§403 — Taxation of employee annuities
184 cases·20 followed·13 distinguished·1 questioned·7 criticized·5 overruled·138 cited—11% support
Statute Text — 26 U.S.C. §403
If an annuity contract is purchased by an employer for an employee under a plan which meets the requirements of section 404(a)(2) (whether or not the employer deducts the amounts paid for the contract under such section), the amount actually distributed to any distributee under the contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities).
To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.
For purposes of this subsection, the term “employee” includes an individual who is an employee within the meaning of section 401(c)(1), and the employer of such individual is the person treated as his employer under section 401(c)(4).
If—
any portion of the balance to the credit of an employee in an employee annuity described in paragraph (1) is paid to him in an eligible rollover distribution (within the meaning of section 402(c)(4)),
the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan, and
in the case of a distribution of property other than money, the amount so transferred consists of the property distributed,
then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.
The rules of paragraphs (2) through (7) and (11) and (9) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A).
Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of such transfer.
An annuity contract shall not fail to be subject to this subsection solely by reason of allowing distributions to which section 401(a)(39) applies.
If—
an annuity contract is purchased—
for an employee by an employer described in section 501(c)(3) which is exempt from tax under section 501(a),
for an employee (other than an employee described in clause (i)), who performs services for an educational organization described in section 170(b)(1) (A)(ii), by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing, or
for the minister described in section 414(e)(5)(A) by the minister or by an employer,
such annuity contract is not subject to subsection (a),
the employee’s rights under the contract are nonforfeitable, except for failure to pay future premiums,
except in the case of a contract purchased by a church, such contract is purchased under a plan which meets the nondiscrimination requirements of paragraph (12), and
in the case of a contract purchased under a salary reduction agreement, the contract meets the requirements of section 401(a)(30),
then contributions and other additions by such employer for such annuity contract shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such contributions and additions (when expressed as an annual addition (within the meaning of section 415(c)(2))) does not exceed the applicable limit under section 415. The amount actually distributed to any distributee under such contract shall be taxable to the distributee (in the year in which so distributed) under section 72 (relating to annuities). For purposes of applying the rules of this subsection to contributions and other additions by an employer for a taxable year, amounts transferred to a contract described in this paragraph by reason of a rollover contribution described in paragraph (8) of this subsection or section 408(d)(3)(A)(ii) shall not be considered contributed by such employer.
To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.
For purposes of this subsection, the term “includible compensation” means, in the case of any employee, the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to section 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service, and which precedes the taxable year by no more than five years. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies. Such term includes—
any elective deferral (as defined in section 402(g)(3)), and
any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), or 457.
In determining the number of years of service for purposes of this subsection, there shall be included—
one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and
a fraction of a year (determined in accordance with regulations prescribed by the Secretary) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such organization.
In no case shall the number of years of service be less than one.
If for any taxable year of the employee this subsection applies to 2 or more annuity contracts purchased by the employer, such contracts shall be treated as one contract.
For purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him for an annuity contract for his employee if the amounts are to be held in that custodial account and are invested in regulated investment company stock or a group trust intended to satisfy the requirements of Internal Revenue Service Revenue Ruling 81–100 (or any successor guidance), and under the custodial account—
no such amounts may be paid or made available to any distributee (unless such amount is a distribution to which section 72(t)(2)(G) applies) before—
the employee dies,
the employee attains age 59½,
the employee has a severance from employment,
the employee becomes disabled (within the meaning of section 72(m)(7)),
subject to the provisions of paragraph (17), the employee encounters financial hardship,
except as may be otherwise provided by regulations, with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the contract, or
as provided for distributions to which section 401(a)(39) applies, and
in the case of amounts described in clause (i)(VI), such amounts will be distributed only in the form of a qualified distribution (as defined in section 401(a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in section 401(a)(38)(B)(iv)).
For purposes of this title, a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as an organization described in section 401(a) solely for purposes of subchapter F and subtitle F with respect to amounts received by it (and income from investment thereof).
For purposes of this paragraph, the term “regulated investment company” means a domestic corporation which is a regulated investment company within the meaning of section 851(a).
In determining whether a distribution is upon the financial hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is—
on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need, and
not in excess of the amount required to satisfy such financial need, and
that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.
If—
any portion of the balance to the credit of an employee in an annuity contract described in paragraph (1) is paid to him in an eligible rollover distribution (within the meaning of section 402(c)(4)),
the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and
in the case of a distribution of property other than money, the property so transferred consists of the property distributed,
then such distribution (to the extent so transferred) shall not be includible in gross income for the taxable year in which paid.
The rules of paragraphs (2) through (7), (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A), except that section 402(f) shall be applied to the payor in lieu of the plan administrator.
For purposes of this title—
a retirement income account shall be treated as an annuity contract described in this subsection, and
amounts paid by an employer described in paragraph (1)(A) to a retirement income account shall be treated as amounts contributed by the employer for an annuity contract for the employee on whose behalf such account is maintained.
For purposes of this paragraph, the term “retirement income account” means a defined contribution program established or maintained by a church, or a convention or association of churches, including an organization described in section 414(e)(3)(A), to provide benefits under section 403(b) for an employee described in paragraph (1) (including an employee described in section 414(e)(3)(B)) or his beneficiaries.
Under regulations prescribed by the Secretary, this subsection shall not apply to any annuity contract (or to any custodial account described in paragraph (7) or retirement income account described in paragraph (9)) unless requirements similar to the requirements of sections 401(a)(9) and 401(a)(31) are met (and requirements similar to the incidental death benefit requirements of section 401(a) are met) with respect to such annuity contract (or custodial account or retirement income account). Any amount transferred in a direct trustee-to-trustee transfer in accordance with section 401(a)(31) shall not be includible in gross income for the taxable year of the transfer.
This subsection shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement (within the meaning of section 402(g)(3)(C)) may be paid only—
when the employee attains age 59½, has a severance from employment, dies, or becomes disabled (within the meaning of section 72(m)(7)),
subject to the provisions of paragraph (17), in the case of hardship,
for distributions to which section 72(t)(2)(G) applies,
except as may be otherwise provided by regulations, with respect to amounts invested in a lifetime income investment (as defined in section 401(a)(38)(B)(ii))—
on or after the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the contract, and
in the form of a qualified distribution (as defined in section 401(a)(38)(B)(i)) or a qualified plan distribution annuity contract (as defined in section 401(a)(38)(B)(iv)), or
for distributions to which section 401(a)(39) applies.
In determining whether a distribution is upon hardship of an employee, the administrator of the plan may rely on a written certification by the employee that the distribution is on account of a financial need of a type which is deemed in regulations prescribed by the Secretary to be an immediate and heavy financial need and is not in excess of the amount required to satisfy such financial need, and that the employee has no alternative means reasonably available to satisfy such financial need. The Secretary may provide by regulations for exceptions to the rule of the preceding sentence in cases where the plan administrator has actual knowledge to the contrary of the employee’s certification, and for procedures for addressing cases of employee misrepresentation.
For purposes of paragraph (1)(D), a plan meets the nondiscrimination requirements of this paragraph if—
with respect to contributions not made pursuant to a salary reduction agreement, such plan meets the requirements of paragraphs (4), (5), (17), and (26) of section 401(a), section 401(m), and section 410(b) in the same manner as if such plan were described in section 401(a), and
all employees of the organization may elect to have the employer make contributions of more than $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions for such contracts pursuant to such agreement.
For purposes of clause (i), a contribution shall be treated as not made pursuant to a salary reduction agreement if under the agreement it is made pursuant to a 1-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement or is made pursuant to a similar arrangement involving a one-time irrevocable election specified in regulations. For purposes of clause (ii), there may be excluded any employee who is a participant in an eligible deferred compensation plan (within the meaning of section 457) or a qualified cash or deferred arrangement of the organization or another annuity contract described in this subsection. Any nonresident alien described in section 410(b)(3)(C) may also be excluded. Subject to the conditions applicable under section 410(b)(4) and section 202(c) of the Employee Retirement Income Security Act of 1974, there may be excluded for purposes of this subparagraph employees who are students performing services described in section 3121(b)(10) and employees who normally work less than 20 hours per week. The fact that the employer offers matching contributions on account of qualified student loan payments as described in section 401(m)(13) shall not be taken into account in determining whether the arrangement satisfies the requirements of clause (ii) (and any regulation thereunder). A plan shall not fail to satisfy clause (ii) solely by reason of offering a de minimis financial incentive (not derived from plan assets) to employees to elect to have the employer make contributions pursuant to a salary reduction agreement.
For purposes of paragraph (1)(D), the term “church” has the meaning given to such term by section 3121(w)(3)(A). Such term shall include any qualified church-controlled organization (as defined in section 3121(w)(3)(B)).
For purposes of paragraph (1)(D), the requirements of subparagraph (A)(i) (other than those relating to section 401(a)(17)) shall not apply to a governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof).
In the case of employees who are eligible to participate in the agreement solely by reason of section 202(c)(1)(B) of the Employee Retirement Income Security Act of 1974—
notwithstanding section 401(a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the plan, and
the employer may elect to exclude such employees from the application of subsections (a)(4), (k)(3), (k)(12), (k)(13), and (m)(2) of section 401 and section 410(b).
No amount shall be includible in gross income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if such transfer is—
for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or
a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.
This subsection shall not apply to an annuity contract unless such contract meets the requirements of section 401(a)(37).
Except in the case of a church plan, this subsection shall not be treated as failing to apply to an annuity contract solely by reason of such contract being purchased under a plan maintained by more than 1 employer.
In the case of a plan maintained by more than 1 employer, this subsection shall not be treated as failing to apply to an annuity contract held under such plan merely because of one or more employers failing to meet the requirements of this subsection if such plan satisfies rules similar to the rules of section 413(e)(2) with respect to any such employer failure.
A plan shall not be treated as meeting the requirements of this subparagraph unless the plan satisfies rules similar to the rules of subparagraph (A) or (B) of section 413(e)(1), except in the case of a multiple employer plan maintained solely by any of the following: A State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing.
A safe harbor deferral-only plan maintained by an eligible employer shall be treated as meeting the requirements of paragraph (12).
For purposes of this paragraph, the term “safe harbor deferral-only plan” means any plan which meets—
the automatic deferral requirements of subparagraph (C),
the contribution limitations of subparagraph (D), and
the requirements of subparagraph (E) of section 401(k)(13).
The requirements of this subparagraph are met if, under the plan, each eligible employee is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation.
The election treated as having been made under clause (i) shall cease to apply with respect to any eligible employee if such eligible employee makes an affirmative election—
to not have such contributions made, or
to make elective contributions at a level specified in such affirmative election.
For purposes of this subparagraph, the term “qualified percentage” means, with respect to any employee, any percentage determined under the plan if such percentage is applied uniformly and is not less than 3 or more than 15 percent.
The requirements of this subparagraph are met if, under the plan—
the only contributions which may be made are elective contributions of eligible employees, and
the aggregate amount of such elective contributions which may be made with respect to any employee for any calendar year shall not exceed $6,000.
In the case of any calendar year beginning after December 31, 2024, the $6,000 amount under clause (i) shall be adjusted in the same manner as under section 402(g)(4), except that “2023” shall be substituted for “2005”.
In the case of an individual who has attained the age of 50 before the close of the taxable year, the limitation under clause (i)(II) shall be increased by the applicable amount determined under section 219(b)(5)(B)(ii) (after the application of section 219(b)(5)(C)(iii)).
For purposes of this paragraph—
The term “eligible employer” means any employer if the employer does not maintain a qualified plan with respect to which contributions are made, or benefits are accrued, for service in the year for which the determination is being made. If only individuals other than employees described in subparagraph (A) of section 410(b)(3) are eligible to participate in such arrangement, then the preceding sentence shall be applied without regard to any qualified plan in which only employees described in such subparagraph are eligible to participate.
Rules similar to the rules of section 408(p)(10) shall apply for purposes of clause (i).
The term “qualified plan” means a plan, contract, pension, account, or trust described in subparagraph (A) or (B) of paragraph (5) of section 219(g) (determined without regard to the last sentence of such paragraph (5)).
For purposes of this paragraph, the term “eligible employee” means any employee of the employer other than an employee who is permitted to be excluded under paragraph (12)(A).
For purposes of paragraphs (7) and (11)—
The following amounts may be distributed upon hardship of the employee:
Contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D)).
Qualified nonelective contributions (as defined in section 401(m)(4)(C)).
Qualified matching contributions described in section 401(k)(3)(D)(ii)(I).
Earnings on any contributions described in clause (i), (ii), or (iii).
A distribution shall not be treated as failing to be made upon the hardship of an employee solely because the employee does not take any available loan under the plan.
Premiums paid by an employer for an annuity contract which is not subject to subsection (a) shall be included in the gross income of the employee in accordance with section 83 (relating to property transferred in connection with performance of services), except that the value of such contract shall be substituted for the fair market value of the property for purposes of applying such section. The preceding sentence shall not apply to that portion of the premiums paid which is excluded from gross income under subsection (b). In the case of any portion of any contract which is attributable to premiums to which this subsection applies, the amount actually paid or made available under such contract to any beneficiary which is attributable to such premiums shall be taxable to the beneficiary (in the year in which so paid or made available) under section 72 (relating to annuities).
184 Citing Cases
Section 402(d)(4) defines lump-sum distribution, in pertinent part, as follows: (A) Lump sum distribution.-–For purposes of this section and section 403, the term “lump sum distribution” means the distribution or payment within 1 taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient-- (i) on account of the employee’s death, (ii) after the employee attains age 59½, (iii) on account of the employee’s separation from the service, o
at 3361 ("The amendments made by this subtitle shall not apply to cases pending on the date ofthe enactment ofthis subtitle."). -14- review in our Court. Act sec. 1203(a)(2), containing new subsection (f)(2), is addressed solely to the Secretary's authorityto grant requests for equitable relief. Act sec. 1203(b) provides that th
Ifdenying relieffromjoint and several liability will not cause the requesting spouse to suffer economic hardship, this factor will be neutral. R Petitioner concedes that she will not suffer economic hardship ifshe is denied relieffor 2012. This factor is neutral. -20- [*20] 3. Knowledge In an underpayment case knowledge exists when
403(2)(c)(iii), 2013-43 I.R.B. at 402. In 2013 at the time ofsigning the returns petitioner had been divorced from Mr. Contreras for almost 17 months. She did not know Mr. Contreras' employment status or earnings. She did not have any involvement with Mr. Contreras' business. Under the circumstances it was not unreasonable for petitioner to be
403(2)(b), 2013-43 I.R.B. at 401. Where the requesting spouse's income exceeds 250% ofthe Federal poverty guidelines, this factor favors reliefifmonthly income exceeds reasonable basic living expenses by $300 or less. R At the time oftrial petitioner had annual income of$69,000, exceeding 250% ofthe Federal poverty guidelines, and estimated mo
403(2)(b), 2013-43 I.R.B. at 401. Where the requesting spouse's income exceeds 250% ofthe Federal poverty guidelines, this factor favors reliefifmonthly income exceeds reasonable basic living expenses by $300 or less. R Ifdenying relieffromjoint and several liability will not cause the requesting spouse to suffer economic hardship, this factor
Section 965(a) provides that a corporation that is a U.S.
at 301, to expand the availability of the marital deduction. See H.R. Rept. No. 97-201, at 158-161 (1981), 1981-2 C.B. 352, 377-378. -33 - [*33] death ofthe surviving spouse, the propertypasses to beneficiaries designated by the first spouse to die. To qualify as QTIP: (1) the terminable interest propertymust pass from the first
at 301, to expand the availability of the marital deduction. See H.R. Rept. No. 97-201, at 158-161 (1981), 1981-2 C.B. 352, 377-378. -33 - [*33] death ofthe surviving spouse, the propertypasses to beneficiaries designated by the first spouse to die. To qualify as QTIP: (1) the terminable interest propertymust pass from the first
118, 120, required qualified- plans to amend their definition of an eligible retirement plan to include eligible deferred compensation plans under section 457(b) and annuity contracts under section 403 (b), respectively.
403 (b); see also secs. 4974(c), 170(b) (1) (A) (ii) (cross- referenced in sec. 403 (b) (1) (A) (ii) ) . - 6 - suggest that the Court adopt the "first in, first out" formula advocated by the AARP. Under this formula, þetitioners argue that all payments received under the annuity contract would be tax free until petitioner had recovered her Šl
Petitioner's mother was an educator who invested for retirement in a section 403 (b) em loyee annuity plan.
(1) (A) (ii) (I) with the word "carryovers", amended section 56(d) (1) (A) (ii) (I) by substituting "from taxable years" in place of "for taxable years", and amended section 56(d) (1) (A) (i) (I) to strike "attributable to carryovers". See 2004 Act sec. 403 (b) (4).- The 2004 Act also amended the effective date provision set forth in 2002 Act section 102(c) (2), by substituting "after December 31, 1990" for "before January 1, 2003". Id. sec. 403(b) (3). The amendments in the 2004 Act were effec
, three occasions but has not faltered the definition of-the term, "underpayment" in response do the regulation. See Pension Protection Act of 2006, Pub.t| L. 109-280, sec. 1219, 120 Stat.s 1083,; 'Gulf Opportunity Zone ct of 2005,e Pub. L. 109-135, sec. 403, 119 Stat. 2615; Americ n Jobs Creation Act of 2004, Pub. L. 108-357, sec. 812, 118 Stat 1577. The Secretary has folldwed Congress' intent to carve out a specialized set of rules fo the penalties applicable to the accuracy of a return. The a
5) petitioner has not demonstrated that she made a good faith effort to comply with Federal income tax laws. Respondent asserts that these factors weigh against granting relief to petitioner. We now address each of the factors of Rev. Proc. 2003-61, sec. 403, separately. 1. Marital Status During 2001, petitioner and Mr. Glenn were married and resided in the same household; however, they occupied separate rooms in the household and considered themselves separated. Petitioner filed for divorce in
403(d), 95 Stat. 302 (effective generally for estates of decedents dying after Dec. 31, 1981). Pursuant to the QTIP rules, if certain conditions are met, property with respect to which the spouse has a qualifying life interest may qualify for (continued...) - 20 - consistency precludes decedent’s estate from now taking the contrary position,
403(d)(1), 95 Stat. 302, added section 2056(b)(7), which allows a marital deduction for qualified terminable interest property (QTIP) interests. Estate of Nicholson v. Commissioner, supra at 672. Section 2056(b)(7)(B) provides in pertinent part: (7) Election with respect to life estate for surviving spouse.-- * * * * * * * (B) * * * For purpos
403(d)(1), 95 Stat. 302, added section 2056(b)(7), which allows a marital deduction 5(...continued) In the context of sec. 7491, by failing to raise the sec. 7491(a) argument at or before trial, petitioner prejudiced respondent’s ability to present evidence that petitioner did not meet the requirements of sec. 7491(a)--e.g., that petitioner di
403(d)(1), 95 Stat. 172, 302. Prior to 1981, a life estate without a power of appointment was considered a terminable property. Estate of Clack v. Commissioner, 106 T.C. 131 (1996); see Estate of Nicholson v. Commissioner, 94 T.C. 666 (1990); see also Estate of Higgins v. 11We do not consider whether a power of appointment was created by the t
For purposes of this section and section 403, the term “lump sum distribution” means the distribution or payment within 1 taxable year of the recipient of the balance to the credit of an employee which becomes payable to the recipient- (i) on account of the employee’s death, ** * * * * * * from a trust which forms a part of a plan described in section 401(a) and which is exempt fr
The extent of the reduction often cannot be determined until year’s end when the individual’s other income for the entire year is known. Similarly, the extent of an overpayment of Social Security benefits resulting from such a reduction often cannot be determined until year’s end. Under those circumstances, an overpayment of Social Securi
403(d), 95 Stat. 172, 302. Under section 2056(b)(7), the decedent is entitled to a marital deduction for transfers of QTIP property to the surviving spouse at the decedent's death. The surviving spouse has a lifetime interest in the QTIP property, and, upon the death of the surviving spouse, the property passes to beneficiaries designated by t
Section 403 of the Fox Field Redevelopment Project plan provides, in pertinent part, that "The Agency [the LRA] may purchase, lease, obtain option upon or otherwise acquire real property located in the Project Area by gift, devise, exchange, purchase, or any other means authorized by law including the use of eminent domain for purposes of redevelop
403(d) and (e)(1), 95 Stat. 172, 302, 305. 6 The duty of consistency is also referred to as quasi- estoppel. E.g., Cluck v. Commissioner, supra at 331; Mayfair Minerals, Inc. v. Commissioner, 56 T.C. 82 (1971), affd. 456 F.2d 622 (5th Cir. 1972); see Johnson, "The Taxpayer's Duty of Consistency", 46 Tax L. Rev. 537, 544 (1991). - 12 - from cl
13 The UPA statutes discussed above are all substantially identical to each other, and to the UPA (1914 Act) (U.L.A.) section 9. The ULPA statutes discussed above are all substantially identical to each other, and to the Revised ULPA (1976) (U.L.A.) section 403. Given the similarity of the statutes involved, we conclude that, under Pennsylvania law, the power to extend the section 6229(a) period of limitations is within the scope of partnership business, and the partnership 9 Cal. Corp. Code sec