26 U.S.C. § 403: Taxation of employee annuities

Amended 1958, 1969

1969 Pub. L. 91-172 Pub. L. 91–172, § 321(b)(2), struck out subsec. (d) providing for taxability of beneficiary under certain forfeitable contracts purchased by exempt organizations, including farmers’ cooperatives, gross income of the employee to include (amount contributed by employer after Dec. 31, 1957), in year of change from forfeitable to nonforfeitable rights. See subsec. (c) of this section.
1958 Pub. L. 85-866 Pub. L. 85–866, § 23(a), added subsec. (b), redesignated former subsec. (b) as (c), and added subsec. (d).

Final rules 10

(a) Taxability of beneficiary under a qualified annuity plan

§ 1.403(a)-1 Taxability of beneficiary under a qualified annuity plan.§ 1.403(a)-2 Capital gains treatment for certain distributions.

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(1) Distributee taxable under section 72 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).

Amended 1958, 1964, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1122(d)(1), substituted “Distributee taxable under section 72” for “General rule” in heading and amended par. (1) generally. Prior to amendment, par. (1) read as follows: “Except as provided in paragraph (2), 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 employee shall include in his gross income the amounts received under such contract for the year received as provided in section 72 (relating to annuities).”
1964 Pub. L. 88-272 Pub. L. 88–272, § 232(e)(4)–(6), struck out “except that section 72(e)(3) shall not apply” after “(relating to annuities)”.
1958 Pub. L. 85-866 Pub. L. 85–866, § 23(b), substituted “which meets the requirements of section 404(a)(2) (whether or not the employer deducts the amounts paid for the contract under such section),” for “with respect to which the employer’s contribution is deductible under section 404(a)(2), or 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),”.

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(2) Special rule for health and long-term care insurance 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.

Amended 1962, 1969, 1974, 1976, 1984, 1986, 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 845(b)(1), added par. (2).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1122(b)(1)(B), struck out par. (2) which read as follows:
“(A) General rule
1986 “If—
“(i) an annuity contract is purchased by an employer for an employee under a plan described in paragraph (1);
“(ii) such plan requires that refunds of contributions with respect to annuity contracts purchased under such plan be used to reduce subsequent premiums on the contracts under the plan; and
“(iii) a lump sum distribution (as defined in section 402(e)(4)(A)) is paid to the recipient,
so much of the total taxable amount (as defined in section 402(e)(4)(D)) of such distribution as is equal to the product of such total taxable amount multiplied by the fraction described in section 402(a)(2) shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months. For purposes of this paragraph, in the case of an individual who is an employee without regard to section 401(c)(1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e)(4)(B) of section 402, but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph.
“(B) Cross reference
1986 “For imposition of separate tax on ordinary income portion of lump sum distribution, see section 402(e).”
1984 Pub. L. 98-369 Pub. L. 98–369, § 1001(b)(4), substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1402(b) (1)(D), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977.
1974 Pub. L. 93-406 Pub. L. 93–406, § 2005(b)(2), substituted “a lump sum distribution (as defined in section 4002(e)(4)(A)) is paid to the recipient” for “the total amounts payable by reason of an employee’s death or other separation from the service, or by reason of the death of an employee after the employee’s separation from the service, are paid to the payee within one taxable year of the payee” as cl. (iii) of subpar. (A), substituted “so much of the total taxable amount (as defined in section 402(e)(4)(D)) of such distribution as is equal to the product of such total taxable amount multiplied by the fraction described in section 402(a)(2) shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months. For purposes of this paragraph, in the case of an individual who is an employee without regard to section 401(c)(1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e)(4)(B) of section 402, but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph” for “then the amount of such payments, to the extent exceeding the amount contributed by the employee (determined by applying section 72(f)), which employee contributions shall be reduced by any amounts theretofore paid to him which were not includible in gross income, shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. This subparagraph shall not apply to amounts paid to any payee to the extent such amounts are attributable to contributions made on behalf of the employee while he was an employee within the meaning of section 401(c)(1)” following cl. (iii) of subpar. (A), substituted provisions setting out a cross reference to section 402(e) for provisions defining “total amounts” as subpar. (B), and struck out subpar. (C) setting out limitations on capital gains treatment.
1969 Pub. L. 91-172 Pub. L. 91–172, § 515(a)(2), added subpar. (C).
1962 Pub. L. 87-792 Pub. L. 87–792, § 4(d)(1), (2), substituted “described in paragraph (1)” for “which meets the requirements of section 401(a)(3), (4), (5), and (6)” in cl. (i), and inserted sentence at end thereof providing that this subparagraph shall not apply to amounts paid to any payee to the extent such amounts are attributable to contributions made on behalf of the employee while he was an employee within the meaning of section 401(c)(1).

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(3) Self-employed individuals 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).

Amended 1962

1962 Pub. L. 87-792 Pub. L. 87–792, § 4(d)(3), added par. (3).

(4) Rollover amounts

Amended 1974, 1976, 1978

1978 Pub. L. 95-600 Pub. L. 95–600, § 157(g)(2), in subpar. (B) substituted “paragraphs (6) and (7)” for “paragraph (6)”.
1978 Pub. L. 95-458 Pub. L. 95–458, among other changes, substituted provision permitting tax free treatment for any portion of a lump sum distribution from a qualified retirement plan which is deposited in an individual retirement account or another qualifying plan for provision which required transfer of all such property received.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(a)(58), reenacted provisions following subpar. (C) without substantive change.
1976 Pub. L. 94-267 Pub. L. 94–267, § 1(b)(2), substituted “a payment” for “the lump-sum distribution”.
1974 Pub. L. 93-406 Pub. L. 93–406, § 2002(g)(6), added par. (4).

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(A) General rule If—

Amended 1976

1976 Pub. L. 94-267 Pub. L. 94–267, § 1(b)(1), restructured provisions by adding cl. (i) and designating existing provision as cl. (ii).

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(i) 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)),

Amended 1984, 1992

1992 Pub. L. 102-318 Pub. L. 102–318, § 521(b)(12)(A), inserted before comma at end “in an eligible rollover distribution (within the meaning of section 402(c)(4))”.
1984 Pub. L. 98-369 Pub. L. 98–369, § 522(a)(2), substituted “any portion of the balance to the credit of an employee in an employee annuity described in paragraph (1) is paid to him,” for “the balance to the credit of an employee in an employee annuity described in paragraph (1) is paid to him in a qualifying rollover distribution.”

(ii) the employee transfers any portion of the property he receives in such distribution to an eligible retirement plan, and

(iii) 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.

(B) Certain rules made applicable 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).

Amended 1984, 1986, 1992, 2004, 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 829(a)(2), inserted “and (11)” after “(7)”.
2004 Pub. L. 108-311 Pub. L. 108–311, § 404(e), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Rules similar to the rules of paragraphs (2) through (7) of section 402(c) shall apply for purposes of subparagraph (A).”
1992 Pub. L. 102-318 Pub. L. 102–318, § 521(b)(12)(B), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “Rules similar to the rules of subparagraphs (B) through (G) of section 402(a)(5) and of paragraphs (6) and (7) of section 402(a) shall apply for purposes of subparagraph (A).”
1986 Pub. L. 99-514 Pub. L. 99–514, § 1852(a)(5)(B)(i), substituted “through (G)” for “through (F)”.
1984 Pub. L. 98-369 Pub. L. 98–369, § 522(d)(9), substituted “(B) through (F)” for “(B) through (E)”.

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(5) Direct trustee-to-trustee transfer 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.

Amended 1976, 1978, 1992

1992 Pub. L. 102-318 Pub. L. 102–318, § 522(c)(2), added par. (5).
1978 Pub. L. 95-458 Pub. L. 95–458 struck out par. (5) which related to special rules concerning time of termination of a profit-sharing plan and the treatment of the sale of a corporate subsidiary or assets as payment or distribution on account of termination of a plan of which an annuity trust was a part.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary” wherever appearing.
1976 Pub. L. 94-267 Pub. L. 94–267, § 1(b)(3), added par. (5).

(6) Qualified long-term care distributions 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.

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 334(b)(2), added par. (6).

(b) Taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school

§ 1.403(b)-0 Taxability under an annuity purchased by a section 501(c)(3) organization or a public school.§ 1.403(b)-1 General overview of taxability under an annuity contract purchased by a section 501(c)(3) organization or a public school.§ 1.403(b)-2 Definitions.§ 1.403(b)-3 Exclusion for contributions to purchase section 403(b) contracts.§ 1.403(b)-4 Contribution limitations.§ 1.403(b)-5 Nondiscrimination rules.§ 1.403(b)-6 Timing of distributions and benefits.§ 1.403(b)-7 Taxation of distributions and benefits.§ 1.403(b)-8 Funding.§ 1.403(b)-9 Special rules for church plans.§ 1.403(b)-10 Miscellaneous provisions.§ 1.403(b)-11 Applicable dates.Prop. § 1.403(b)-2 Proposed 2001 · Required minimum distributions from annuity contracts purchased, or custodial accounts or retirement income accounts established, by a section 501(c)(3) organization or a public school.Prop. § 1.403(b)-3 Proposed 2005 · Exclusion for contributions to purchase section 403(b) contracts.

Amended 1958, 1961, 1980

1980 Pub. L. 96-222 Pub. L. 96–222 substituted in par. (1) “409(b)(3)(C)” for “409(d)(3)(C)”, and in par. (7)(A) “which satisfies” for “which satisfied”.
1961 Pub. L. 87-370 Pub. L. 87–370, § 3(a)(3), inserted “or public school” in heading.
1958 Pub. L. 85-866 Pub. L. 85–866, § 23(a), added subsec. (b), redesignated former subsec. (b) as (c), and added subsec. (d).

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(1) General rule If—

“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.” Closing words

Textual readingALL OF= employer contributions excluded from gross income

(A) an annuity contract is purchased—

Textual readingANY OF= annuity contract purchased as described

(i) for an employee by an employer described in section 501(c)(3) which is exempt from tax under section 501(a),

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(ii) 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

Amended 1976

1976 Pub. L. 94-455 Pub. L. 94–455, § 1901(b)(8)(A), substituted “educational organization described in section 170(b)(1)(A)(ii)” for “educational institution (as defined in section 151(e)(4))”.

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(iii) for the minister described in section 414(e)(5)(A) by the minister or by an employer,

Amended 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 1601(d)(6)(B), added cl. (iii).

Amended 1961

1961 Pub. L. 87-370 Pub. L. 87–370, § 3(a)(1), included annuity contracts purchased for an employee, other than one described in clause (i) of this subpar., who performs services for an educational institution, as defined in section 151(e)(4) of this title, by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of either.

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(B) such annuity contract is not subject to subsection (a),

(D) 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

Amended 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(m)(1)(B), substituted “paragraph (12)” for “paragraph (10)”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1120(a), added subpar. (D).

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(E) in the case of a contract purchased under a salary reduction agreement, the contract meets the requirements of section 401(a)(30),

Amended 1988, 1996

1996 Pub. L. 104-188 Pub. L. 104–188, § 1450(c)(1), amended subpar. (E) generally. Prior to amendment, subpar. (E) read as follows: “in the case of a contract purchased under a plan which provides a salary reduction agreement, the plan meets the requirements of section 401(a)(30),”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(c)(7)(B), added subpar. (E).

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.

Amended 1964, 1978, 1984, 1986, 2001, 2002

2002 Pub. L. 107-147 Pub. L. 107–147, § 411(p)(1), inserted concluding provisions and struck out former concluding provisions which read as follows: “then amounts contributed by such employer for such annuity contract on or after such rights become nonforfeitable shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such amounts 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 amounts contributed 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.”
2001 Pub. L. 107-16 Pub. L. 107–16, § 642(b)(1), substituted “section 408(d)(3)(A)(ii)” for “section 408(d)(3)(A)(iii)” in concluding provisions.
2001 Pub. L. 107-16 Pub. L. 107–16, § 632(a)(2)(A), substituted “the applicable limit under section 415” for “the exclusion allowance for such taxable year” in concluding provisions.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1122(d)(2), amended second sentence generally. Prior to amendment, second sentence read as follows: “The employee shall include in his gross income the amounts received under such contract for the year received as provided in section 72 (relating to annuities)”.
1984 Pub. L. 98-369 Pub. L. 98–369, § 491(d)(12), struck out “or 409(b)(3)(C)” after “408(d)(3)(A)(iii)”.
1978 Pub. L. 95-600 Pub. L. 95–600, § 156(b), inserted provision relating to application of rules of this subsection to amounts contributed by an employer for a taxable year.
1964 Pub. L. 88-272 Pub. L. 88–272, § 232(e)(4)–(6), struck out “except that section 72(e)(3) shall not apply” after “(relating to annuities)”.

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Amended 1974, 1982, 2001, 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 845(b)(2), added par. (2).
2001 Pub. L. 107-16 Pub. L. 107–16, § 632(a)(2)(B), struck out par. (2), which described exclusion allowance for purposes of subsec. (b) providing general criteria, determination under section 415 rules, number of years of service for duly ordained, commissioned, or licensed ministers or lay employees, and alternative exclusion allowance for such ministers or lay employees.
1982 Pub. L. 97-248 Pub. L. 97–248, § 251(a)(1), (c)(3), substituted “home health service agencies, and certain churches, etc.” for “and home health service agencies”, and “(under section 415 without regard to section 415(c)(8))” for “(under section 415)”.
1982 Pub. L. 97-248 Pub. L. 97–248, § 251(a)(2), added subpars. (C) and (D).
1974 Pub. L. 93-406 Pub. L. 93–406, § 2004(c)(4), designated existing provisions as subpar. (A) and added subpar. (B).

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(3) Includible compensation 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—

Amended 1961, 1983, 1997, 2001, 2002

2002 Pub. L. 107-147 Pub. L. 107–147, § 411(p)(3), in first sentence, inserted “, and which precedes the taxable year by no more than five years” before period at end and, in second sentence, struck out “or any amount received by a former employee after the fifth taxable year following the taxable year in which such employee was terminated” after “this subsection applies”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 632(a)(2)(C), inserted “or any amount received by a former employee after the fifth taxable year following the taxable year in which such employee was terminated” before period at end of second sentence.
1997 Pub. L. 105-34 Pub. L. 105–34, § 1504(a)(1), inserted at end “Such term includes—” and subpars. (A) and (B).
1983 Pub. L. 98-21 Pub. L. 98–21 substituted “section 911” for “sections 105(d) and 911”.
1961 Pub. L. 87-370 Pub. L. 87–370, § (3)(a)(2), substituted “the employer described in paragraph (1)(A)” for “the employer described in section 501(c)(3) and exempt from tax under section 501(a)”.

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(A) any elective deferral (as defined in section 402(g)(3)), and

(B) 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.

Amended 2000

2000 Pub. L. 106-554 Pub. L. 106–554 substituted “section 125, 132(f)(4), or” for “section 125 or”.

(4) Years of service In determining the number of years of service for purposes of this subsection, there shall be included—

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(A) one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and

(B) 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.

Amended 1976

1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.

In no case shall the number of years of service be less than one.

(5) Application to more than one annuity contract 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.

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[(6) Repealed. Pub. L. 107–147, title IV, § 411(p)(2), Mar. 9, 2002, 116 Stat. 50]

Amended 2002

2002 Pub. L. 107-147 Pub. L. 107–147, § 411(p)(2), struck out heading and text of par. (6). Text read as follows: “For purposes of this subsection and section 72(f) (relating to special rules for computing employees’ contributions to annuity contracts), if rights of the employee under an annuity contract described in subparagraphs (A) and (B) of paragraph (1) change from forfeitable to nonforfeitable rights, then the amount (determined without regard to this subsection) includible in gross income by reason of such change shall be treated as an amount contributed by the employer for such annuity contract as of the time such rights become nonforfeitable.”

(7) Custodial accounts

Amended 1974, 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 128(b), struck out “for regulated investment company stock” after “Custodial accounts” in heading.
1974 Pub. L. 93-406 Pub. L. 93–406, § 1022(e), added par. (7).

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(A) Amounts paid treated as contributions 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—

Amended 1978, 2019, 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 128(a), in introductory provisions, substituted “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)” for “if the amounts are to be invested in regulated investment company stock to be held in that custodial account”.
2019 Pub. L. 116-94 Pub. L. 116–94, § 109(c)(2), substituted “if the amounts are to be invested in regulated investment company stock to be held in that custodial account, and under the custodial account—” for “if—” and cls. (i) and (ii) for former cls. (i) and (ii) which read as follows:
2019 “(i) the amounts are to be invested in regulated investment company stock to be held in that custodial account, and
2019 “(ii) 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, attains age 59½, has a severance from employment, becomes disabled (within the meaning of section 72(m)(7)), or in the case of contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D)), encounters financial hardship.”
1978 Pub. L. 95-600 Pub. L. 95–600, § 154(a), struck out “the amounts are paid to provide a retirement benefit for that employee and are to be invested in regulated investment company stock to be held in that custodial account” after “contract for his employee if”, and added cls. (i) and (ii).

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(i) 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—

(I) the employee dies,

(II) the employee attains age 59½,

(III) the employee has a severance from employment,

(IV) the employee becomes disabled (within the meaning of section 72(m)(7)),

(V) subject to the provisions of paragraph (17), the employee encounters financial hardship,

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 602(b)(1), substituted “subject to the provisions of paragraph (17)” for “in the case of contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D))”.

(VI) 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

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(VII) as provided for distributions to which section 401(a)(39) applies, and

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 334(b)(3), added subcl. (VII).

(ii) 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)).

Amended 1986, 2001, 2004, 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 827(b)(2), inserted “(unless such amount is a distribution to which section 72(t)(2)(G) applies)” after “distributee”.
2004 Pub. L. 108-311 Pub. L. 108–311, § 408(a)(11), substituted “3121(a)(5)(D)” for “3121(a)(1)(D)”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 646(a)(2)(A), substituted “has a severance from employment” for “separates from service”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1123(c)(2), inserted “in the case of contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(1)(D)),” after “section 72(m)(7)), or”.

(B) Account treated as plan 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).

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(C) Regulated investment company 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).

Textual readingALL OF= a regulated investment companyGate Wizard 🧙

“a domestic corporation”

“which is a regulated investment company within the meaning of section 851(a)” needs § 851(a)

§ 851(a)

For purposes of this subtitle, the term “regulated investment company” means any domestic corporation—

“any domestic corporation—” Opening words

Textual readingANY OF= a regulated investment company

“which, at all times during the taxable year— is registered under the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 to 80b–2) as a management company or unit investment trust, or has in effect an election under such Act to be treated as a business development company, or” § 851(a)(1)

“which is a common trust fund or similar fund excluded by section 3(c)(3) of such Act (15 U.S.C. 80a–3(c)) from the definition of “investment company” and is not included in the definition of “common trust fund” by section 584(a).” § 851(a)(2)

Amended 1976

1976 Pub. L. 94-455 Pub. L. 94–455, § 1504(a), struck out “, and which issues only redeemable stock” after “regulated investment company within the meaning of section 851(a)”.

(D) Employee certification 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—

Amended 1984, 1986, 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 312(b)(1), added subpar. (D).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1852(a)(3)(B), struck out subpar. (D) “Distribution requirements” which read as follows: “For purposes of determining when the interest of an employee in a custodial account must be distributed, such account shall be treated in the same manner as an annuity contract.”
1984 Pub. L. 98-369 Pub. L. 98–369, § 521(c), added subpar. (D).

(i) 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

(ii) 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.

(8) Rollover amounts

Amended 1978, 1983, 1984, 1986, 1992

1992 Pub. L. 102-318 Pub. L. 102–318, § 521(b)(13)(B), added subpar. (B) and struck out former subpars. (B) to (D), which related to special rules for partial distributions, applicability of certain similar rules, and eligibility for rollover treatment of required distributions.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1852(b)(10), inserted “and” before “(F)(i)”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1852(a)(5)(B)(ii), added subpar. (D).
1984 Pub. L. 98-369 Pub. L. 98–369, § 522(d)(11), substituted “(F)(i)” for “(D)(v), and (E)(i)”.
1983 Pub. L. 97-448 Pub. L. 97–448 substituted “subparagraphs (B), (C), (D)(v), and (E)(i) of section 402(a)(5)” for “subparagraphs (B), (C), and (E)(i) of section 402(a)(5)”.
1978 Pub. L. 95-600 Pub. L. 95–600, § 156(a), added par. (8).

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(A) General rule If—

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(i) 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)),

Amended 1984, 1992

1992 Pub. L. 102-318 Pub. L. 102–318, § 521(b)(13)(A), inserted before comma at end “in an eligible rollover distribution (within the meaning of section 402(c)(4))”.
1984 Pub. L. 98-369 Pub. L. 98–369, § 522(a)(3), substituted “any portion of the balance to the credit of an employee in an annuity contract described in paragraph (1) is paid to him” for “the balance to the credit of an employee is paid to him in a qualifying distribution”.

(ii) 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

Amended 2001

2001 Pub. L. 107-16 Pub. L. 107–16, § 641(b)(1), substituted “such distribution to an eligible retirement plan described in section 402(c)(8)(B), and” for “such distribution to an individual retirement plan or to an annuity contract described in paragraph (1), and”.

(iii) 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.

(B) Certain rules made applicable 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.

Amended 1981, 1984, 1992, 1998, 2001, 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 829(a)(3), substituted “, (9), and (11)” for “and (9)”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 641(e)(7), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Rules similar to the rules of paragraphs (2) through (7) of section 402(c) (including paragraph (4)(C) thereof) shall apply for purposes of subparagraph (A).”
1998 Pub. L. 105-206 Pub. L. 105–206 inserted “(including paragraph (4)(C) thereof)” after “section 402(c)”.
1992 Pub. L. 102-318 Pub. L. 102–318, § 521(b)(13)(B), added subpar. (B) and struck out former subpars. (B) to (D), which related to special rules for partial distributions, applicability of certain similar rules, and eligibility for rollover treatment of required distributions.
1984 Pub. L. 98-369 Pub. L. 98–369, § 522(d)(10), substituted provisions relating to special rules for partial distributions for provisions relating to definition of qualifying distributions.
1981 Pub. L. 97-34 Pub. L. 97–34 inserted “, or 1 or more distributions of accumulated deductible employee contributions (within the meaning of section 72(o)(5))” after “subsection (a)”.

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(9) Retirement income accounts provided by churches, etc.

Textual readingALL OF= Retirement income account

“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”

(A) Amounts paid treated as contributions For purposes of this title—

(i) a retirement income account shall be treated as an annuity contract described in this subsection, and

(ii) 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.

(B) Retirement income account 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.

Textual readingALL OF= a retirement income account

“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”

Amended 2005, 2019

2019 Pub. L. 116-94 Pub. L. 116–94, § 111(a), inserted “(including an employee described in section 414(e)(3)(B))” after “employee described in paragraph (1)”.
2005 Pub. L. 109-135 Pub. L. 109–135 inserted “or” before “a convention”.

Amended 1982

1982 Pub. L. 97-248 Pub. L. 97–248, § 251(b), added par. (9).

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(10) Distribution requirements 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.

Amended 1986, 1988, 1992, 1996

1996 Pub. L. 104-188 Pub. L. 104–188, § 1704(t)(69), substituted “a direct” for “an direct” in last sentence.
1992 Pub. L. 102-318 Pub. L. 102–318, § 522(a)(3), (c)(3), substituted “sections 401(a)(9) and 401(a)(31)” for “section 401(a)(9)” and inserted at end “Any amount transferred in an 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.”
1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(m)(1)(A), redesignated par. (10), relating to nondiscrimination requirements, as (12).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1120(b), added par. (10) relating to nondiscrimination requirements.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1852(a)(3)(A), added par. (10) relating to distribution requirements.

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(11) Requirement that distributions not begin before age 59½, severance from employment, death, or disability 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—

Amended 1986, 2001, 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 602(b)(2)(B), in concluding provisions, struck out “Such contract may not provide for the distribution of any income attributable to such contributions in the case of hardship.” before “In determining”.
2022 Pub. L. 117-328 Pub. L. 117–328, § 312(b)(2), in concluding provisions, inserted at end “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.”
2001 Pub. L. 107-16 Pub. L. 107–16, § 646(a)(2)(B), substituted “severance from employment” for “separation from service” in heading.
1986 Pub. L. 99-514 Pub. L. 99–514, § 1123(c)(1), added par. (11).

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(A) when the employee attains age 59½, has a severance from employment, dies, or becomes disabled (within the meaning of section 72(m)(7)),

Amended 2001

2001 Pub. L. 107-16 Pub. L. 107–16, § 646(a)(2)(A), substituted “has a severance from employment” for “separates from service”.

(B) subject to the provisions of paragraph (17), in the case of hardship,

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 602(b)(2)(A), substituted “subject to the provisions of paragraph (17), in” for “in”.

Amended 2006

2006 Pub. L. 109-280 Pub. L. 109–280, § 827(b)(3), added subpar. (C).

(D) 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))—

Amended 2019

2019 Pub. L. 116-94 Pub. L. 116–94, § 109(c)(1), added subpar. (D).

(i) 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

(ii) 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

(E) for distributions to which section 401(a)(39) applies.

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 334(b)(4), added subpar. (E).

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.

(12) Nondiscrimination requirements

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(m)(1)(A), redesignated par. (10), relating to nondiscrimination requirements, as (12).

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(A) In general For purposes of paragraph (1)(D), a plan meets the nondiscrimination requirements of this paragraph if—

Amended 1988, 1990, 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 125(a)(2)(B)(i), which directed that the “last sentence” of subpar. (A) be amended by inserting “and section 202(c) of the Employee Retirement Income Security Act of 1974” after “under section 410(b)(4)”, was executed by making the insertion after “under section 410(b)(4)” in what had been the last sentence of concluding provisions prior to amendments by Pub. L. 117–328, §§ 110(e), 113(b), to reflect the probable intent of Congress. See notes below.
2022 Pub. L. 117-328 Pub. L. 117–328, § 113(b), in concluding provisions, inserted at end “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.”
2022 Pub. L. 117-328 Pub. L. 117–328, § 110(e), in concluding provisions, inserted at end “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).”
1990 Pub. L. 101-508 Pub. L. 101–508 inserted “involving a one-time irrevocable election” after “similar arrangement” in second sentence.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(m)(2), inserted “(17),” after “paragraphs (4), (5),” and “, section 401(m),” after “of section 401(a)” in cl. (i).
1988 Pub. L. 100-647 Pub. L. 100–647, § 1011(c)(12), inserted after cl. (ii) “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 specified in regulations.”
1988 Pub. L. 100-647 Pub. L. 100–647, § 6052(a)(1), amended last sentence generally. Prior to amendment, last sentence read as follows: “For purposes of this subparagraph, students who normally work less than 20 hours per week may (subject to the conditions applicable under section 410(b)(4)) be excluded.”

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(i) 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

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(ii) 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.

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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.

(B) Church 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)).

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(C) State and local governmental plans 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).

Amended 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 1505(c), added subpar. (C).

(D) Rules relating to certain part-time employees

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 125(a)(2)(A), added subpar. (D).

(i) 11 So in original. No cl. (ii) has been enacted. In general 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—

(I) 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

(II) 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).

(13) Trustee-to-trustee transfers to purchase permissive service credit 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—

Amended 2001

2001 Pub. L. 107-16 Pub. L. 107–16, § 647(a), added par. (13).

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(A) for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or

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(B) a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.

(14) Death benefits under USERRA-qualified active military service This subsection shall not apply to an annuity contract unless such contract meets the requirements of section 401(a)(37).

Amended 2008

2008 Pub. L. 110-245 Pub. L. 110–245 added par. (14).

(15) Multiple employer plans

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 106(a), added par. (15).

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(A) In general 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.

(B) Treatment of employers failing to meet requirements of plan

(i) In general 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.

(ii) Additional requirements in case of non-governmental plans 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.

(17) Special rules relating to hardship withdrawals For purposes of paragraphs (7) and (11)—

Amended 2022

2022 Pub. L. 117-328 Pub. L. 117–328, § 602(a), added par. (17).

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(A) Amounts which may be withdrawn The following amounts may be distributed upon hardship of the employee:

(i) Contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(5)(D)).

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(ii) Qualified nonelective contributions (as defined in section 401(m)(4)(C)).

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(iii) Qualified matching contributions described in section 401(k)(3)(D)(ii)(I).

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(iv) Earnings on any contributions described in clause (i), (ii), or (iii).

(B) No requirement to take available loan 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.

(c) Taxability of beneficiary under nonqualified annuities or under annuities purchased by exempt organizations 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).

§ 1.403(c)-1 Taxability of beneficiary under a nonqualified annuity.

Amended 1958, 1964, 1969, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1122(d)(3), amended last sentence generally. Prior to amendment, last sentence read as follows: “The amount actually paid or made available to any beneficiary under such contract shall be taxable to him in the year in which so paid or made available under section 72 (relating to annuities).”
1969 Pub. L. 91-172 Pub. L. 91–172, § 321(b)(2), consolidated provisions of subsec. (c) providing for taxability of beneficiary under a nonqualified annuity, the employees gross income to include amount contributed by employer for annuity contract in the year in which amount is contributed, the amount to be included as provided in section 72 of this title and of subsec. (d) providing for taxability of beneficiary under certain forfeitable contracts purchased by exempt organizations, including farmers’ cooperatives, the gross income to include amount contributed by employer after Dec. 31, 1957, in the year of change from forfeitable to nonforfeitable rights, the new provisions including premiums paid by an employer in accordance with section 83, except that value of the contract shall be substituted for fair market value of the property for purposes of applying such section 83, such provision not to be applicable to that portion of premiums paid which is excluded from gross income under subsec. (b) of this section.
1964 Pub. L. 88-272 Pub. L. 88–272, § 232(e)(4)–(6), struck out “except that section 72(e)(3) shall not apply” after “(relating to annuities)”.
1958 Pub. L. 85-866 Pub. L. 85–866, § 23(a), added subsec. (b), redesignated former subsec. (b) as (c), and added subsec. (d).

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