Tax Sheltered Annuities

<div class="Section1"><br /> <br /> The safe harbor rules for automatic contribution plans with respect to 401(k) plans also apply with respect to matching contributions under a 403(b) annuity through the application of IRC Section 403(b)(12) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3762">3762</a>). This provision is effective for years beginning after<br /> December&nbsp;31, 2007.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect;&nbsp;401(k)(13), 401(m)(12), 414(w).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Under the final regulations, a plan-to-plan transfer from a 403(b) plan to another 403(b) plan is permitted if each of the following conditions is met:<br /> <p style="padding-left: 40px;">(1)  the participant is an employee or former employee of the employer for the receiving plan or, in the case of a transfer for a beneficiary of a deceased participant, the participant was an employee or former employee of the employer for the receiving plan;</p><br /> <p style="padding-left: 40px;">(2)  the transferring plan provides for transfers;</p><br /> <p style="padding-left: 40px;">(3)  the receiving plan provides for the receipt of transfers;</p><br /> <p style="padding-left: 40px;">(4)  the participant or beneficiary whose assets are being transferred has an accumulated benefit immediately after the transfer that is at least equal to the accumulated benefit immediately before the transfer;</p><br /> <p style="padding-left: 40px;">(5)  the receiving plan imposes restrictions on distributions to the participant or beneficiary whose assets are being transferred that are no less stringent than those imposed on the transferring plan; and</p><br /> <p style="padding-left: 40px;">(6)  if a plan-to-plan transfer does not constitute a complete transfer of the participant’s or beneficiary’s interest in the 403(b) plan, the receiving plan treats the amount transferred as a continuation of a pro rata portion of the participant’s or beneficiary’s interest in the Section 403(b) plan (e.g., a pro rata portion of the participant’s or beneficiary’s interest in any after-tax employee contributions).<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> No transfers are permitted between contracts that are not part of a plan under Revenue Procedure 2007-71, because the 2007 regulations revoked Revenue Ruling 90-24 which had previously permitted such transfers.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.403(b)-10(b)(3).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Section&nbsp;403(b) plans are allowed to offer a <em>qualified Roth contribution program</em>, which is basically a Roth account for elective deferrals.<a href="#_ftn1" name="_ftnref1">¹</a> Essentially, participants of 403(b) plans establishing these programs are able to designate all or a portion of their elective deferrals as Roth contributions. Roth contributions will be included in the participant&rsquo;s gross income in the year the contribution is made and then be held in a separate account with separate recordkeeping.<a href="#_ftn2" name="_ftnref2">²</a> For details on Roth contribution programs under cash or deferred arrangements, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3780">3780</a>.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect;&nbsp;402A(b), 402A(e).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;402A(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em><em>See also</em></em> Treas. Reg. &sect;&sect;&nbsp;1.403(b)-3(c), 1.403(b)-7(e), 1.403(b)-10(d)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> To avoid treatment as a deemed distribution, a loan must be evidenced by a legally enforceable agreement, which may include more than one document, set forth either in writing or in an electronic medium specifying the amount of the loan, the term of the loan, and the repayment schedule.<br /> <br /> The agreement does not have to be signed if it is enforceable under applicable law without being signed.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If the agreement is set forth in an electronic medium, it must be one that is reasonably accessible to the participant and provided under a system that is reasonably designed to preclude anyone other than the participant from requesting a loan, provides the participant with a reasonable opportunity to review, confirm, modify, or rescind the terms of the loan before it is made, and provides the participant with confirmation of the loan terms within a reasonable time after it is made. The confirmation may be provided in an electronic format or in a written paper document. If it is provided electronically, it must be done in a manner that is no less understandable to a participant than a written document; at the time a confirmation is provided, a participant must be advised that he or she may request and receive a written paper document at no charge.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.72(p)-1, A-3(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.72(p)-1, A-3(b).<br /> <br /> </div>

<div class="Section1"><br /> <br /> If an individual has more than one tax sheltered annuity, each must meet the requirements separately. However, after determining the required minimum for each 403(b) annuity separately, the amounts may be totaled and the total taken from any one or more of the annuities.<br /> <br /> Only amounts that an individual holds as a participant may be aggregated under this rule. If an individual account holder is also the beneficiary of the tax sheltered annuity of a decedent, the required distribution from that account may not be aggregated with amounts required under contracts held by the individual for purposes of meeting the distribution requirements.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.403(b)-3, A-4; Prop. Treas. Reg. § 1.403(b)-6(e)(7).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Contributions to a 403(b) plan generally do not need to be aggregated with other 401(a) defined contribution plans of the employer in computing the Section 415 limitation. If a person participates in a 401(a) defined contribution plan and also participates in a 403(b) plan of another employer, contributions to both plans must be aggregated for 415 purposes if that participant is in control of either employer.<br /> <br /> In applying the IRC Section 415 limit to a combination of a 403(b) annuity and a defined contribution plan of an individual controlled by the employer, each plan separately must meet the limit applicable to it taking into consideration only the compensation from the employer providing the plan. In determining the combined limit, compensation from the controlled employer may be aggregated with that from the employer providing the annuity.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 415(f).<br /> <br /> </div>

<div class="Section1"><br /> <br /> With respect to distributions other than eligible rollover distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>), amounts will be withheld from periodic payments at the rates applicable to wage payments and from other distributions at a 10 percent rate. An employee may elect not to have income tax withheld from these payments. Tax will not be withheld on amounts distributed where it is reasonable to believe they will not be includable in income.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Any eligible rollover distribution made after December&nbsp;31, 1992 is subject to mandatory income tax withholding at the rate of 20 percent unless the distributee elects to have the distribution paid by means of a direct rollover.<a href="#_ftn2" name="_ftnref2">²</a> This mandatory withholding applies even if the employee&rsquo;s employment terminated prior to January&nbsp;1, 1993, and even if the eligible rollover distribution is part of a series of payments that began before January&nbsp;1, 1993.<a href="#_ftn3" name="_ftnref3">³</a> For distributions after 1992 but before October&nbsp;19, 1995, slightly different rules may be applicable under temporary regulations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4000">4000</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;3405; Temp. Treas. Reg. &sect;&nbsp;35.3405-1T, A-20.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;3405(c); Treas. Reg. &sect;&nbsp;31.3405(c)-1, A-1(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;31.3405(c)-1, A-1(c)(1)(i).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> For taxable years beginning after 2001, the rules requiring that the contribution limits under IRC Section&nbsp;457 be coordinated with elective deferral limits are permanently repealed.<a href="#_ftn1" name="_ftnref1">¹</a> Consequently, an individual who participates in a 403(b) and 457 plan conceivably could defer a total of $47,000 in 2025 ($23,500 in each plan) (up from $46,000 in 2024 ($23,000 in each plan), $45,000 in 2023 ($22,500 in each plan), $41,000 in 2022 ($20,500 in each plan), and $39,000 in 2020-2021 ($19,500 in each plan) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3584">3584</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;457(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IR-2013-86 (Oct. 31, 2013), IR-2014-99 (Oct. 23, 2014). See, e.g., Let. Rul. 200934012 (college president allowed to defer $15,500 each to a 403(b) plan and a 457(b) plan for calendar year 2008), Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> With respect to distributions other than eligible rollover distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>), payments to a surviving spouse or beneficiary are subject to income tax withholding unless the spouse or beneficiary elects not to have withholding apply. Amounts need not be withheld on any part of the distribution where it is reasonable to believe those amounts will not be includable in gross income. Annuity payments are subject to withholding at the rate applicable to wages; other payments are subject to withholding at a 10 percent rate.<a href="#_ftn1" name="_ftnref1">¹</a> In the case of an eligible rollover distribution, a surviving spouse or other beneficiary is subject to the same mandatory withholding rules as the employee ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4088">4088</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;3405; Temp. Treas. Reg. &sect;&sect;&nbsp;35.3405-1T, A-17; 35.3405-1T, A-28.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes, but time limits apply.<br /> <br /> Under the IRC, the term includable compensation ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4043">4043</a>) means compensation earned by the employee for the most recent period, ending not later than the close of the taxable year for which the limitation is being determined, that constitutes a full year of service and that precedes the taxable year by no more than five years.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A former employee is deemed to have monthly includable compensation ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4043">4043</a>) for the period through the end of the taxable year in which the employee ceases to be an employee and through the end of each of the next five taxable years. The amount of the monthly includable compensation is equal to one-twelfth of the former employee&rsquo;s includable compensation during the former employee&rsquo;s most recent year of service. Accordingly, non-elective employer contributions for a former employee must not exceed the IRC Section&nbsp;415(c) limit up to the lesser of the dollar amount in IRC Section&nbsp;415(c) or the former employee&rsquo;s annual includable compensation based on the former employee&rsquo;s average monthly compensation during his or her most recent year of service.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;403(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-4(d)(1).<br /> <br /> </div></div><br />