Tax Sheltered Annuities

<div class="Section1"><br /> <br /> Yes, if certain conditions are met.<br /> <br /> An employer is permitted to amend its 403(b) plan to eliminate future contributions for existing participants, or to limit participation to existing participants and employees. A 403(b) plan also is permitted to contain provisions that provide for plan termination and that allow accumulated benefits to be distributed on termination.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In the case of a 403(b) contract that is subject to distribution restrictions relating to<br /> custodial accounts and 403(b) elective deferrals, termination of the plan and the distribution of accumulated benefits is permitted only if the employer does not establish a successor 403(b) plan by making contributions to any 403(b) contract that is not part of the plan during the period beginning on the date of plan termination and ending twelve months after distribution of all assets from the terminated plan, taking into account all entities that are treated as the same employer under IRC Sections 414(b), 414(c), 414(m), or 414(o) on the date of the termination.<br /> <br /> The alternative 403(b) contract will be disregarded if, at all times during the period beginning twelve months before the termination and ending twelve months after distribution of all assets from the terminated plan, fewer than 2 percent of the employees who were eligible under the 403(b) plan as of the date of plan termination are eligible under the alternative 403(b) contract.<br /> <br /> For a 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan. For this purpose, delivery of a fully paid individual insurance annuity contract is treated as a distribution. The mere provision for, and making of, distributions to participants or beneficiaries on plan termination does not cause a contract to cease to be a 403(b) contract. The IRS has informally taken the position that a custodial account cannot qualify for treatment as a fully paid individual annuity contract.<br /> <br /> <em>Employers that cease to be eligible</em> employers. An employer that ceases to be an eligible employer may no longer contribute to a 403(b) contract for any subsequent period and the contract will fail to satisfy Treasury Regulation Section 1.403(b)-3(a), which is the exclusion for contributions to 403(b) contracts, if any further contributions are made with respect to a period after the employer ceases to be an eligible employer.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The IRS has not recognized the distribution of custodial accounts as being terminating distributions from a plan.<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(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.403(b)-10(a)(2).<br /> <br /> </div>

<div class="Section1"><br /> <p style="text-align: center;"><strong>Excess Contributions to Custodial Accounts</strong></p><br /> Contributions to a custodial account for the purchase of regulated investment company stock and to a retirement income account to the extent funded through custodial accounts are subject to a tax of 6 percent, not to exceed 6 percent of the value of the account, on (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 such excess carried over from the preceding tax year ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4053">4053</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <p style="text-align: center;"><strong>Early or Premature Distributions</strong></p><br /> If a taxpayer receives a premature distribution from a tax sheltered annuity, he or she will be subject to an excise tax equal to 10 percent of the portion of the distribution includable in income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4074">4074</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <p style="text-align: center;"><strong>Minimum Required Distribution Failure</strong></p><br /> If the amount distributed during a tax year is less than the minimum required distribution for the year, there generally is a tax equal to 25 (50 percent prior to 2023) of the amount that the distribution made in the year falls short of the required amount. The tax is imposed on the payee, not the plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4075">4075</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <p style="text-align: center;"><strong>Excess Aggregate Contributions</strong></p><br /> If an employee makes after-tax contributions or the employer makes contributions that match contributions under an employee&rsquo;s salary reduction agreement or match employee after-tax contributions and the aggregate amount of the contributions exceeds the nondiscriminatory amount ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3804">3804</a>), a tax of 10 percent of the amount in excess of the permitted, nondiscriminatory maximum is imposed on the employer to the extent the excess amount and income attributable to it is not distributed within 2&frac12; months after the end of the plan year ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>).<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;4973.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;72(t).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;4974.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;4979.<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>), 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 /> 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 /> A death benefit under a tax sheltered annuity generally is taxed in the same way as a death benefit under a qualified pension, qualified plan or profit sharing plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3974">3974</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3976">3976</a>).<br /> <br /> In the case of a single sum payment where no life insurance is involved, all amounts received by a beneficiary are taxable as ordinary income except that the beneficiary may exclude from gross income the employee&rsquo;s unrecovered cost basis, if any.<br /> <br /> If a death benefit consists of life insurance proceeds, the amount of the proceeds in excess of the cash surrender value of the policy immediately before the insured&rsquo;s death is excludable from gross income under IRC Section&nbsp;101(a)(1). For the rule under the final regulations restricting the availability of life insurance in 403(b) arrangements, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4034">4034</a>.<br /> <br /> Cash surrender value is taxable as ordinary income to the extent that it exceeds the portion of the premiums taxed to the employee as being the cost of life insurance protection (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4061">4061</a> regarding the proper measure of the value of current life insurance protection), and any other unrecovered cost basis of the employee.<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;403(c), 72(m)(3)(C); Treas. Reg. &sect;&nbsp;1.72-16(c).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Excludable amounts paid into a tax sheltered annuity are not wages subject to income tax withholding, even if the amounts are derived from a salary reduction agreement.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The amount of salary reduction contributions to the plan is subject to Social Security taxes even though it is excludable from the employee's gross income. Employer non-salary reduction contributions are not includable in wages for Social Security purposes.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Under the final regulations, salary reduction agreement means a plan or arrangement under which payment will be made by an employer on behalf of an employee or his or her beneficiary under or to an annuity contract if the employee:<br /> <p style="padding-left: 40px;">(1)  elects to reduce his or her compensation under a cash or deferred election;</p><br /> <p style="padding-left: 40px;">(2)  elects to reduce his or her compensation pursuant to a one time irrevocable election made at or before the time of initial eligibility to participate in such plan or arrangement; or</p><br /> <p style="padding-left: 40px;">(3)  if the employee agrees as a condition of employment to make a contribution that reduces his or her compensation.<a href="#_ftn3" name="_ftnref3">³</a></p><br /> The Seventh Circuit Court of Appeals concluded that Congress intended IRC Section 3121(a)(5)(D) to include salary reduction agreements, whether voluntary or mandatory, in the FICA wage base. Accordingly, the Seventh Circuit held that payments made under a salary reduction agreement include salary reductions made under voluntary and mandatory agreements.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Amounts contributed by salary reduction by a minister or by church employees whose organizations have chosen to be exempt from FICA are not treated as wages subject to Social Security taxes to the extent the contributions are not more than the employer contribution limit.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Amounts of salary reduction treated as wages for Social Security tax are creditable to the individual's Social Security account for benefit purposes.<a href="#_ftn6" name="_ftnref6">⁶</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>.  Rev. Rul. 65-208, 1965-2 CB 414. <em><em>See also</em></em> IRS Pub. 571.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 3121(a)(5); Rev. Rul. 65-208, 1965-2 CB 383; Rev. Rul. 181, 1953-2 CB 111. <em><em>See also</em></em> CCA 200333003; TAM 200305006; Let. Ruls. 200318074, 200234009.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 31.3121(a)(5)-2.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  <em>University of Chicago vs. United States</em>, 547 F.3d 773 (7th Cir. 2008).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  IRS Pub. No. 517.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  SSR 64-59.<br /> <br /> </div>

<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 /> <em>Editor&rsquo;s Note:</em> Post-SECURE Act, it was widely expected that the minimum distribution rules would no longer vary based upon whether the participant dies before or after his or her required beginning date. However, under regulations proposed in 2022, a beneficiary will be required to take annual RMDs during the new ten-year distribution period if the original account owner died on or after his or her required beginning date. <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3902">3902</a> for details.<br /> <br /> A tax sheltered annuity must satisfy the minimum distribution requirements set forth in IRC Section&nbsp;401(a)(9) for qualified plans.<a href="#_ftn1" name="_ftnref1">¹</a> Most of the requirements were explained in regulations published in 2002.<a href="#_ftn2" name="_ftnref2">²</a> Regulations governing annuity payouts from defined benefit plans were finalized in 2004 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3754">3754</a>), and regulations addressing additional matters were finalized under IRC Section&nbsp;403(b) in 2007.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The 2002 regulations simplified the calculation process and included longer life expectancy tables. The final regulations took effect for required minimum distributions in 2003 and later years ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3896">3896</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>).<br /> <br /> Pre-SECURE Act, after the death of a tax sheltered annuity participant, the application of the minimum distribution requirements depended on whether he or she died before or after his or her required beginning date. For this purpose, distributions generally were treated as having begun in accordance with the minimum distribution requirements under IRC Section&nbsp;401(a)(9)(A)(ii), without regard to whether payments had been made before that date.<a href="#_ftn4" name="_ftnref4">⁴</a> If distributions irrevocably, except for acceleration, began prior to the required beginning date in the form of an annuity that meets the minimum distribution rules, the annuity starting date was treated as the required beginning date for purposes of calculating lifetime and after death minimum distribution requirements.<a href="#_ftn5" name="_ftnref5">⁵</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).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; TD 8987, 67 Fed. Reg. 18988 (4-17-02).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-2, A-6(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-10, A-11.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> To be a designated beneficiary, an individual must be a beneficiary on the date of the participant&rsquo;s death. The determination of the existence and identity of a designated beneficiary for purposes of minimum distributions is made as of the date of the participant&rsquo;s death for tax years beginning in 2020 and thereafter. Pre-SECURE Act, the determination was made on September&nbsp;30 of the calendar year following the year of the participant&rsquo;s death.<a href="#_ftn1" name="_ftnref1">¹</a> Exceptions may apply if the account is payable as an annuity, or if a surviving spouse beneficiary dies after the participant but before distributions have begun. Pre-2020, the September&nbsp;30 deadline was imposed so that a distribution may be calculated and made by the deadline of December&nbsp;31 following the year of the participant&rsquo;s death. Consequently, an individual who was a beneficiary as of the date of the participant&rsquo;s death, but was not a beneficiary as of September&nbsp;30 of the following year, such as because he or she disclaims entitlement to the benefit or because he or she receives the entire benefit to which he or she is entitled before that date, was not taken into account for purposes of determining the distribution period for required minimum distributions after the participant&rsquo;s death.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Note that the SECURE Act did not change the definition of designated beneficiary. Instead, the Act created a new class of beneficiaries called eligible designated beneficiaries. Post-SECURE Act, only an eligible designated beneficiary is entitled to rely upon the life expectancy method of distribution. Non-eligible designated beneficiaries must empty the account under the new ten-year rule. <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3902">3902</a> and <a href="https://www.thinkadvisor.com/tax-facts/2020/01/28/3903-01-what-is-an-eligible-designated-beneficiary-how-does-this-designation-impact-the-rules-governing-retirement-plan-distributions-after-an-account-owners-death/">Q 3903</a> for details.<br /> <br /> Under the 2002 regulations, special rules apply if more than one beneficiary is designated as of the date on which the determination is made. Generally, the beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the distribution period.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If a surviving spouse beneficiary dies after the participant, but before distributions to the spouse have begun, the 10 year rule, the five year rule and the life expectancy rule described above for surviving spouses will be applied as though the surviving spouse were the participant.<a href="#_ftn4" name="_ftnref4">⁴</a> This provision will not allow a new spouse of the deceased participant&rsquo;s surviving spouse to delay distributions under the surviving spouse rules of IRC Section&nbsp;401(a)(9)(B)(iv).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The 2007 regulations provide that the special rule allowing a surviving spouse to treat an IRA interest as the spouse&rsquo;s own<a href="#_ftn6" name="_ftnref6">⁶</a> does not apply to a Section&nbsp;403(b) contract, even if the spouse is the sole beneficiary.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> If a beneficiary is not an individual or a permitted trust ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3904">3904</a>), the participant will be treated as having no beneficiary. A participant&rsquo;s estate may not be a designated beneficiary.<a href="#_ftn8" name="_ftnref8">⁸</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; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-4(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-4(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-5, A-7(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;401(a)(9)(B)(iv)(II); Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-5.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-3, A-5.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.408-8, A-5.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.403(b)-6(e)(4).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-4, A-3.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a participant&rsquo;s benefit is payable in the form of a life annuity for the life of the participant that satisfies the requirements of IRC Section&nbsp;401(a)(9), the MDIB requirement will be satisfied.<a href="#_ftn1" name="_ftnref1">¹</a> If a participant&rsquo;s sole beneficiary as of the annuity starting date is the participant&rsquo;s spouse, and the distributions satisfy IRC Section&nbsp;401(a)(9), the MDIB requirement will be satisfied.<a href="#_ftn2" name="_ftnref2">²</a> Payments under the annuity must be nonincreasing, except as explained at Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If distributions begin under a particular distribution option that is in the form of a joint and survivor annuity for the joint lives of the participant and a nonspouse beneficiary, the MDIB requirement will not be satisfied as of the date distributions begin unless the distribution option provides that annuity payments to be made to the participant on and after his or her required beginning date will satisfy the conditions set forth in Treasury Regulation<br /> Section&nbsp;1.401(a)(9)-6, A-2(c). Under those provisions, the periodic annuity payment payable to the survivor must not at any time on and after the participant&rsquo;s required beginning date exceed the applicable percentage of the annuity payment payable to the participant using the RMD MDIB Joint and Survivor Annuity Table.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The applicable percentage is based on how much older the participant is than the beneficiary as of their attained ages on their birthdays in the first calendar year for which distributions to the participant are required. For example, if a beneficiary is 10 or fewer years younger, the survivor annuity may be 100 percent. If the age difference is greater than 10 years, the maximum survivor annuity permitted is less than 100 percent. If there is more than one beneficiary, the age of the youngest beneficiary is used.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> If a distribution form includes a life annuity and a period certain, the amount of the annuity payments payable to the beneficiary need not be reduced during the period certain, but in the case of a joint and survivor annuity with a period certain, the amount of the annuity payments payable to the beneficiary must satisfy the foregoing requirements after the expiration of the period certain.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The period certain for annuity distributions commencing during the life of a participant with an annuity starting date on or after his or her required beginning date generally may not exceed the applicable distribution period for the participant ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4078">4078</a>) for the calendar year that contains the annuity starting date.<br /> <br /> If the participant&rsquo;s spouse is his or her sole beneficiary and the annuity provides only a period certain and no life annuity, the period certain may last as long as the joint and survivor life expectancy of the participant and spouse, if that period is longer than the applicable distribution period for the participant.<a href="#_ftn7" name="_ftnref7">⁷</a> If distributions commence after the death of the participant under the life expectancy rule ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3900">3900</a>), the period certain for any distributions commencing after death cannot exceed the distribution period determined under the life expectancy provisions of Treasury Regulation Section&nbsp;1.401(a)(9)-5, A-5(b).<br /> <br /> The amount required to be distributed generally is the greater of the MDIB or the regular RMD amount ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3892">3892</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3908">3908</a>). If the amount required to be distributed exceeds the amount distributed, the shortfall is subject to a 50 percent excise tax, levied on the individual, not the plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>).<a href="#_ftn8" name="_ftnref8">⁸</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; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Rev. Proc. 2003-10, 2003-1 CB 259; Notice 2003-2, 2003-1 CB 257.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(c)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(c)(1).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-2(d).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.401(a)(9)-6, A-3(a).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;4974.<br /> <br /> </div></div><br />