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">Dividends are treated as earnings on 403(b) investments. The IRS treats interest on accumulated dividends as part of a retirement fund and interest is not taxed until the participant begins to receive distributions from the fund.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. General Information Letter, Jan. 20, 1978.<br /> <br /> </div></div><br />

<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">Yes, but only certain distributions may be rolled over ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4014">4014</a>).<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. See IRC &sect;&sect; 402(c)(2)(A), 402(c)(11).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a taxpayer receives a taxable amount from a tax sheltered annuity including any amount attributable to accumulated deductible contributions and including plan loan amounts treated as deemed distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4063">4063</a>), the taxpayer will be subject to an excise tax of 10 percent on that distribution unless the distribution is:<br /> <p style="padding-left: 40px;">(1)&nbsp; made on or after the date on which an employee attains age 59&frac12;;<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <p style="padding-left: 40px;">(2)&nbsp; made to a beneficiary or the employee&rsquo;s estate on or after the death of the employee;<a href="#_ftn2" name="_ftnref2">²</a></p><br /> <p style="padding-left: 40px;">(3)&nbsp; attributable to an employee&rsquo;s disability;<a href="#_ftn3" name="_ftnref3">³</a></p><br /> <p style="padding-left: 40px;">(4)&nbsp; part of a series of substantially equal periodic payments made not less frequently than annually for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and the employee&rsquo;s beneficiary and beginning after the employee separates from the service of the employer.<a href="#_ftn4" name="_ftnref4">⁴</a> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3679">3679</a> discusses acceptable methods for meeting this exception. If the series of payments is later modified other than because of death or disability before the employee reaches age 59&frac12; or, if after the employee reaches age 59&frac12;, within five years of the date of the first payment, the employee&rsquo;s tax for the year the modification occurs is increased by an amount equal to the tax that, but for the exception, would have been imposed plus interest for the deferral period;<a href="#_ftn5" name="_ftnref5">⁵</a></p><br /> <p style="padding-left: 40px;">(5)&nbsp; made to an employee on account of separation from service after attaining age 55.<a href="#_ftn6" name="_ftnref6">⁶</a> A distribution will be treated as falling within this exception if the distribution is made after the employee has separated from service and the separation occurs during or after the calendar year in which the employee attains age 55;<a href="#_ftn7" name="_ftnref7">⁷</a></p><br /> <p style="padding-left: 40px;">(6)&nbsp; properly made to an alternate payee under a qualified domestic relations order<br /> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4035">4035</a>);<a href="#_ftn8" name="_ftnref8">⁸</a></p><br /> <p style="padding-left: 40px;">(7)&nbsp; made to an employee for medical care but not in excess of the amount allowable as a medical expense deduction to the employee for amounts paid during the taxable year for medical care determined without regard to whether the employee itemizes deductions for the year. Apparently, this exempts from the penalty only amounts in excess of the 7.5 percent floor on deductible medical expenses;<a href="#_ftn9" name="_ftnref9">⁹</a></p><br /> <p style="padding-left: 40px;">(8)&nbsp; timely made to correct an excess aggregate contribution<a href="#_ftn10" name="_ftnref10">¹⁰</a> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4038">4038</a>);</p><br /> <p style="padding-left: 40px;">(9)&nbsp; timely made to reduce an excess elective deferral ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>);</p><br /> <p style="padding-left: 40px;">(10)&nbsp; made on account of a qualified birth or adoption for tax years in an amount up to $5,000 beginning after 2019.<a href="#_ftn11" name="_ftnref11">¹¹</a></p><br /> <p style="padding-left: 40px;">(11) made on account of a qualifying disaster for periods after January 26, 2021 in an amount up to $22,000.</p><br /> <p style="padding-left: 40px;">(12) made to employees who have experienced domestic violence for periods beginning after December 31, 2023 in an amount equal to the lesser of $10,000 (the $10,000 amount will be indexed for inflation for tax years after 2024) or 50% of the employee&rsquo;s vested balance.</p><br /> <p style="padding-left: 40px;">(13) made to employees who are experiencing personal or family emergencies for periods beginning after December 31, 2023 in an amount up to the lesser of $1,000, or the employee&rsquo;s vested balance minus $1,000.</p><br /> <p style="padding-left: 40px;">(14) made to employees who have been diagnosed with terminal illnesses for periods beginning after December 29, 2022.</p><br /> <p style="padding-left: 40px;">(15) made to employees for long-term care insurance expenses in an amount equal to the lesser of (1) the cost of the employee&rsquo;s long-term care insurance premiums, (2) 10% of the employee&rsquo;s vested account balance, or (3) $2,500 (as indexed after 2024) for periods beginning after December 29, 2025.</p><br /> The costs of life insurance protection that are included in an employee&rsquo;s income are not considered as distributions for purposes of applying the premature distribution penalty.<a href="#_ftn12" name="_ftnref12">¹²</a> <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a> regarding the proper measure of the value of current life insurance protection.<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;72(t)(2)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;72(t)(2)(ii).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;72(t)(2)(iii).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&sect;&nbsp;72(t)(2)(A)(iv), 72(t)(3).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;72(t)(4).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;72(t)(2)(A)(v).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Notice 87-13, 1987-1 CB 432, A-20.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;72(t)(2)(C).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IRC &sect;&nbsp;72(t)(2)(B); <em><em>see</em> </em>Ann. 87-2, 1987-2 IRB 38.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; IRC &sect;&nbsp;401(m)(7).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; IRC &sect;&nbsp;402(g)(2)(C).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; Notice 89-25, 1989-1 CB 662, A-11.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The amount of elective deferrals that an individual can exclude from income for a tax year is limited. Elective deferrals are:<br /> <p style="padding-left: 40px;">(1)&nbsp; amounts contributed to tax sheltered annuity plans under salary reduction agreements;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; amounts contributed under cash or deferred arrangements to 401(k) plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3751">3751</a>) and salary reduction SEPs (&ldquo;SAR-SEPs&rdquo;) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3705">3705</a>); and</p><br /> <p style="padding-left: 40px;">(3)&nbsp; amounts contributed under salary reductions to SIMPLE IRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>).<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> Elective deferrals do not include elective contributions made pursuant to a one-time irrevocable election that is made at initial eligibility to participate in the salary reduction agreement or pursuant to certain other one time irrevocable elections specified in regulations, or pre-tax contributions made as a condition of employment.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> For 2020-2021, the aggregate limit on elective deferrals was $19,500, and the limit for 2022 is $20,500. The limit increased to $22,500 in 2023, $23,000 in 2024 and $23,500 in 2025 (projected).<a href="#_ftn3" name="_ftnref3">³</a> The elective deferral limit is indexed for inflation in increments of $500.<a href="#_ftn4" name="_ftnref4">⁴</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;402(g).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;402(g)(3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;402(g)(1); Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;402(g)(4).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The minimum distribution incidental benefit (&ldquo;MDIB&rdquo;) requirement constitutes a second set of minimum distribution rules that must be considered in determining the minimum amount required to be distributed during a participant&rsquo;s lifetime.<a href="#_ftn1" name="_ftnref1">¹</a> The MDIB rules apply to the pre-1987 account balance as well as the post-1986 balance. The reason they apply to the pre-1987 account balance, while the minimum distribution rules under IRC Section&nbsp;401(a)(9) do not, is that unlike those requirements, the incidental benefit rule existed in regulations for many years before it was enacted into the IRC in 1986 and amounts accumulated before 1987 were subject to its requirements. Regulations under IRC Section&nbsp;403(b) required that the death benefit under a tax sheltered annuity be merely incidental to its primary purpose of providing retirement benefits.<br /> <br /> In 2007, regulations under Section&nbsp;403(b) were finalized that briefly addressed the application of the older MDIB rule. These regulations took effect after 2008.<a href="#_ftn2" name="_ftnref2">²</a> They generally restated rules contained in earlier regulations, to the effect that the post-1986 balance is subject to the IRC Section&nbsp;401(a)(9) regulations and that both the pre-1987 balance and the post-1986 balance are subject to the MDIB rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4075">4075</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The 2007 regulations do not interpret the old MDIB rule but describe two ways it can be satisfied. First, distributions attributable to the pre-1987 account balance are treated as satisfying the MDIB requirement if all distributions from a Section&nbsp;403(b) contract, including distributions attributable to the post-1986 account balance, satisfy the requirements of Treasury Regulation Section&nbsp;1.401-1(b)(1)(i) (which the regulations cite as authority for the old MDIB rule) without regard to whether distributions under the 2002 regulations and distributions from the post-1986 account satisfy the requirements of IRC Section&nbsp;401(a)(9).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Second, and in the alternative, distributions attributable to the pre-1987 account will be treated as satisfying the MDIB requirement if all distributions from the contract, whether pre-1987 or post-1986 amounts, satisfy the regulations under IRC Section&nbsp;401(a)(9).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Under much earlier rulings, the old rule generally was interpreted as requiring a distribution arrangement under which the present value of the aggregate payments to be made to the participant must be more than 50 percent of the present value of the total payments to be made to the participant and his or her beneficiaries.<a href="#_ftn6" name="_ftnref6">⁶</a> The old rules generally required that<br /> distributions commence by age 75.<a href="#_ftn7" name="_ftnref7">⁷</a> It would appear that the old rules may continue to apply in determining distributions required from the pre-1987 balance.<a href="#_ftn8" name="_ftnref8">⁸</a> Of course, nothing would prevent a participant from choosing to apply the Section&nbsp;401(a)(9) rules.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> Final 2002 regulations state that if distributions are made in accordance with the individual account rules set forth therein ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>), the MDIB requirement will be satisfied.<a href="#_ftn10" name="_ftnref10">¹⁰</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)(10); Treas. Reg. &sect;&nbsp;1.401-1(b)(1)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; TD 9340, 72 Fed. Reg. 41128 (July&nbsp;26, 2007).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-2, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Rev. Rul. 72-241, 1972-1 CB 108; Rev. Rul. 73-239, 1973-1 CB 201; Let. Ruls. 8642072, 7843043, 7825010.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Let. Ruls. 9345044, 7825010.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Let. Rul. 9345044.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-3, A-3; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(6)(vi).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-1(d).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> There are several different limitations applicable to amounts contributed to 403(b) annuities. Contributions that exceed any of these particular limits may be thought of as excess contributions, but they are treated differently depending on the limit that is exceeded and, sometimes, depending on whether the excess amount is contributed to a custodial account or toward the purchase of an annuity contract.<br /> <br /> When contributions that exceed the lesser of the excludable amount or the overall limit are made to a custodial account for the purchase of regulated investment company stock or a retirement income account to the extent funded through custodial accounts, they are properly called excess contributions and are subject to an excise tax.<a href="#_ftn1" name="_ftnref1">¹</a> The tax is 6 percent (not to exceed 6 percent of the value of the account) of the following: (1) the amount by which the contributions, other than a permissible rollover contribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>), exceed the lesser of the amount excludable from gross income under IRC Section&nbsp;403(b) or the overall limitation under IRC Section&nbsp;415, or whichever is applicable if only one is applicable, plus (2) any excess carried over from the preceding tax year. An excess carried over from a previous year may be reduced by contributing in a year less than the excludable amount or the contribution limit, whichever is lower. An excess also may be reduced by taxable distributions.<a href="#_ftn2" name="_ftnref2">²</a> The tax is imposed on the employee.<br /> <br /> If contributions are made toward the purchase of an annuity contract, the excess is not subject to an excise tax.<br /> <br /> For contributions in excess of the overall limit of IRC Section&nbsp;415, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4046">4046</a>.<br /> <br /> Where salary reduction contributions are in excess of the limit on elective deferrals, the amount above the limit is not excludable from income when contributed and, if not timely distributed, is included in gross income for a second time when later distributed ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4042">4042</a>).<br /> <br /> Discriminatory Matching Employer Contributions. If an employer makes certain discriminatory matching contributions toward an annuity contract or to a custodial account, amounts in excess of nondiscriminatory amounts are called excess aggregate contributions and are subject to a 10 percent excise tax if not timely distributed ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</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;&nbsp;4973(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;4973(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;4979.<br /> <br /> </div></div><br />