s Note: The remedial amendment period (RAP) applicable to tax sheltered annuities (see Q 4037) was extended through March 31, 2020 under Revenue Procedure 2017-18. Pursuant to this new plan, employers were required to restate their plans to reflect a new plan document by the end of the extended RAP. In response to COVID-19, the March 31 deadline was extended to June 30, 2020.
Exclusion for Contributions to Purchase 403(b) Contracts
Under final regulations ( Q 4026), amounts contributed by an eligible employer for the purchase of an annuity contract for an employee are excluded from the gross income of the employee under IRC Section 403(b) only if each of the nine requirements below are satisfied.1 The final regulations require the 403(b) plan, in both form and operation, to satisfy the applicable requirements for exclusion.2
(1) Purchase by Eligible Employer. A tax sheltered annuity contract must be purchased by an eligible employer ( Q 4027).3 Final regulations provide that the annuity contract cannot be purchased under a qualified plan ( Q 3832, Q 3934), or an eligible governmental plan ( Q 3600).4
Thus, an employer must agree to pay premiums. Although the employer must pay premiums, the premiums may be derived either directly from the
employer as additional compensation to the employee or indirectly from the employee through a reduction in his or her salary. If premiums are to come from a reduction in the employee’s salary, the reduction must be made under a legally binding agreement between the employer and the employee, and the agreement must be irrevocable as to salary earned while the agreement is in effect.