613 / How is an employee taxed on periodic retirement benefits under a qualified pension, annuity, or profit sharing plan if the annuity starting date is after December 31, 1997?

The tax treatment is the same whether payment is made directly from a qualified trust or annuity plan or whether a trust buys an annuity and distributes it to an employee.² Distribution of an annuity contract itself affects the tax on lump sum distributions ( Q 140). If an employee has a cost basis for his or her interest, payments are taxed as discussed below, depending on the annuity starting date.

For an employee who has a cost basis for his or her interest, and whose annuity starting date is after December 31, 1997, the investment in the contract is recovered according to one of two schedules set forth in the IRC. For purposes of this rule, the employee’s investment in the contract does not include any adjustment for a refund feature under the contract.³

These tables operate in the same manner as the simplified safe harbor announced in 1988.⁴ If an annuity is payable over one life, the payments will be taxed as described below for annuities with a starting date after November 18, 1996. If the annuity is payable over two or more lives, the excludable portion of each monthly payment is determined by dividing the employee’s investment in the contract by the number of anticipated payments, as follows:⁵

If the combined ages of the annuitants are	Number of payments
110 and under	410
111-120	360
121-130	310
131-140	260
141+	210

According to the Conference Committee Report for TRA ’97, this table applies to benefits based on the life of more than one annuitant, even if the amount of the annuity varies by annuitant. It does not apply to an annuity paid on a single life merely because it has additional features, such as a term certain. In the case of a term certain annuity without a life contingency, the expected number of payments is the number of monthly payments provided under the contract.⁶ In the case of payments made other than monthly, an adjustment must be made to take into account the period on the basis of which payments are made. Two methods of making such an adjustment are set forth in Notice 98-2.⁷

For purposes of this rule, if an annuity is payable to a primary annuitant and more than one survivor annuitant, the combined ages of the annuitants is the sum of the age of the primary annuitant and the youngest survivor annuitant. If an annuity is payable to more than one survivor annuitant but there is no primary annuitant, the combined ages of the annuitants is the sum of the age of the oldest survivor annuitant and the youngest survivor annuitant. Any survivor annuitant whose entitlement to payments is based on an event other than the death of the primary annuitant is disregarded. For an explanation of the basis recovery rules under IRC Section 72(d), see Letter Ruling 200009066.