David E. Kenty, Esq.

Tax-Deferred Annuities — Section 403(b), written by David E. Kenty, Esq., Schnader Harrison Segal & Lewis LLP, examines tax-deferred annuities (TDAs) governed by Code §403(b). Although often used as the basic funding vehicle for retirement plans for employees of public schools (including employees of state colleges and universities), hospitals, and other tax-exempt organizations, TDAs also may be used by individual employees of these organizations as an advantageous means of saving for retirement on a tax-sheltered basis. This Portfolio: 

• Focuses on the complex rules limiting the contributions that may be excluded, or deducted, from an eligible employee's gross income
• Identifies the employees who are eligible for TDAs
• Discusses the characteristics of the possible investment vehicles
• Notes the ERISA provisions that apply to retirement plans funded through TDAs
• Considers the special tax rules applicable to TDAs and to distributions to employees 

This Portfolio also addresses and discusses specific topics such as  correction of TDA compliance failures, excise taxes, safe harbors, fidelity bonding, vesting, and more.

Tax-Deferred Annuities — Section 403(b) allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

Detailed Analysis

I. Introduction

II. Eligibility

Introductory Material

A. Public Education Employees

B. Employees of Certain Tax-Exempt Organizations

1. Private § 501(c)(3) Organizations

2. Public Institutions Other Than Public Schools

C. Employee vs. Self-Employed Status

III. Funding Vehicles for § 403(b) Plans

Introductory Material

A. Annuity Contracts

1. Characteristics

a. Nontransferability and Nonforfeitability

b. Underlying Investments

c. Portability

d. Distribution Requirements

(1) After Death

(2) At Retirement

(3) Before Retirement

(4) Excise Tax

e. Cap on Salary Reduction Contributions

2. Life Insurance

B. Custodial Accounts

1. Characteristics

a. Investment

b. Distribution Restrictions

c. Similarity to Annuities

2. Tax Treatment

C. Retirement Income Accounts

1. Availability

2. Characteristics

D. Face Amount Certificates

IV. Uses of and Requirements for TDAs

A. Introduction

B. Employer-Sponsored Plan

1. Nondiscrimination Rules

a. Coverage

b. Contributions

c. Limits on Matching Contributions

(1) Restrictions

(2) Excise Tax

d. Safe Harbors

e. Special Rules for Veterans and Military Personnel

2. Coverage by ERISA

a. Eligibility Rules

(1) Minimum Age and Length of Service

(2) Maximum Age

b. Reporting and Disclosure Requirements

(1) Annual Return/Report

(2) Disclosure

(3) Penalties for Noncompliance

c. Fiduciary Standards

(1) Duties of Fiduciaries

(2) Prohibited Transactions

d. Funding Requirements

e. Vesting

f. Other Plan Requirements

(1) In General

(2) Qualified Joint and Survivor Annuity

(3) Fidelity Bonding

(4) Notice of Contribution Reduction

3. Sex Discrimination Problems

C. Salary Reduction Arrangements

1. Tax Rules

2. Coverage By ERISA

D. Written Plan Requirement

E. Separate Account Requirement

F. Excise Tax on Prohibited Tax Shelter Transactions

V. Tax Incentives of § 403(b) Plans

Introductory Material

A. Exclusion of Contributions from Gross Income

1. Limitation on Salary Reductions

a. Primary Limitation

b. Catch-up Contribution

c. Catch-up Election

2. Former § 403(b) Exclusion Allowance

a. Formula

b. Salary Reduction Formula

c. Part-time or Former Employees

d. Years of Service Multiplier

e. Certain Church Employees

f. Amounts That Become Substantially Vested

3. Limitation on Contributions

a. Basic Limitation

(1) Formula

(2) Employee Contributions

(3) Compensation

(4) Limitation Year

b. Elections Varying Contribution Limitation

(1) 2002 and Thereafter

(2) Alternative Limitations Prior to 2002

c. Aggregation with Other Plans

(1) General Rule

(2) Limitation Year

4. Excise Tax on Excess Contributions

B. Tax-Free Accumulation

1. General Rule

2. Constructive Receipt

C. Deductible Employee Contributions

1. In General

2. Limitations

D. Deemed IRA Contributions

E. Designated Roth Contributions

F. Income Tax Credit for Elective Deferral Contributions

G. Automatic Enrollment Safe Harbor

VI. Distributions

Introductory Material

A. At Retirement

1. Form

2. Minimum Required Distributions

3. Taxation

4. Rollovers

B. Before Retirement

1. Premature Withdrawal Penalty

2. Withdrawals of Employee Contributions

3. Loans

4. Rollover

5. Exchange or Transfer

C. After Death

1. Income Tax

a. In General

b. Life Insurance Proceeds

2. Estate and Gift Tax

VII. Correction of TDA Compliance Failures

A. Employee Plans Compliance Resolution System

1. In General

2. Section 403(b) Failures

B. Self-Correction Program

1. Types of Corrections

2. Distribution of Excess Contributions

3. Timing

C. Voluntary Correction Program

1. Availability

2. Voluntary Correction of Tax-Sheltered Annuity Failures

3. Correction

D. Audit CAP

E. Specific Compliance Issues

1. Nonapproved Trustee/Custodian

2. Noncomplying Investments

VIII. Approval of Written Plan

A. In General

B. Obtaining IRS Approval

1. Prototype Plan Document

a. Prototype Plan Provisions

b. Standardized and Nonstandardized Plans

c. Forms and User Fee

2. Opinion Letter

a. Scope of Letter

b. Employer Reliance

c. Withdrawal or Abandonment

3. Remedial Amendment

Working Papers

Table of Worksheets

Worksheet 1 DEPARTMENT OF LABOR OPINION LETTERS DOL Opinion 75–33

Worksheet 2 DOL Opinion 77–36

Worksheet 3 DOL Opinion 79–90A

Worksheet 4 DOL Opinion 80–19A

Worksheet 5 Sample Section 403(b) Defined Contribution Retirement Plan with Employer and Employee Contributions

Worksheet 6 [Reserved]

Worksheet 7 Section 403(b) Plan with Employer, Employee and Matching Contributions

Worksheet 8 Summary Plan Description - Section 403(b) Plan with Employer, Employee and Matching Contributions.

Worksheet 9 [Reserved]

Worksheet 10 Comparison of § § 403(b) and 401(k)

Worksheet 11 Internal Revenue Manual 4.72.13 - Employee Plans Technical Guidelines: 403(b) Plans

Bibliography

OFFICIAL

Statutes:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

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