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 |