Reg-155608-02

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules
number of small entities. Each of the
banks in the System, considered
together with its affiliated associations,
has assets and annual income in excess
of the amounts that would qualify them
as small entities. Therefore, System
institutions are not ‘‘small entities’’ as
defined in the Regulatory Flexibility
Act.

Dated: November 10, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04–25397 Filed 11–15–04; 8:45 am]

List of Subjects in 12 CFR Part 617

Internal Revenue Service

Banks, banking, Criminal referrals,
Criminal transactions, Embezzlement,
Insider abuse, Investigations, Money
laundering, Theft.
For the reasons stated in the
preamble, part 617, chapter VI, title 12
of the Code of Federal Regulations is
proposed to be amended as follows:
PART 617—BORROWER RIGHTS

Authority: Secs. 4.13, 4.13A, 4.13B, 4.14,
4.14A, 4.14C, 4.14D, 4.14E, 4.36, 5.9, 5.17 of
the Farm Credit Act (12 U.S.C. 2199, 2200,
2201, 2202, 2202a, 2202c, 2202d, 2202e,
2219a, 2243, 2252).

Subpart A—General
2. Amend § 617.7010(a) by:
a. Removing the reference, ‘‘paragraph
(b)’’ and adding in its place, the
reference ‘‘paragraphs (b) and (c)’’ in
paragraph (a);
b. Redesignating and revising existing
paragraph (c) as new paragraph (d);
c. Adding a new paragraph (c) as
follows:
May borrower rights be

*

*
*
*
*
(c) A borrower may waive all
borrower rights provided for in part 617
of these regulations in connection with
a loan syndication transaction with nonSystem lenders that are otherwise not
required by section 4.14A(a)(6) of the
Act to provide borrower rights. For
purposes of this paragraph, a ‘‘loan
syndication’’ is a multi-lender
transaction in which each member of
the lending syndicate has a direct
contractual relationship with the
borrower, but does not include a
transaction created for the primary
purpose of avoiding borrower rights.
(d) All waivers must be voluntary and
in writing. The document evidencing
the waiver must clearly explain the
rights the borrower is being asked to
waive and provide an explanation of
such rights. Additionally, a borrower in
a loan syndication must certify in
writing that the borrower was advised
by legal counsel prior to executing a
waiver.

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DEPARTMENT OF THE TREASURY

26 CFR Parts 1 and 31
[REG–155608–02]
RIN 1545–BB64

Revised Regulations Concerning
Section 403(b) Tax-Sheltered Annuity
Contracts
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking,
notice of proposed rulemaking by crossreference to temporary regulations, and
notice of public hearing.
AGENCY:

1. The authority citation for part 617
continues to read as follows:

§ 617.7010
waived?

BILLING CODE 6705–01–P

SUMMARY: This document contains
proposed regulations under section
403(b) of the Internal Revenue Code and
under related provisions of sections
402(b), 402(g), 414(c), and 3121(a)(5)(D).
The proposed regulations would
provide updated guidance on section
403(b) contracts of public schools and
tax-exempt organizations described in
section 501(c)(3). These regulations
would provide the public with guidance
necessary to comply with the law and
will affect sponsors of section 403(b)
contracts, administrators, participants
and beneficiaries. In the Rules and
Regulations section of this issue of the
Federal Register, the Treasury
Department and IRS are issuing
temporary regulations providing
employment tax guidance to employers
and employees on salary reduction
agreements. This document also
provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by February 14, 2005.
Outlines of topics to be discussed at the
public hearing scheduled for February
15, 2005, to be held in the IRS
Auditorium (7th Floor) must be received
by January 25, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–155608–02), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–155608–02),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,

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67075

NW., Washington, DC, or sent
electronically via the IRS Internet site at
http://www.irs.gov/regs or via the
Federal eRulemaking Portal at http://
www.regulations.gov (IRS–REG–
155608–02). The public hearing will be
held in the IRS Auditorium (7th Floor),
Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
R. Lisa Mojiri-Azad or John Tolleris,
(202) 622–6060; concerning the
proposed regulations as applied to
church-related entities, Robert Architect
(202) 283–9634; concerning submission
of comments, the hearing, and/or to be
placed on the building access list to
attend the hearing, Sonya Cruse, (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in this notice of rulemaking
has been previously reviewed and
approved by the Office of Management
and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1341.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
Regulations (TD 6783) under section
403(b) of the Internal Revenue Code
(Code) were published in the Federal
Register (29 FR 18356) on December 24,
1964 (1965–1 C.B. 180). These
regulations provided guidance for
complying with section 403(b) which
had been enacted in 1958 in section
23(a) of the Technical Amendments Act
of 1958, Public Law 85–866 (1958),
relating to tax-sheltered annuity
arrangements established for employees
by public schools and tax-exempt
organizations described in section
501(c)(3). Since 1964, additional
regulations have been issued under
section 403(b) to reflect rules relating to
eligible rollover distributions and
minimum distributions under section
401(a)(9).
These proposed regulations would
amend the current regulations to

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conform them to the numerous
amendments made to section 403(b) by
subsequent legislation, including
section 1022(e) of the Employee
Retirement Income Security Act of 1974
(ERISA) (88 Stat. 829), Public Law 93–
406; section 251 of the Tax Equity and
Fiscal Responsibility Act of 1982
(TEFRA) (96 Stat. 324,529), Public Law
97–248; section 1120 of the Tax Reform
Act of 1986 (TRA ’86) (100 Stat. 2085,
2463), Public Law 99–514; section
1450(a) of the Small Business Job
Protection Act of 1996 (SBJPA) (110
Stat. 1755, 1814), Public Law 104–188;
and sections 632, 646, and 647 of the
Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA)
(115 Stat. 38, 113, 126, 127), Public Law
107–16.
Explanation of Provisions
Overview
The purposes of these proposed
regulations are to update the current
regulations under section 403(b) to
delete provisions that no longer have
legal effect due to changes in law, to
include in the regulations a number of
items of interpretive guidance that have
been issued under section 403(b) since
the 1964 regulations,1 and generally to
reflect the numerous legal changes that
have been made in section 403(b). A
major effect of the legal changes in
section 403(b) has been to diminish the
extent to which the rules governing
section 403(b) plans differ from the
rules governing other arrangements that
include salary reduction contributions,
i.e., section 401(k) plans and section
457(b) plans for State and local
governmental entities. Thus, these
regulations will reflect the increasing
similarity among these arrangements.
Since the existing regulations were
issued in 1964, a number of revenue
rulings and other guidance under
section 403(b) have become outdated as
a result of changes in law. In addition,
as a result of the inclusion in these
proposed regulations of much of the
guidance that the IRS has issued
regarding section 403(b), it is
anticipated that these regulations, when
finalized, will supersede a number of
revenue rulings and notices that have
been issued under section 403(b). Thus,
the IRS anticipates taking action to
obsolete many revenue rulings, notices,
and other guidance under section 403(b)
1 Since 1964, the existing regulations have been
revised for certain specific changes in law, for
example, regulations under section 403(b) have
been issued in question and answer form to reflect
changes relating to eligible rollover distributions
(TD 8619, September 15, 1995) and minimum
distributions under section 401(a)(9) (TD 8987,
April 16, 2002).

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when these regulations are issued in
final form.2 However, the positions
taken in certain rulings and other
outstanding guidance are expected to be
retained. For example, it is intended
that a revenue ruling will be issued that
substantially replicates and consolidates
the existing rules 3 for determining
when employees are performing
services for a public school.4
The existing regulations include
special rules for determining the
amount of the contributions made for an
employee under a defined benefit plan,
based on the employee’s pension under
the plan. These rules are generally no
longer applicable for section 403(b)
because the limitations on contributions
to a section 403(b) contract are no longer
coordinated with accruals under a
defined benefit plan. (See also the
discussion of defined benefit plans
below under the heading Miscellaneous
Provisions.) However, the rules for
determining the amount of
contributions made for an employee
under a defined benefit plan in the
existing regulations under section
403(b) are also used for purposes of
section 402(b) (relating to nonqualified
plans funded through trusts) and,
accordingly, these rules are proposed to
be deleted from the regulations under
section 403(b). New proposed
regulations under section 402(b) would
authorize the Commissioner to issue
guidance for determining the amount of
the contributions made for an employee
2 It is expected that the following guidance is
outdated, or will be superseded, when these
regulations are issued in final form: Rev. Rul. 64–
333. 1964–2 C.B. 114; Rev. Rul. 65–200, 1965–2
C.B. 141; Rev. Rul. 66–254, 1966–2 C.B. 125; Rev.
Rul. 66–312, 1966–2 C.B. 127; Rev. Rul. 67–78,
1967–1 C.B. 94; Rev. Rul. 67–69, 1967–1 C.B. 93;
Rev. Rul. 67–361, 1967–2 C.B. 153; Rev. Rul. 67–
387, 1967–2 C.B. 153; Rev. Rul. 67–388, 1967–2
C.B. 153; Rev. Rul. 68–179, 1968–1 CB 179; Rev.
Rul. 68–482, 1968–2 CB 186; Rev. Rul. 68–487,
1968–2 CB 187; Rev. Rul. 68–488, 1968–2 C.B. 188;
Rev. Rul. 69–629, 1969–2 C.B. 101; Rev. Rul. 70–
243, 1970–1 C.B. 107; Rev. Rul. 87–114, 1987–2
C.B. 116; Notice 89–23, 1989–1 C.B. 654; Rev. Rul.
90–24, 1990–1 C.B. 97; Notice 90–73, 1990–2 C.B.
353; Notice 92–36, 1992–2 C.B. 364; and
Announcement 95–48, 1995–23 I.R.B. 13. It is
expected that the following guidance will not be
superseded when these regulations are issued in
final form: Rev. Rul. 66–254, 1966–2 C.B. 125; Rev.
Rul. 68–33, 1968–1 C.B. 175; Rev. Rul 68–58, 1968–
1 C.B. 176; Rev. Rul. 68–116, 1968–1 C.B. 177; Rev.
Rul. 68–648, 1968–2 C.B. 49; Rev. Rul. 68–488,
1968–2 C.B. 188; and Rev. Rul. 69–146, 1969–1 C.B.
132. Comments are requested on whether any
guidance items under section 403(b) should be
added to or deleted from either of the preceding
lists. See the request for comments below under the
heading Comments and Public Hearing.
3 Rev. Rul. 73–607, 1973–2 C.B. 145 and Rev. Rul.
80–139, 1980–1 C.B. 88.
4 As discussed below (under the heading
Controlled Group Rules For Tax-Exempt Entities),
other guidance that may be reissued includes the
controlled group safe harbor rules in paragraph
(V)(B)(2)(b) of Notice 89–23.

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under a defined benefit plan under
section 402(b). See also the request for
comments on this guidance under the
heading Comments and Public Hearing.
The proposed regulations also include
controlled group rules under section
414(c) for entities that are tax-exempt
under section 501(a).
Exclusion for Contributions to Section
403(b) Contracts
Section 403(b) provides an exclusion
from gross income for certain
contributions made by certain types of
employers for their employees to
specific types of funding arrangements.
There are three categories of funding
arrangements to which section 403(b)
applies: (1) Annuity contracts (as
defined in section 401(g)) issued by an
insurance company; (2) custodial
accounts that are invested solely in
mutual funds; and (3) retirement income
accounts which are only permitted for
church employees. The exclusion
applies only if certain general
requirements are satisfied. For purposes
of most of these requirements, section
403(b)(5) provides that all section 403(b)
contracts purchased for an individual by
an employer are treated as purchased
under a single contract. Other
aggregation rules apply for certain
specific purposes, including the
aggregation rules under section 402(g)
for purposes of satisfying the limitations
on elective deferrals (which apply both
on an individual basis and to all
contributions made by an employer) and
the controlled group rules of section
414(b) and (c) for purposes of the
general nondiscrimination rules and the
contribution limitations of section 415
(which generally apply on an employerby-employer basis).
Section 403(b) Requirements
Section 403(b)(1)(C) requires that the
contract be nonforfeitable except for the
failure to pay future premiums. The
proposed regulations define
nonforfeitability based on the
regulations under section 411(a) and
clarify that if an annuity contract issued
by an insurance company is purchased
that would satisfy section 403(b) except
for the failure to satisfy this
nonforfeitability requirement, then the
contract is treated as a contract to which
section 403(c) applies. Section 403(c)
provides that the value of a nonqualified
contract is included in gross income
under the rules of section 83, which
generally does not occur before the
employee’s rights in the contract
become substantially vested. Under the
proposed regulations, on the date on
which the employee’s interest in that
contract becomes nonforfeitable, the

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contract may be treated as a section
403(b) contract if the contract has at all
prior times satisfied the requirements of
section 403(b) other than the
nonforfeitability requirement. Solely for
this purpose, if a participant’s interest
in a contract is only partially
nonforfeitable in a year, then the portion
that is nonforfeitable and the portion
that fails to be nonforfeitable are
bifurcated.
Section 403(b)(12) requires a section
403(b) contract to make elective
deferrals available to all employees (the
universal availability rule) and requires
other contributions to satisfy the general
nondiscrimination requirements
applicable to qualified plans. These
rules are discussed further below under
the heading Section 403(b)
Nondiscrimination and Universal
Availability Rules.
Section 403(b)(1)(E) requires a section
403(b) contract to satisfy the
requirements of section 401(a)(30)
relating to limitations on elective
deferrals under section 402(g)(1). The
proposed regulations provide that a
contract only satisfies this requirement
if the contract requires all elective
deferrals for an employee to satisfy
section 402(g)(1), including elective
deferrals for the employee under the
contract and any other elective deferrals
under the plan under which the contract
is purchased and under all other plans,
contracts, or arrangements of the
employer that are subject to the limits
of section 402(g). This rule is the same
as the rule for section 401(k)
arrangements.
A section 403(b) contract is also
required to provide that it will satisfy
the minimum required distribution
requirements of section 401(a)(9), the
incidental benefit requirements of
section 401(a), and the rollover
distribution rules of section 402(c).
The proposed regulations address the
requirement that annual additions to the
contract not exceed the applicable
limitations of section 415(c) (treating
contributions as annual additions). In
accordance with the last sentence of
section 415(a)(2), if an excess annual
addition is made to a contract that
otherwise satisfies the requirements of
section 403(b), then the portion of the
contract that includes the excess will
fail to be a section 403(b) contract (and
instead will be a contract to which
section 403(c) applies) and the
remaining portion of the contract that
includes the contribution that is not in
excess of the section 415 limitations is
a section 403(b) contract. This rule
under which only the excess annual
addition is subject to section 403(c) does
not apply unless, for the year of the

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excess and each year thereafter, the
issuer of the contract maintains separate
accounts for the portion that includes
the excess and for the section 403(b)
portion, i.e., the portion that includes
the amount not in excess of the section
415 limitations.
The proposed regulations require that
these conditions for the exclusion be
satisfied both in form and operation in
the section 403(b) contract. Because
several of these requirements are based
on plan documents—in particular the
requirements that elective deferrals
satisfy a universal availability rule and
that other contributions satisfy the
nondiscrimination rules applicable to
qualified plans—the proposed
regulations require that the contract be
maintained pursuant to a plan. For this
purpose, it is intended that the plan
would include all of the material
provisions regarding eligibility, benefits,
applicable limitations, the contracts
available under the plan, and the time
and form under which benefit
distributions would be made. This rule
does not require that there be a single
plan document. For example, this
requirement would be satisfied by
complying with the plan document
rules applicable to qualified plans.
Interaction Between Title I of ERISA and
Section 403(b) of the Code
The Treasury Department and the IRS
have consulted with the Department of
Labor concerning the interaction
between Title I of the Employee
Retirement Income Security Act of 1974
(ERISA) and section 403(b) of the Code.
The Department of Labor has advised
the Treasury Department and the IRS
that Title I of ERISA generally applies
to ‘‘any plan, fund, or program * * *
established or maintained by an
employer or by an employee
organization, or by both, to the extent
that * * * such plan, fund, or program
* * * provides retirement income to
employees, or * * * results in a deferral
of income by employees for periods
extending to the termination of covered
employment or beyond.’’ ERISA, section
3(2)(A). However, governmental plans
and church plans are generally excluded
from coverage under Title I of ERISA.
See ERISA, section 4(b)(1) and (2).
Therefore, section 403(b) contracts
purchased or provided under a program
that is either a ‘‘governmental plan’’
under section 3(32) of ERISA or a
‘‘church plan’’ under section 3(33) of
ERISA are not generally covered under
Title I. However, section 403(b) of the
Code is also available with respect to
contracts purchased or provided by
employers for employees of a section
501(c)(3) organization, and many

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programs for the purchase of section
403(b) contracts offered by such
employers are covered under Title I of
ERISA as part of an ‘‘employee pension
benefit plan’’ within the meaning of
section 3(2)(A) of ERISA. The
Department of Labor has promulgated a
regulation, 29 CFR 2510.3–2(f),
describing circumstances under which
an employer’s program for the purchase
of section 403(b) contracts for its
employees, which is not otherwise
excluded from coverage under Title I,
will not be considered to constitute the
establishment or maintenance of an
‘‘employee pension benefit plan’’ under
Title I of ERISA.
These proposed regulations are
generally limited to the requirements
imposed under section 403(b). In this
regard, the proposed regulations require
that a section 403(b) program be
maintained pursuant to a plan, which
for this purpose is defined as a written
defined contribution plan which, in
both form and operation, satisfies the
regulatory requirements of section
403(b) and contains all the material
terms and conditions for benefits under
the plan. The Department of Labor has
advised the Treasury Department and
the IRS that, although it does not appear
that the proposed regulations would
mandate the establishment or
maintenance of an employee pension
benefit plan in order to satisfy its
requirements, it leaves open the
possibility that an employer may
undertake responsibilities that would
constitute establishing and maintaining
an ERISA-covered plan. The Department
of Labor has further advised the
Treasury Department and the IRS that
whether the manner in which any
particular employer decides to satisfy
particular responsibilities under these
proposed regulations will cause the
employer to be considered to have
established or to maintain a plan that is
covered under Title I of ERISA must be
analyzed on a case-by-case basis,
applying the criteria set forth in 29 CFR
2510.3–2(f), including the employer’s
involvement as contemplated by the
plan documents and in operation.
To the extent that these proposed
regulations may raise questions for
employers concerning the scope and
application of the regulation at 29 CFR
2510.3–2(f), the Treasury Department
and the IRS are requesting comments.
See below under the heading Comments
and Public Hearing.
All employee pension benefit plans
covered under Title I of ERISA,
including plans that involve the
purchase of section 403(b) contracts,
must satisfy a number of requirements,
including requirements relating to

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reporting and disclosure, eligibility,
vesting, benefit accrual, advance notice
of contribution reductions, qualified
joint and survivor annuities, minimum
funding, fiduciary standards, fidelity
bonds, and claims procedures.
Authority to interpret many of the
requirements in parts 2 and 3 of Title I
of ERISA (specifically those relating to
eligibility, vesting, benefit accrual,
minimum funding, and qualified joint
and survivor annuities) has been
transferred to the Treasury Department
and the IRS. See Reorganization Plan
No. 4 of 1978, 43 FR 47713, October 17,
1978. As a result, those section 403(b)
contracts of a section 501(c)(3)
organization that are part of an
employee pension benefit plan are
subject to requirements parallel to those
imposed under sections 401(a)(11)
through 401(a)(15), 410, 411, 412, and
417 of the Internal Revenue Code and
the regulations promulgated thereunder,
since regulations and other guidance
issued under those Code sections are
applicable for purposes of the parallel
requirements in ERISA. Further,
although specific references are made to
Title I in these proposed regulations,
this does not imply that other Title I
issues are not applicable.
Comparison With Section 401(k)
Elective Deferrals
Section 1450(a) of SBJPA provides
that the rules applicable to cash or
deferred elections under section 401(k)
are to apply under section 403(b) for
purposes of determining the frequency
with which an employee may enter into
a salary reduction agreement, the salary
to which such an agreement may apply,
and the ability to revoke such an
agreement. Based in part on this
provision, and taking into account the
guidance that has been issued since
SBJPA,5 the proposed regulations would
clarify the extent to which section
403(b) elective deferrals are like elective
deferrals under proposed and final rules
under section 401(k). Specifically, the
rules are fundamentally similar with
respect to the frequency with which a
deferral election can be made, changed,
or revoked, including automatic
enrollment (plan provisions under
which elective deferrals are
automatically made for employees
unless they elect otherwise), the ability
for a deferral election that has been
made in one year to be carried forward
to subsequent periods until modified,
the rule under which irrevocable
elections are not treated as elective
5 See, for example, Rev. Rul. 2000–35, 2000–2
C.B. 138, relating to automatic enrollment in section
403(b) plans.

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deferrals, and the requirement that
employees have an annual effective
opportunity to make, revoke, or modify
a deferral election. The rules are also
fundamentally similar with respect to
the compensation with respect to which
the election can be made, e.g., allowing
a deferral election to be made for
compensation up to the day before the
compensation is currently available.
Likewise, the proposed regulations
explicitly provide that, for purposes of
sections 402(g) and 403(b), an elective
deferral with respect to a section 403(b)
contract is limited to contributions
made pursuant to a cash or deferred
election, as defined in regulations under
section 401(k).
These proposed regulations also
include a rule comparable to the anticonditioning rule at section 401(k)(4).
Finally, the proposed regulations
include rules similar to those for section
401(k) plans regarding plan limitations
to comply with section 401(a)(30) and to
pay out section 403(b) elective deferrals
in excess of the related section 402(g)
limitation.
As a result, under the proposed
regulations, the three major differences
between the rules applicable to section
403(b) elective deferrals and the rules
applicable to elective deferrals under
section 401(k) are:
• Section 403(b) is limited to certain
specific employers and employees (i.e.,
employees of a State public school,
employees of a section 501(c)(3)
organization, and certain ministers),
whereas section 401(k) is available to all
employers, except a State or local
government or any political subdivision,
agency, or instrumentality thereof.
• Unlike section 401(k), contributions
under section 403(b) can only be made
to certain funding arrangements, i.e., an
insurance annuity contract, custodial
account that is limited to mutual fund
shares, or church retirement income
account, and not to a trust or custodial
account that fails to satisfy the custodial
account rules at section 403(b)(7) or the
retirement income account rules at
section 403(b)(9) for churches.
• A universal availability rule applies
to section 403(b) elective deferrals,
whereas an average deferral percentage
rule (the ADP test) and a minimum
coverage rule (section 410(b)) apply
with respect to elective deferrals under
section 401(k).6
6 Other differences between the rules applicable
to elective deferrals under section 403(b) and
elective deferrals under section 401(k) include the
following: the consequences of failing to satisfy the
rules of section 403(b) (described below under the
heading Failure to satisfy section 403(b)); the
definition of compensation (including the five-year
rule) at section 403(b)(3); the special section 403(b)

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Failure To Satisfy Section 403(b)
The regulations clarify that if the
requirements of section 403(b) fail to be
satisfied with respect to an employer
contribution, then the contribution is
subject either to the rules under section
403(c) (relating to nonqualified
annuities) if the contribution is for an
annuity contract issued by an insurance
company, or is subject to the rules
under section 61, 83, or 402(b) if the
contribution is to a custodial account or
retirement income account that fails to
satisfy the requirements of section
403(b).
Issues have been raised about the
application of section 403(b) to taxexempt entities that have State or local
government features. These proposed
regulations do not attempt to address
when an entity is a State (treating a local
government or other subdivision as a
State) and when it is a section 501(c)(3)
organization that is not a State.7 Thus,
for example, these regulations do not
provide guidance on the conditions
under which a tax-exempt charter
school is, or is not, a State entity.
Based on the wording of section
401(k)(4)(B)(i) and (ii), an entity that is
both a section 501(c)(3) organization
and an instrumentality of a State cannot
have a section 401(k) plan. Under
sections 457(b)(6) and 457(g), an entity
that is both an instrumentality of a State
and a section 501(c)(3) organization can
have an eligible plan under section
457(b) only if it is funded. However,
under section 403(b)(1)(A)(i) and (ii), an
entity that is both an instrumentality of
a State and a section 501(c)(3)
organization could cover any of its
employees, regardless of whether they
are performing services for a public
school.
Maximum Contribution Limitations
The exclusion provided under section
403(b) applies only to the extent that all
amounts contributed by the employer
for the purchase of an annuity contract
for the participant do not exceed the
applicable limit under section 415 and,
with respect to section 403(b) elective
deferrals, only if the contract is
purchased under a plan that includes
the limits under section 402(g),
including aggregation under all plans of
catch-up elective deferral at section 402(g)(7); the
section 415 aggregation rules; and the general
inapplicability of stock ownership for State entities
(and some nonprofit entities), including the related
inapplicability of employee stock ownership plans
and the use of stock ownership to determine
common control. An additional difference is
discussed below, under the heading Severance
From Employment.
7 Similarly, the proposed regulations do not
address the conditions under which a plan is a
governmental plan under section 414(d).

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the employer. The proposed regulations
require a section 403(b) contract to
include this limit on section 403(b)
elective deferrals, as imposed by section
402(g).
Catch-Up Contributions
A section 403(b) contract may provide
for additional catch-up contributions for
a participant who is age 50 by the end
of the year, provided that those age 50
catch-up contributions do not exceed
the catch-up limit under section 414(v)
for the taxable year (which is $3,000 for
2004). In addition, an employee of a
qualified organization who has at least
15 years of service (disregarding any
period during which an individual is
not an employee of the eligible
employer) is entitled to a special section
403(b) catch-up limit. Under the special
section 403(b) catch-up limit, the
section 402(g) limit is increased by the
lowest of the following three amounts:
(i) $3,000; (ii) the excess of $15,000 over
the total special section 403(b) catch-up
elective deferrals made for the qualified
employee by the qualified organization
for prior taxable years; or (iii) the excess
of (A) $5,000 multiplied by the number
of years of service of the employee with
the qualified organization, over (B) the
total elective deferrals made for the
qualified employee by the qualified
organization for prior taxable years. For
this purpose, a qualified organization is
an eligible employer that is a school,
hospital, health and welfare service
agency (including a home health service
agency), or a church-related
organization. In the case of a churchrelated organization, all entities that are
in such a church-related organization
are treated as a single qualified
organization, so that years of service and
any section 403(b) catch-up elective
deferrals previously made for a qualified
employee for any such church are taken
into account for purposes of
determining the amount of section
403(b) catch-up elective deferrals to
which an employee is entitled under
any section 403(b) plan maintained by
another entity in the same churchrelated organization. A health and
welfare service agency is defined as
either an organization whose primary
activity is to provide medical care as
defined in section 213(d)(1) (such as a
hospice), or a section 501(c)(3)
organization whose primary activity is
the prevention of cruelty to individuals
or animals, or which provides
substantial personal services to the
needy as part of its primary activity
(such as a section 501(c)(3) organization
that provides meals to needy
individuals).

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The proposed regulations provide that
any catch-up contribution for an
employee who is eligible for both an age
50 catch-up and the special section
403(b) catch-up is treated first as a
special section 403(b) catch-up to the
extent a special section 403(b) catch-up
is permitted, and then as an amount
contributed as an age 50 catch-up (to the
extent the age 50 catch-up amount
exceeds the maximum special section
403(b) catch-up).
Any contribution made for a
participant to a section 403(b) contract
for a taxable year that exceeds either the
section 415 maximum annual
contribution limit or the section 402(g)
elective deferral limit constitutes an
excess contribution that is included in
gross income for that taxable year (or, if
later, the taxable year in which the
contract becomes nonforfeitable). The
proposed regulations provide that a
section 403(b) contract or the section
403(b) plan may provide that any excess
deferral as a result of a failure to comply
with the section 402(g) elective deferral
limit for the taxable year with respect to
any section 403(b) elective deferral
made for a participant by the employer
will be distributed to the participant,
with allocable net income, no later than
April 15 or otherwise in accordance
with section 402(g).
Determination of Years of Service Under
Section 403(b)
For purposes of determining a
participant’s includible compensation
and years of service—used both for the
special section 403(b) catch-up
contributions and for employer
contributions for former employees—an
employee’s number of years of service
include each full year during which the
individual is a full-time employee of the
eligible employer plus a fraction of a
year for each part of a year during which
the individual is a full-time or part-time
employee of the eligible employer. A
year of service is based on the
employer’s annual work period, not the
employee’s taxable year. Thus, in
determining whether a university
professor is employed full-time, the
annual work period is the school’s
academic year. In determining whether
an individual is employed full-time, the
amount of work actually performed is
compared with the amount of work that
is normally required of individuals
performing similar services from which
substantially all of their annual
compensation is derived. An individual
is treated as performing a fraction of a
year of service for each annual work
period during which he or she is a fulltime employee for part of the annual
work period or for each annual work

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67079

period during which he or she is a parttime employee either for the entire
annual work period or for a part of the
annual work period.
In measuring the amount of work of
an individual performing particular
services, the work performed is
determined based on the individual’s
hours of service (as defined under
section 410(a)(3)(C)), except that a plan
may use a different measure of work if
appropriate under the facts and
circumstances. For example, a plan may
provide for a university professor’s work
to be measured by the number of
courses taught during an annual work
period if that individual’s work
assignment is generally based on a
specified number of courses to be
taught.
In determining years of service, any
period during which an individual is
not an employee of the eligible
employer is disregarded, except that, for
a section 403(b) contract of an eligible
employer that is a church-related
organization, any period during which
an individual is an employee of that
eligible employer and any other eligible
employer that is within the same
church-related organization with that
eligible employer is taken into account
on an aggregated basis. In the case of a
part-time employee or a full-time
employee who is employed for only part
of the year, the employee’s most recent
periods of service are aggregated to
determine his or her most recent oneyear period of service, as follows: the
employee’s service during the annual
work period for which the last year of
service’s includible compensation is
being determined is taken into account
first; then the employee’s service during
the next preceding annual work period
based on whole months is taken into
account; and so forth, until the
employee’s service equals, in the
aggregate, one year of service.
Special Rule for Former Employees
Under section 403(b)(3), a former
employee is deemed to have monthly
includible compensation for the period
through the end of the taxable year of
the employee in which he or she ceases
to be an employee and through the end
of each of the next five taxable years of
the employee. The amount of the
monthly includible compensation is
equal to 1⁄12 of the former employee’s
includible compensation during the
former employee’s most recent year of
service. Accordingly, a plan may
provide that nonelective employer
contributions are continued for up to
five years for a former employee, up to
the lesser of the dollar amount in
section 415(c)(1)(A) or the former

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employee’s annual includible
compensation based on the former
employee’s compensation during his or
her most recent year of service.

applies to a governmental plan, within
the meaning of section 414(d), is the
limitation on compensation (section
401(a)(17)).

Other Contributions for Former
Employees

Universal Availability
Under section 403(b)(12)(A)(ii), a
universal availability requirement
applies under which all employees of
the eligible employer must be permitted
to elect to have section 403(b) elective
deferrals contributed on their behalf if
any employee of the eligible employer
may elect to have the organization make
section 403(b) elective deferrals. Under
the proposed regulations, the universal
availability requirement is not satisfied
unless the contributions are made
pursuant to a plan and the plan permits
elective deferrals that satisfy the
universal availability requirement. The
proposed regulations generally provide
that the universal availability
requirement applies separately to each
common law entity, i.e., to each section
501(c)(3) organization, or, in the case of
a section 403(b) plan that covers the
employees of more than one State
entity, to each entity that is not part of
a common payroll. The proposed
regulations allow an employer that
historically has treated one or more of
its various geographically distinct units
as separate for employee benefit
purposes to treat each unit as a separate
organization if the unit is operated
independently on a day-to-day basis.
The proposed regulations include the
statutory categories that are exceptions
to the universal availability rule, and
provide that, if any employee listed in
any excludable category has the right to
have section 403(b) elective deferrals
made on his or her behalf, then no
employees in that category may be
excluded. The categories generally are:
employees who are eligible to
participate in an eligible governmental
plan under section 457(b) which
permits contributions or deferrals at the
election of the employee or a plan of the
employer offering a qualified cash or
deferred election under section 401(k);
employees who are non-resident aliens;
employees who are students performing
services described in section
3121(b)(10); and employees who
normally work fewer than 20 hours per
week. Additionally, Notice 89–23
included transition rules for certain
other exclusions that are not in the
statute: employees who make a one-time
election to participate in a governmental
plan instead of a section 403(b) plan;
employees covered by a collective
bargaining agreement; visiting
professors for up to one year under
certain circumstances; and employees
affiliated with a religious order who

The proposed regulations do not
address the extent, if any, to which the
exclusion from gross income provided
by section 403(b) applies to
contributions made for former
employees (e.g., whether a contribution
may be made for a former employee if
the contribution is with respect to
compensation that would otherwise be
paid for a payroll period that begins
after severance from employment) other
than as provided under the five-year
rule at section 403(b)(3), described
above under the heading Special Rule
for Former Employees. The Treasury
Department and the IRS expect to issue
separate guidance on this issue,
potentially addressing this question
with respect to not only section 403(b),
but also sections 401(k), 457(b) (for
eligible governmental plans), and
415(c).
Section 403(b) Nondiscrimination and
Universal Availability Rules
Nondiscrimination
Section 403(b)(12)(A)(i) requires that
employer contributions and employee
after-tax contributions made under a
section 403(b) contract satisfy a
specified series of requirements (the
nondiscrimination requirements) in the
same manner as a qualified plan under
section 401(a). These proposed
regulations do not adopt the good faith
reasonable standard of Notice 89–23 for
purposes of satisfying the
nondiscrimination requirements of
section 403(b)(12)(A)(i). These
nondiscrimination requirements include
rules relating to nondiscrimination in
contributions, benefits, and coverage
(sections 401(a)(4) and 410(b)), a
limitation on the amount of
compensation that can be taken into
account (section 401(a)(17)), and the
average contribution percentage rules of
section 401(m) (relating to matching and
after-tax contributions). The
nondiscrimination requirements are
generally tested using compensation as
defined in section 414(s) and are
applied on an aggregated basis taking
into account all plans of the employer.
See the discussion below under the
heading Controlled Group Rules For
Tax-Exempt Entities.
The nondiscrimination requirements
do not apply to section 403(b) elective
deferrals. In addition, the only
nondiscrimination requirement that

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have taken a vow of poverty. The
proposed regulations do not adopt these
transition rules. See the reference to
these exclusions below under the
heading
Comments and Public Hearing
The nondiscrimination and the
universal availability requirements do
not apply to a section 403(b) contract
purchased by a church, which is
specially defined for this purpose, and
generally does not include a university,
hospital, or nursing home.
The nondiscrimination and universal
availability requirements are in addition
to other applicable legal requirements.
Specifically, these requirements do not
reflect the requirements of Title I of
ERISA that may apply with respect to a
section 403(b) plan, such as the ERISA
vesting requirements. Another example
is that, while employees who normally
work fewer than 20 hours per week may
be excluded under the universal
availability rule, employers who
maintain plans that are subject to Title
I of ERISA should be aware that Title I
of ERISA includes limitations on the
conditions under which employees can
be excluded from a plan on account of
not working full time and that these
limitations would generally not permit
an exclusion for employees who
normally work fewer than 20 hours per
week. See section 202(a)(1) of ERISA
and regulations under section 410(a) of
the Code (which interpret section 202 of
ERISA).
Timing of Distributions and Benefits
The proposed regulations reflect the
statutory rules regarding when
distributions can be made from a section
403(b) contract. Thus, amounts held in
a custodial contract attributable to
employer contributions (that are not
section 403(b) elective deferrals) may
not be paid to a participant before the
participant has a severance from
employment, becomes disabled (within
the meaning of section 72(m)(7)), or
attains age 591⁄2. This rule also applies
to amounts transferred out of a custodial
account (i.e., to an annuity contract or
retirement income account), including
earnings thereon. In addition,
distributions of amounts attributable to
section 403(b) elective deferrals may not
be paid to a participant earlier than
when the participant has a severance
from employment, has a hardship,
becomes disabled (within the meaning
of section 72(m)(7)), or attains age 591⁄2.
Hardship is generally defined under
regulations issued under section 401(k).
The proposed regulations would
reflect the requirements of section 402(f)
relating to the written explanation

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules
requirements for distributions that
qualify as eligible rollover distributions,
including conforming the timing rule to
the rule for qualified plans.
Where the distribution restrictions do
not apply, a section 403(b) contract is
permitted to distribute retirement
benefits to the participant after
severance from employment or upon the
prior occurrence of an event, such as
after a fixed number of years, the
attainment of a stated age, or disability.
The proposed regulations include a
number of exceptions to the timing
restrictions, e.g., the rule for elective
deferrals does not apply to distributions
of section 403(b) elective deferrals (not
including earnings thereon) that were
contributed before January 1, 1989.
Severance From Employment
The proposed regulations define
severance from employment in a
manner that is generally the same as the
proposed regulations under section
401(k),8 but provide that a severance
from employment occurs on any date on
which the employee ceases to be
employed by an eligible employer that
maintains the section 403(b) plan. Thus,
a severance from employment would
occur when an employee ceases to be
employed by an eligible employer even
though the employee may continue to
be employed by an entity that is part of
the same controlled group but that is not
an eligible employer, or on any date on
which the employee works in a capacity
that is not employment with an eligible
employer. Examples of the situations
that constitute a severance from
employment include: an employee
transferring from a section 501(c)(3)
organization to a for-profit subsidiary of
the section 501(c)(3) organization; an
employee ceasing to work for a public
school, but continuing to be employed
by the same State; and an individual
employed as a minister for an entity that
is neither a State nor a section 501(c)(3)
organization ceasing to perform services
as a minister, but continuing to be
employed by the same entity.
Section 401(a)(9)
The proposed regulations include
rules similar to those in the existing
regulations relating to the minimum
distribution requirements of section
401(a)(9), but with some minor changes
(for example, omitting the special rules
for 5-percent owners). Thus, section
403(b) contracts must satisfy the
incidental benefit rules. Existing
revenue rulings provide guidance with
respect to the application of the
8 See proposed § 1.401(k)–1(d)(2), REG–108639–
99, 68 FR 42476 (July 17, 2003).

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incidental benefit requirements to
permissible nonretirement benefits such
as life, accident, or health benefits.9
Loans
The proposed regulations include
rules reflecting that loans can be made
to participants from a section 403(b)
contract.
QDROs
The proposed regulations include
limited rules relating to qualified
domestic relations orders (QDROs)
under section 414(p). Section 414(p)(9)
provides that the QDRO rules only
apply to plans that are subject to the
anti-alienation provisions of section
401(a)(13), except that section 414(p)(9)
also provides that, except to the extent
set forth in regulations—there are
currently no regulations under section
414(p)—the section 414(p) QDRO rules
apply to a section 403(b) contract. These
proposed section 403(b) regulations
clarify that the section 414(p) QDRO
rules apply to section 403(b) contracts
for purposes of applying section 403(b).
Taxation of Distributions and Benefits
From a Section 403(b) Contract
The proposed regulations include a
number of rules regarding the taxation
of distributions and benefits from
section 403(b) contracts, including the
statutory provision that only amounts
actually distributed from a section
403(b) contract are generally includible
in the gross income of the recipient for
the year in which distributed under
section 72, relating to annuities. The
regulations also reflect the rule that any
payment that constitutes an eligible
rollover distribution is not taxed in the
year distributed to the extent the
payment is directly rolled over or
transferred to an eligible retirement
plan. The payor must withhold 20
percent Federal income tax, however, if
an eligible rollover distribution is not
rolled over in a direct rollover. Another
provision requires the payor to give
proper written notice to the section
403(b) participant or beneficiary
concerning the eligible rollover
distribution provision. Notice 2002–3
(2002–2 I.R.B. 289), provides a sample
of the safe-harbor notice that the payor
may furnish to satisfy this requirement.
9 See, for example, Rev. Rul. 61–121, 1961–2 C.B.
65; Rev. Rul. 68–304, 1968–1 C.B. 179; Rev. Rul.
72–240, 1972–1 C.B. 108; Rev. Rul. 72–241, 1972–
1 C.B. Rev. Rul. 73–239, 1973–1 C.B. 201; and Rev.
Rul. 74– 115, 1974–1 C.B. 100. (see § 601(d)(2)(ii)(b)
of this chapter).

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67081

Funding of Section 403(b) Arrangements
Annuity Contracts
As described above, section 403(b)
only applies to contributions made to
certain funding arrangements, namely:
amounts held in an annuity contract, in
a custodial account that is treated as an
annuity contract under section
403(b)(7), or in a church retirement
income account that is treated as an
annuity contract under section
403(b)(9). The proposed regulations
require that contributions to a section
403(b) plan be transferred to the
insurance company issuing the annuity
contract (or the entity holding assets of
any custodial or retirement income
account that is treated as an annuity
contract) within a period that is not
longer than is reasonable for the proper
administration of the plan, such as
transferring elective deferrals within 15
business days following the month in
which these amounts would otherwise
have been paid to the participant.
The proposed regulations provide
that, except where a custodial or
retirement income account is treated as
an annuity contract, an annuity contract
means a contract that is issued by an
insurance company qualified to issue
annuities in a State and that includes
payment in the form of an annuity, but
does not include a contract that is a life
insurance contract, as defined in section
7702, an endowment contract, a health
or accident insurance contract, or a
property, casualty, or liability insurance
contract. The regulations include a
special transition rule relating to life
insurance contracts issued before the
effective date.
Rev. Rul. 67–361 (1967–2 C.B. 153),
and Rev. Rul. 67–387 (1967–2 C.B. 153),
provided for certain State plans to be
treated as qualifying as annuities under
section 403(b). Rev. Rul. 82–102 (1982–
1 C.B. 62), revoked this interpretation
(in connection with the 1974 enactment
of section 403(b)(7) which allowed
custodial accounts), but provides
section 7805(b) relief for arrangements
established in reliance on these rulings,
i.e., for arrangements established on or
before May 17, 1982. The proposed
regulations contemplate that the section
7805(b) relief provided by these rulings
would be continued. This relief would
be limited to State section 403(b) plans
established on or before May 17, 1982
satisfying either of the following
requirements: (i) benefits under the
contract are provided from a separately
funded retirement reserve that is subject
to supervision of the State insurance
department or (ii) benefits under the
contract are provided from a fund that
is separate from the fund used to

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provide statutory benefits payable under
a State retirement system and that is
part of a State teachers retirement
system to purchase benefits that are
unrelated to the basic benefits provided
under the retirement system, and the
death benefit provided under the
contract cannot at any time exceed the
larger of the reserve or the contribution
made for the employee.
Custodial Accounts
The proposed regulations define a
custodial account as a plan, or a
separate account under a plan, in which
an amount attributable to section 403(b)
contributions (or amounts rolled over to
a section 403(b) contract) is held by a
bank or a person who satisfies the
conditions in section 401(f)(2), if
amounts held in the account are
invested in stock of a regulated
investment company (as defined in
section 851(a) relating to mutual funds),
the special restrictions on distributions
with respect to a custodial account are
satisfied, the assets held in the account
cannot be used for, or diverted to,
purposes other than for the exclusive
benefit of plan participants or their
beneficiaries, and the account is not part
of a retirement income account, as
described below. This requirement
limiting investments to mutual funds is
not satisfied if the account includes any
assets other than stock of a regulated
investment company.
Special Rules for Church Plans
Retirement Income Accounts
The proposed regulations include a
number of special rules for church
plans. Under section 403(b)(9), a
retirement income account for
employees of a church-related
organization is treated as an annuity
contract for purposes of section 403(b)
and these regulations. Under the
proposed regulations, the rules for a
retirement income account are based
largely on the legislative history to
TEFRA. The proposed regulations
define a retirement income account as a
defined contribution program
established or maintained by a churchrelated organization under which (i)
there is separate accounting for the
retirement income account’s interest in
the underlying assets (i.e., it must be
possible at all times to determine the
retirement income account’s interest in
the underlying assets and distinguish
that interest from any interest that is not
part of the retirement income account),
(ii) investment performance is based on
gains and losses on those assets, and
(iii) the assets held in the account
cannot be used for, or diverted to,

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purposes other than for the exclusive
benefit of plan participants or their
beneficiaries. For this purpose, assets
are treated as diverted to the employer
if the employer borrows assets from the
account. A retirement income account
must be maintained pursuant to a
program which is a plan and the plan
document must state (or otherwise
evidence in a similarly clear manner)
the intent to constitute a retirement
income account.
If any asset of a retirement income
account is owned or used by a
participant or beneficiary, then that
ownership or use is treated as a
distribution to that participant or
beneficiary. The proposed regulations
provide that a retirement income
account that is treated as an annuity
contract is not a custodial account (even
if it is invested in stock of a regulated
investment company).
A life annuity can generally only be
provided from an individual account by
the purchase of an insurance annuity
contract. However, in light of the special
rules applicable to church retirement
income accounts, the proposed
regulations permit a life annuity to be
paid from such an account if certain
conditions are satisfied. The conditions
are that the amount of the distribution
form have an actuarial present value, at
the annuity starting date, that is equal
to the participant’s or beneficiary’s
accumulated benefit, based on
reasonable actuarial assumptions,
including assumptions regarding
interest and mortality, and that the plan
sponsor guarantee benefits in the event
that a payment is due that exceeds the
participant’s or beneficiary’s
accumulated benefit.
Commingling Assets
Under these proposed regulations,
both custodial accounts and retirement
income accounts would be subject to an
exclusive benefit requirement similar to
the exclusive benefit requirement
applicable to qualified plans. Section
403(b)(7)(B) provides for a custodial
account to be treated as a tax exempt.
When these regulations are issued as
final regulations, to the extent permitted
by the Commissioner in future
guidance, assets held under a custodial
account or a retirement income account
may be pooled with trust assets held
under qualified plans.
Controlled Group Rules for Tax-Exempt
Entities
The proposed regulations include
controlled group rules under section
414(c) for entities that are tax-exempt
under section 501(a). Under these rules,
the employer for a plan maintained by

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a section 501(c)(3) organization (or any
other tax-exempt organization under
section 501(a)) includes not only the
organization whose employees
participate in the plan, but also any
other exempt organization that is under
common control with such organization,
based on 80 percent of the directors or
trustees being either representatives of
or directly or indirectly controlled by an
exempt organization. The proposed
regulations include an anti-abuse rule
and would also allow tax exempt
organizations to choose to be aggregated
if they maintain a single plan covering
one or more employees from each
organization and the organizations
regularly coordinate their day to day
exempt activities. For a section 501(c)(3)
organization that makes contributions to
a section 403(b) contract, these rules
would be generally relevant for
purposes of the nondiscrimination
requirements, as well as the section 415
contribution limitations, the special
section 403(b) catch-up contributions,
and the section 401(a)(9) minimum
distribution rules.
These controlled group rules for taxexempt entities generally do not apply
to certain church entities. Comments are
requested below under the heading
Comment and Public Hearing on
whether these rules should be extended
to such church entities.
The proposed regulations do not
include controlled group rules for
public schools. As noted above (under
the heading Overview), it is anticipated
that, when these regulations are issued
as final regulations, guidance may be
issued providing controlled group safe
harbors for public schools taking into
account the existing safe harbors in
Notice 89–23.
Miscellaneous Provisions
The proposed regulations include a
number of rules that address the
circumstances under which a section
403(b) plan may be terminated or assets
may be exchanged or transferred.
Plan Termination
The proposed regulations, if adopted
as final regulations, would not only
permit an employer to amend its section
403(b) plan to eliminate future
contributions for existing participants,
but would allow plan provisions that
permit plan termination with a resulting
distribution of accumulated benefits. In
general, the distribution of accumulated
benefits would be permitted only if the
employer (taking into account all
entities that are treated as the employer
under section 414 on the date of the
termination) does not make
contributions to another section 403(b)

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules
contract that is not part of the plan
(based generally on contributions made
to a section 403(b) contract during the
12 months before and after the date of
plan termination). In order for a section
403(b) plan to be considered terminated,
all accumulated benefits under the plan
must be distributed to all participants
and beneficiaries as soon as
administratively practicable after
termination of the plan. A distribution
includes delivery of a fully paid
individual insurance annuity contract.
Eligible rollover distributions would not
be subject to current income inclusion
if rolled over to an eligible retirement
plan.
The proposed regulations prohibit an
employer that ceases to be an eligible
employer from making any further
contributions to the section 403(b)
contract for subsequent periods. In this
event, the contract can be held under a
frozen plan or the plan could be
terminated in accordance with the rules
regarding plan termination.
Exchanges and Transfers
Under certain conditions, the
proposed regulations permit the
following exchanges or transfers:
• A section 403(b) contract is
permitted to be exchanged for another
section 403(b) contract held under the
same section 403(b) plan if the
following conditions are satisfied: (1)
The plan provides for the exchange, (2)
the participant or beneficiary has an
accumulated benefit immediately after
the exchange at least equal to the
accumulated benefit of that participant
or beneficiary immediately before the
exchange (taking into account the
accumulated benefit of that participant
or beneficiary under both section 403(b)
contracts immediately before the
exchange), and (3) the contract received
in the exchange provides that, to the
extent a contract that is exchanged is
subject to any section 403(b)
distribution restrictions, the contract
received in the exchange imposes
restrictions on distributions to the
participant or beneficiary that are not
less stringent than those imposed on the
contract being exchanged.
• A section 403(b) contract is
permitted to be transferred to another
section 403(b) plan (i.e., the section
403(b) contracts held thereunder,
including any assets held in a custodial
account or retirement income account
that are treated as section 403(b)
contracts) if the following conditions are
satisfied: (1) The participant or
beneficiary whose assets are being
transferred is an employee of the
employer providing the receiving plan,
(2) the transferor plan provides for

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transfers, (3) the receiving plan provides
for the receipt of transfers, (4) the
participant or beneficiary whose assets
are being transferred has an
accumulated benefit immediately after
the transfer at least equal to the
accumulated benefit with respect to that
participant or beneficiary immediately
before the transfer, and (5) the receiving
plan provides that, to the extent any
amount transferred is subject to any
section 403(b) distribution restrictions,
the receiving plan imposes restrictions
on distributions to the participant or
beneficiary whose assets are being
transferred that are not less stringent
than those imposed on the transferor
plan. In addition, if a plan-to-plan
transfer does not constitute a complete
transfer of the participant’s or
beneficiary’s interest in the section
403(b) plan, then the transferee plan
must treat the amount transferred as a
continuation of a pro rata portion of the
participant’s or beneficiary’s interest in
the transferor section 403(b) plan (e.g.,
a pro rata portion of the participant’s or
beneficiary’s interest in any after-tax
employee contributions).
• A section 403(b) plan may provide
for the transfer of its assets to a qualified
plan under section 401(a) to purchase
permissive service credit under a
defined benefit governmental plan or to
make a repayment to a defined benefit
governmental plan.
However, neither a qualified plan nor an
eligible plan under section 457 may
transfer assets to a section 403(b) plan,
and a section 403(b) plan may not
accept such a transfer. In addition, a
section 403(b) contract may not be
exchanged for an annuity contract that
is not a section 403(b) contract. Neither
a plan-to-plan transfer nor a contract
exchange permitted under the proposed
regulations is treated as a distribution
for purposes of the section 403(b)
distribution restrictions (so that such a
transfer or exchange may be made
before severance from employment or
another distribution event).
Additional plan-to-plan transfer rules
may apply in the event that a plan-toplan transfer is made to or from a
section 403(b) arrangement that is
subject to Title I of ERISA. See section
208 of ERISA and regulations under
section 414(l) of the Internal Revenue
Code (which are the regulations
interpreting section 208 of ERISA).
Defined Benefit Plans
These proposed regulations generally
require a section 403(b) plan to be a
defined contribution plan. This
requirement would not apply to certain
church plans. Specifically, section
251(e)(5) of TEFRA permits a church

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67083

arrangement in effect on September 3,
1982 (the date TEFRA was enacted) to
not be treated as failing to satisfy the
exclusion allowance limitations of
section 403(b)(2) merely because it is a
defined benefit plan and these
regulations would allow such a plan to
be continued. Any other defined benefit
plan in existence on the effective date
of these regulations that has taken the
position, based on a reasonable
interpretation of the statute, that it
satisfies section 403(b) would not be
subject to the requirement in these
regulations that the plan be a defined
contribution plan for pre-effective date
accruals, and such a plan might seek to
take the position that it satisfies the
section 401 qualified plan rules for
subsequent accruals (assuming it
satisfies those rules with respect to
those accruals).
Section 3121(a)(5)(D)
These proposed regulations also
include proposed amendments to
regulations under section 3121(a)(5)(D),
defining salary reduction agreement for
purposes of the Federal Insurance
Contributions Act (FICA). The text of
the proposed amendments is the same
as that of temporary regulations being
issued under section 3121(a)(5)(D) in
this same issue of the Federal Register.
The proposed regulations under section
3121(a)(5)(D) would be applicable on
November 16, 2004.
Proposed Effective Date
These regulations (other than the
proposed amendments to regulations
under section 3121(a)(5)(D)) are
proposed to be generally applicable for
taxable years beginning after December
31, 2005. However, there are certain
transition rules. Under one transition
rule, for a section 403(b) contract
maintained pursuant to a collective
bargaining agreement that is ratified and
in effect when the final regulations are
issued, the regulations would not apply
until the collective bargaining
agreement terminates (determined
without regard to any extension thereof
after the date of publication of final
regulations). Under another transition
rule, for a section 403(b) contract
maintained by a church-related
organization for which the authority to
amend the contract is held by a church
convention (within the meaning of
section 414(e)), the regulations would
not apply before the earlier of (i) January
1, 2007 or (ii) 60 days following the
earliest church convention that occurs
after the date of publication of final
regulations. These proposed regulations
cannot be relied upon until adopted in
final form.

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules

Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations.
It is hereby certified that the
collection of information in these
regulations will not have a significant
economic impact on a substantial
number of small entities. This
certification is based upon the
determination that respondents will
need to spend minimal time (an average
of 1⁄2 hour per year) giving the
statutorily required notice to departing
employees. Therefore, a Regulatory
Flexibility Analysis is not required
under the Regulatory Flexibility Act (5
U.S.C. chapter 6).
Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of
proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on their impact on small
business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written comments (a signed original and
eight (8) copies) or electronic comments
that are submitted timely to the IRS.
Comments are requested on all aspects
of the proposed regulations. In addition,
comments are specifically requested on
the clarity of the proposed regulations
and how they can be revised to be more
easily understood. All comments will be
available for public inspection and
copying.
Comments are also requested on the
following:
• As indicated above, the IRS expects
to obsolete a number of revenue rulings,
notices, and other guidance when these
regulations are issued in final form,
including guidance that is now outdated
as a result of changes in the law, and
guidance that will become outdated by
final regulations. Other previously
issued guidance is expected to continue
in effect. Comments are requested as to
whether any previously issued guidance
should be added or deleted from either
list, with respect to the scope of this
obsolescence, and also with respect to
whether there are any aspects that
should to be preserved in the guidance
that is expected to be obsolete.
• The Treasury Department and the
IRS are requesting comments describing

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the issues and suggesting methods of
clarifying the interaction between the
employer activities required under these
proposed regulations for an arrangement
to satisfy section 403(b) and the
employer conduct that will give rise to
the establishment and maintenance of
an employee pension benefit plan
covered under Title I of ERISA. The
Treasury Department and the IRS will
forward a copy of the comments on this
issue to the Department of Labor.
• These proposed regulations
authorize the Commissioner to issue
rules to determine the amount of
contributions for a participant in a
defined benefit plan under section
402(b) (relating to the tax treatment of
contributions to nonqualified plans).
Comments are requested on the
methodology and assumptions that
should be used for this purpose,
including specifically whether the
methodology and assumptions should
be the same as those currently in the
regulations under section 403(b),
whether revisions should be made to
reflect the possibility that a
nonqualified plan might include an
early retirement subsidy, and whether
the assumptions currently applicable
under the section 403(b) regulations
should be updated (for example, to
match the assumptions in Rev. Proc.
2004–37 (2004–2 I.R.B. 26), relating to
determining the extent to which certain
pension payments made to a
nonresident alien are not U.S. source
income).
• With respect to includible
compensation, comments are requested
on whether the Treasury Department
and IRS have the authority to permit
403(b) plans to use compensation, as
defined in section 415(c)(3) without
regard to section 415(c)(3)(E), in lieu of
the definition of includible
compensation under section 403(b)(3)
and, if so, whether this should be done.
• With respect to the universal
availability rule, comments are
requested on whether the requirement
should apply separately to employees
covered by a collective bargaining unit.
Comments are also requested on
whether plans that exclude any of the
following additional types of employees
(as has been permitted under Notice 89–
23) should be permitted to continue to
exclude these types of employees for at
least some period of time: employees
who make a one-time election to
participate in a governmental plan
described in section 414(d) instead of a
section 403(b) plan; professors who are
providing services on a temporary basis
to another public school for up to one
year and for whom section 403(b)
contributions are being made at a rate

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no greater than the rate each such
professor would receive under the
section 403(b) plan of the original
public school; employees who are
affiliated with a religious order and who
have taken a vow of poverty where the
religious order provides for the support
of such employees in their retirement;
and employees who are covered by a
collective bargaining agreement.
• The controlled group rules in these
proposed regulations for tax-exempt
entities generally do not apply to certain
church entities. Comments are
requested on whether these rules should
be extended to such church entities.
A public hearing has been scheduled
for February 15, 2005, at 10 a.m. in the
IRS Auditorium (7th Floor), Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington DC. All
visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the
immediate entrance area at the
Constitution Avenue entrance more
than 30 minutes before the hearing
starts. For information about having
your name placed on the building
access list to attend the hearing, see the
FOR FURTHER INFORMATION CONTACT

section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral
comments at the hearing must submit
electronic or written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic (a
signed original and eight (8) copies) by
January 25, 2005. A period of 10
minutes will be allotted to each person
for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for
receiving outlines has passed. Copies of
the agenda will be available free of
charge at the hearing.
Drafting Information
The principal authors of these
regulations are R. Lisa Mojiri-Azad and
John Tolleris, Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities), IRS.
However, other personnel from the IRS
and the Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad retirement,

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules

§ 1.414(c)–5 Also issued under 26 U.S.C.
414(b), (c), and (o). * * *

(b) Special rule. Notwithstanding
paragraph (a) of this section, for
purposes of section 402(g)(3)(C), an
elective deferral only includes a
contribution that is made pursuant to a
cash or deferred election (as defined at
§ 1.401(k)–1(a)(3)). Thus, for purposes of
section 402(g)(3)(C), an elective deferral
does not include a contribution that is
made pursuant to an employee’s onetime irrevocable election made on or
before the employee’s first becoming
eligible to participate under the
employer’s plan or a contribution made
as a condition of employment that
reduces the employee’s compensation.
(c) Effective date. This section is
applicable for taxable years beginning
after December 31, 2005.
Par. 4. Section 1.403(b)–0 is added to
read as follows:

Par. 2. Section 1.402(b)–1 is amended
by revising paragraphs (a)(2) and
(b)(2)(ii) to read as follows:

§ 1.403(b)–0 Taxability under an annuity
purchased by a section 501(c)(3)
organization or a public school.

Reporting and recordkeeping
requirements, Social security,
Unemployment compensation.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 31
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by removing the
entry for § 1.403(b)–3 and adding entries
in numerical order to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
§ 1.403(b)–6 Also issued under 26 U.S.C.
403(b)(10). * * *

§ 1.402(b)–1 Treatment of beneficiary of a
trust not exempt under section 501(a).

(a) * * *
(2) Determination of amount of
employer contributions. If, for an
employee, the actual amount of
employer contributions referred to in
paragraph (a)(1) of this section for any
taxable year of the employee is not
determinable or for any other reason is
not known, such amount shall be the
amount applicable under rules
prescribed by the Commissioner in
revenue rulings, notices, or other
guidance published in the Internal
Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter).
(b) * * *
(2) * * *
(ii) If a separate account in a trust for
the benefit of two or more employees is
not maintained for each employee, the
value of the employee’s interest in such
trust is determined in accordance with
rules prescribed by the Commissioner
under the authority in paragraph (a)(2)
of this section.
*
*
*
*
*
Par. 3. Section 1.402(g)(3)–1 is added
to read as follows:
§ 1.402(g)(3)–1 Employer contributions to
purchase a section 403(b) contract under a
salary reduction agreement.

(a) General rule. With respect to an
annuity contract under section 403(b),
except as provided in paragraph (b) of
this section, an elective deferral means
an employer contribution to purchase
an annuity contract under section 403(b)
under a salary reduction agreement
within the meaning of § 31.3121(a)(5)–
2(a) of this chapter.

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§ 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
benefits.

Timing of distributions and

§ 1. 403(b)–7
benefits.

Taxation of distributions and

§ 1.403(b)–8

Funding.

§ 1.403(b)–9

Special rules for church plans.

§ 1.403(b)–10

Miscellaneous provisions.

§ 1.403(b)–11

Effective date.

Par. 5. Sections 1.403(b)–1, 1.403(b)–
2 and 1.403(b)–3 are revised to read as
follows:
§ 1.403(b)–1 General overview of taxability
under an annuity contract purchased by a
section 501(c)(3) organization or a public
school.

Section 403(b) and §§ 1.403(b)–2
through 1.403(b)–10 provide rules for
the Federal income tax treatment of an
annuity purchased for an employee by
an employer that is either a tax-exempt
entity under section 501(c)(3) (relating
to certain religious, charitable,
scientific, or other types of
organizations) or a public school, or for
a minister described in section
414(e)(5)(A). See section 403(a) (relating
to qualified annuities) for rules
regarding the taxation of an annuity
purchased under a qualified annuity
plan that meets the requirements of

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67085

section 404(a)(2), and see section 403(c)
(relating to nonqualified annuities) for
rules regarding the taxation of other
types of annuities.
§ 1.403(b)–2

Definitions.

(a) This section sets forth the
definitions that are applicable for
purposes of §§ 1.403(b)–1 through
1.403(b)–11.
(1) Accumulated benefit means the
total benefit to which a participant or
beneficiary is entitled under a section
403(b) contract, including all
contributions made to the contract and
all earnings thereon.
(2) Annuity contract means a contract
that is issued by an insurance company
qualified to issue annuities in a State
and that includes payment in the form
of an annuity. See § 1.401(f)–1(d)(2) and
(e) for the definition of an annuity, and
see § 1.403(b)–8(c)(3) for a special rule
for certain State plans. See also
§§ 1.403(b)–8(d) and 1.403(b)–9(a) for
additional rules regarding the treatment
of custodial accounts and retirement
income accounts as annuity contracts.
(3) Beneficiary means a person who is
entitled to benefits in respect of a
participant following the participant’s
death or an alternate payee pursuant to
a qualified domestic relations order, as
described in § 1.403(b)–10(c).
(4) Catch-up amount or catch-up
limitation for a participant for a taxable
year means a section 403(b) elective
deferral permitted under section 414(v)
(as described in § 1.403(b)–4(c)(2)), or
section 402(g)(7) (as described in
§ 1.403(b)–4(c)(3)).
(5) Church means a church as defined
in section 3121(w)(3)(A) and a qualified
church-controlled organization as
defined in section 3121(w)(3)(B).
(6) Church-related organization
means a church or convention or
association of churches as described in
section 414(e)(3)(A).
(7) Elective deferral means an elective
deferral under § 1.402(g)(3)–1 (with
respect to an employer contribution to
a section 403(b) contract) and any other
amount that constitutes an elective
deferral under section 402(g)(3).
(8)(i) Eligible employer means—
(A) A State, but only with respect to
an employee of the State performing
services for a public school;
(B) A section 501(c)(3) organization
with respect to any employee of the
section 501(c)(3) organization;
(C) Any employer of a minister
described in section 414(e)(5)(A), but
only with respect to the minister; or
(D) A minister described in section
414(e)(5)(A), but only with respect to a
retirement income account established
for the minister.

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules

(ii) An entity is not an eligible
employer under paragraph (a)(8)(i)(A) of
this section if it treats itself as not being
a State for any other purpose of the
Internal Revenue Code, and a subsidiary
or other affiliate of an eligible employer
is not an eligible employer under
paragraph (a)(8)(i) of this section if the
subsidiary or other affiliate is not an
entity described in paragraph (a)(8)(i) of
this section.
(9) Employee means a common-law
employee performing services for the
employer, and does not include a former
employee or an independent contractor.
Subject to any rules in §§ 1.403(b)–1
through 1.403(b)–11 that are specifically
applicable to ministers, an employee
also includes a minister described in
section 414(e)(5)(A) when performing
services in the exercise of his or her
ministry.
(10) Employee performing services for
a public school means an employee
performing services as an employee for
a public school of a State. This
definition is not applicable unless the
employee’s compensation for
performing services for a public school
is paid by the State. Further, a person
occupying an elective or appointive
public office is not an employee
performing services for a public school
unless such office is one to which an
individual is elected or appointed only
if the individual has received training,
or is experienced, in the field of
education. The term public office
includes any elective or appointive
office of a State.
(11) Includible compensation means
the employee’s compensation received
from an eligible employer that is
includible in the participant’s gross
income for Federal income tax purposes
(computed without regard to section
911) for the most recent period that is
a year of service. Includible
compensation for a minister who is selfemployed means the minister’s earned
income as defined in section 401(c)(2)
(computed without regard to section
911) for the most recent period that is
a year of service. Includible
compensation does not include any
compensation received during a period
when the employer is not an eligible
employer. Includible compensation also
includes any elective deferral and any
amount contributed or deferred by the
eligible employer at the election of the
employee that is not includible in the
gross income of the employee by reason
of section 125, 132(f)(4), or 457. The
amount of includible compensation is
determined without regard to any
community property laws. See
§ 1.403(b)–4(d) for a special rule
regarding former employees.

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(12) Participant means an employee
for whom a section 403(b) contract is
currently being purchased, or an
employee or former employee for whom
a section 403(b) contract has previously
been purchased and who has not
received a distribution of his or her
entire benefit under the contract.
(13) Plan means a plan as described
in § 1.403(b)–3(b)(3).
(14) Public school means a Statesponsored educational organization
described in section 170(b)(1)(A)(ii)
(relating to educational organizations
that normally maintain a regular faculty
and curriculum and normally have a
regularly enrolled body of pupils or
students in attendance at the place
where educational activities are
regularly carried on).
(15) Retirement income account
means a defined contribution program
established or maintained by a churchrelated organization to provide benefits
under section 403(b) for its employees
or their beneficiaries as described in
§ 1.403(b)–9.
(16) Section 403(b) contract; section
403(b) plan—(i) Section 403(b) contract
means a contract described in
§ 1.403(b)–3. If for any taxable year an
employer contributes to more than one
section 403(b) contract for a participant
or beneficiary, then, under section
403(b)(5), all such contracts are treated
as one contract for purposes of section
403(b) and §§ 1.403(b)–2 through
1.403(b)–10. See also § 1.403(b)–3(b)(1).
(ii) Section 403(b) plan means the
plan of the employer under which the
section 403(b) contracts for its
employees are maintained.
(17) Section 403(b) elective deferral
means an elective deferral that is an
employer contribution to a section
403(b) contract for an employee. See
§ 1.403(b)–5(b) for additional rules with
respect to a section 403(b) elective
deferral.
(18) Section 501(c)(3) organization
means an organization that is described
in section 501(c)(3) (relating to certain
religious, charitable, scientific, or other
types of organizations) and exempt from
tax under section 501(a).
(19) Severance from employment
means that the employee ceases to be
employed by the employer maintaining
the plan. See regulations under section
401(k) for additional guidance
concerning severance from employment.
See also § 1.403(b)–6(h) for a special
rule under which severance from
employment is determined by reference
to employment with the eligible
employer.
(20) State means a State, a political
subdivision of a State, or any agency or
instrumentality of a State. For this

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purpose, the District of Columbia is
treated as a State, as provided under
section 7701(a)(10). In addition, for
purposes of determining whether an
individual is an employee performing
services for a public school, an Indian
tribal government is treated as a State,
as provided under section 7871(a)(6)(B).
See also section 1450(b) of the Small
Business Job Protection Act of 1996 (110
Stat. 1755, 1814) for special rules
treating certain contracts purchased in a
plan year beginning before January 1,
1995, that include contributions by an
Indian tribal government as section
403(b) contracts, whether or not those
contributions are for employees
performing services for a public school.
(21) Years of service means each full
year during which an individual is a
full-time employee of an eligible
employer, plus fractional credit for each
part of a year during which the
individual is either a full-time employee
of an eligible employer for a part of the
year or a part-time employee of an
eligible employer. See § 1.403(b)–4(e)
for rules for determining years of
service.
(b) [Reserved].
§ 1.403(b)–3 Exclusion for contributions to
purchase section 403(b) contracts.

(a) Exclusion for section 403(b)
contracts. Amounts contributed by an
eligible employer for the purchase of an
annuity contract for an employee are
excluded from the gross income of the
employee under section 403(b) only if
each of the requirements in paragraphs
(a)(1) through (9) of this section is
satisfied. In addition, amounts
contributed by an eligible employer for
the purchase of an annuity contract for
an employee pursuant to a cash or
deferred election are not includible in
an employee’s gross income at the time
the cash would have been includible in
the employee’s gross income (but for the
cash or deferred election) if each of the
requirements in paragraphs (a)(1)
through (9) of this section is satisfied.
(1) Not a contract issued under
qualified plan or eligible governmental
plan. The contract is not purchased
under a qualified plan (under section
401(a) or 404(a)(2)) or an eligible
governmental plan under section 457(b).
(2) Nonforfeitability. The rights of the
employee under the contract
(disregarding rights to future premiums)
are nonforfeitable. An employee’s rights
under a contract fail to be nonforfeitable
unless the participant for whom the
contract is purchased has at all times a
fully vested and nonforfeitable right (as
defined under § 1.411(a)–4) to all
benefits provided under the contract.
See paragraph (c) of this section for

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additional rules regarding the
nonforfeitability requirement of this
paragraph (a)(2).
(3) Nondiscrimination and universal
availability. In the case of a contract
purchased by an eligible employer other
than a church, the contract is purchased
under a plan that satisfies section
403(b)(12) (relating to
nondiscrimination and universal
availability requirements). See
§ 1.403(b)–5.
(4) Limitations on elective deferrals.
In the case of an elective deferral, the
contract satisfies section 401(a)(30)
(relating to limitations on elective
deferrals). A contract does not satisfy
section 401(a)(30) as required under this
paragraph (a)(4) unless the contract
requires all elective deferrals for an
employee to not exceed the limits of
section 402(g)(1), including elective
deferrals for the employee under the
contract and any other elective deferrals
under the plan under which the contract
is purchased and under all other plans,
contracts, or arrangements of the
employer.
(5) Nontransferability. The contract is
not transferable. This paragraph (a)(5)
does not apply to a contract issued
before January 1, 1963. See section
401(g).
(6) Minimum required distributions.
The contract satisfies the requirements
of section 401(a)(9) (relating to
minimum required distributions). See
§ 1.403(b)–6(e).
(7) Rollover distributions. The
contract provides that, if the distributee
of an eligible rollover distribution elects
to have the distribution paid directly to
an eligible retirement plan, as defined in
section 402(c)(8)(B), and specifies the
eligible retirement plan to which the
distribution is to be paid, then the
distribution will be paid to that eligible
retirement plan in a direct rollover. See
§ 1.403(b)–7(b)(2).
(8) Limitation on incidental benefits.
The contract satisfies the incidental
benefit requirements of section 401(a).
See § 1.403(b)–6(g).
(9) Maximum annual additions. The
annual additions to the contract do not
exceed the applicable limitations of
section 415(c) (treating contributions
and other additions as annual
additions). See paragraph (b) of this
section and § 1.403(b)–4(b).
(b) Application of requirements—(1)
Aggregation of contracts. In accordance
with section 403(b)(5), for purposes of
determining whether this section is
satisfied, all section 403(b) contracts
purchased for an individual by an
employer are treated as purchased
under a single contract. Additional
aggregation rules apply under section

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402(g) for purposes of satisfying
paragraph (a)(4) of this section and
under section 415 for purposes of
satisfying paragraph (a)(9) of this
section.
(2) Disaggregation for excess annual
additions. In accordance with the last
sentence of section 415(a)(2), if an
excess annual addition is made to a
contract that otherwise satisfies the
requirements of this section, then the
portion of the contract that includes
such excess annual addition fails to be
a section 403(b) contract (and instead is
a contract to which section 403(c)
applies, as further described in
paragraph (c)(1) of this section) and the
remaining portion of the contract is a
section 403(b) contract. This paragraph
(b)(2) does not apply unless, for the year
of the excess and each year thereafter,
the issuer of the contract maintains
separate accounts for each such portion.
Thus, the entire contract fails to be a
section 403(b) contract if an excess
annual addition is made and a separate
account is not maintained with respect
to the excess.
(3) Plan in form and operation. A
contract does not satisfy paragraph (a) of
this section unless it is maintained
pursuant to a plan. For this purpose, a
plan is a written defined contribution
plan, which, in both form and
operation, satisfies the requirements of
this section and §§ 1.403(b)–4 through
1.403(b)–10. For purposes of this section
and §§ 1.403(b)–4 through 1.403(b)–10,
the plan must contain all the material
terms and conditions for eligibility,
benefits, applicable limitations, the
contracts available under the plan, and
the time and form under which benefit
distributions would be made. For
purposes of this section and
§§ 1.403(b)–4 through 1.403(b)–10, a
plan may contain certain optional
features not required under section
403(b), such as hardship withdrawal
distributions, loans, plan-to-plan or
annuity contract-to-annuity contract
transfers, and acceptance of rollovers to
the plan. However, if a plan contains
any optional provisions, the optional
provisions must meet, in both form and
operation, the relevant requirements
under section 403(b), this section, and
§§ 1.403(b)–4 through 1.403(b)–10. This
paragraph (b)(3) applies to contributions
to an annuity contract by a church only
if the annuity is part of a retirement
income account, as defined in
§ 1.403(b)–9.
(4) Exclusion limited to former
employees—(i) General rule. Except as
provided in paragraph (b)(4)(ii) of this
section and in § 1.403(b)–4(d), the
exclusion from gross income provided
by section 403(b) does not apply to

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67087

contributions made for former
employees. For this purpose, a
contribution is not made for a former
employee if the contribution is with
respect to compensation that would
otherwise be paid for a payroll period
that begins before severance from
employment.
(ii) Exceptions. [Reserved].
(c) Effect of failure—(1) General rule.
See section 403(c) (relating to
nonqualified annuities) for the
treatment of a nonqualified annuity
contract issued by an insurance
company that is not a section 403(b)
contract. See section 61, 83, or 402(b)
for the treatment of a custodial account
or retirement income account that fails
to be treated as a section 403(b) contract.
(2) Failure to satisfy nonforfeitability
requirement. If an annuity contract
issued by an insurance company would
qualify as a section 403(b) contract but
for the failure to satisfy the
nonforfeitability requirement of
paragraph (a)(2) of this section, then the
contract is treated as a contract to which
section 403(c) applies. However, on or
after the date on which the participant’s
interest in that contract becomes
nonforfeitable, the contract may be
treated as a section 403(b) contract if no
election has been made under section
83(b) with respect to the contract, the
participant’s interest in the contract has
been subject to a substantial risk of
forfeiture before becoming
nonforfeitable, and the contract has at
all times satisfied the requirements of
paragraph (a) of this section other than
the nonforfeitability requirement of
paragraph (a)(2) of this section. Thus,
for example, for the current year and
each prior year, no contribution can
have been made to the contract that
would cause the contract to fail to be a
section 403(b) contract as a result of
contributions exceeding the limitations
of section 415 (except to the extent
permitted under paragraph (b)(2) of this
section) or to fail to satisfy the
nondiscrimination rules described in
§ 1.403(b)–5.
(3) Treatment of partial vesting and
separate accounts. For purposes of
applying this paragraph (c), if a
participant’s interest in a contract
becomes nonforfeitable to any extent in
a year but the participant’s entire
interest in the contract is not
nonforfeitable, then the portion that is
nonforfeitable and the portion that fails
to be nonforfeitable are each treated as
separate contracts. In addition, for
purposes of applying this paragraph (c),
if a contribution is made to an annuity
contract in excess of the limitations of
section 415(c) and the excess is
maintained in a separate account, then

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the portion of the contract that includes
the excess contributions account and
the remainder are each treated as
separate contracts. Thus, if an annuity
contract that includes an excess
contributions account changes from
forfeitable to nonforfeitable during a
year, then the portion that is not
attributable to the excess contributions
account constitutes a section 403(b)
contract (assuming it otherwise satisfies
the requirements to be a section 403(b)
contract) and is not included in gross
income, and the portion that is
attributable to the excess contributions
account is included in gross income in
accordance with section 403(c).
Par. 5a. Sections 1.403(b)–4 through
1.403(b)–11 are added to read as
follows:
§ 1.403(b)–4

Contribution limitations.

(a) Treatment of contributions in
excess of limitations. The exclusion
provided under § 1.403(b)–3(a) applies
to a participant only if the amounts
contributed by the employer for the
purchase of an annuity contract for the
participant do not exceed the applicable
limit under sections 415 and 402(g), as
described in this section. Under
§ 1.403(b)–3(a)(4), a section 403(b)
contract is required to include the limits
on elective deferrals imposed by section
402(g), as described in paragraph (c) of
this section. See paragraph (f) of this
section for special rules concerning
correction of excess contributions and
deferrals. The limits imposed by section
415, § 1.403(b)–3(a)(9), section 402(g),
§ 1.403(b)–3(a)(4), and this section do
not apply with respect to rollover
contributions made to a section 403(b)
contract, as described in § 1.403(b)–
10(d), but after-tax contributions are
taken into account under section 415,
§ 1.403(b)–3(a)(9), and this section.
(b) Maximum annual contribution—
(1) General rule. In accordance with
section 415(a)(2) and § 1.403(b)–3(b)(2),
the contributions for any participant
under a section 403(b) contract (i.e.,
employer nonelective contributions
(including matching contributions),
section 403(b) elective deferrals, and
after-tax contributions) are not
permitted to exceed the limitations
imposed by section 415. For this
purpose, contributions made for a
participant are aggregated to the extent
applicable under sections 414(b), (c),
(m), (n), and (o). For purposes of section
415(a)(2) and § 1.403(b)–1 through
§ 1.403(b)–11, a contribution means any
annual addition, as defined in section
415(c).
(2) Special rules. See section 415(k)(4)
for a special rule under which
contributions to section 403(b) contracts

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are generally aggregated with
contributions under other arrangements
in applying section 415. For purposes of
applying section 415(c)(1)(B) with
respect to a section 403(b) contract,
except as provided in section
415(c)(3)(C), a participant’s includible
compensation (as defined in § 1.403(b)–
2) is substituted for the participant’s
compensation, as described in section
415(c)(3)(E). Any age 50 catch-up
contributions under paragraph (c)(2) of
this section are disregarded in applying
section 415.
(c) Section 403(b) elective deferrals—
(1) Basic limit under section 402(g)(1).
In accordance with section 402(g)(1)(A),
the section 403(b) elective deferrals for
any individual are included in the
individual’s gross income to the extent
the amount of such deferrals, plus all
other elective deferrals for the
individual, for the taxable year exceeds
the applicable dollar amount under
section 402(g)(1)(B). The applicable
annual dollar amount under section
402(g)(1)(B) is: $11,000 for 2002;
$12,000 for 2003; $13,000 for 2004;
$14,000 for 2005; and $15,000 for 2006
and thereafter. After 2006, the $15,000
amount is adjusted for cost-of-living in
the manner described in section
402(g)(4). See § 1.403(b)–5(b) for a
universal availability rule that applies if
any employee is permitted to have any
section 403(b) elective deferrals made
on his or her behalf.
(2) Age 50 catch-up—(i) In general. In
accordance with section 414(v) and the
regulations thereunder, a section 403(b)
contract may provide for additional
catch-up contributions for a participant
who is age 50 by the end of the year,
provided that such age 50 catch-up
contributions do not exceed the catchup limit under section 414(v)(2) for the
taxable year. The maximum amount of
additional age 50 catch-up contributions
for a taxable year under section 414(v)
is as follows: $1,000 for 2002; $2,000 for
2003; $3,000 for 2004; $4,000 for 2005;
and $5,000 for 2006 and thereafter. After
2006, the $5,000 amount is adjusted for
cost-of-living in the manner described
in section 414(v)(2)(C). For additional
requirements, see regulations under
section 414(v).
(ii) Coordination with special section
403(b) catch-up. In accordance with
sections 414(v)(6)(A)(ii) and
402(g)(7)(A), the age 50 catch-up
described in this paragraph (c)(2) may
apply for any taxable year in which a
participant also qualifies for the special
section 403(b) catch-up under paragraph
(c)(3) of this section.
(3) Special section 403(b) catch-up for
certain organizations—(i) Amount of the
special section 403(b) catch-up. In the

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case of a qualified employee of a
qualified organization for whom the
basic section 403(b) elective deferrals
for any year are not less than the
applicable dollar amount under section
402(g)(1)(B), the section 403(b) elective
deferral limitation of section 402(g)(1)
for the taxable year of the qualified
employee is increased by the least of—
(A) $3,000;
(B) The excess of—
(1) $15,000; over
(2) The total special section 403(b)
catch-up elective deferrals made for the
qualified employee by the qualified
organization for prior years; or
(C) The excess of—
(1) $5,000 multiplied by the number
of years of service of the employee with
the qualified organization; over
(2) The total elective deferrals (as
defined at § 1.403(b)–2) made for the
qualified employee by the qualified
organization for prior years.
(ii) Qualified organization. (A) For
purposes of this paragraph (c)(3),
qualified organization means an eligible
employer that is either—
(1) An educational organization
described in section 170(b)(1)(A)(ii);
(2) A hospital;
(3) A health and welfare service
agency (including a home health service
agency); or
(4) A church-related organization. All
entities that are in a church-related
organization are treated as a single
qualified organization (so that years of
service and any special section 403(b)
catch-up elective deferrals previously
made for a qualified employee for a
church within a church-related
organization are taken into account for
purposes of applying this paragraph
(c)(3) to the employee with respect to
any other entity within the same
church-related organization).
(B) For purposes of this paragraph
(c)(3)(ii), a health and welfare service
agency means either an organization
whose primary activity is to provide
services that constitute medical care as
defined in section 213(d)(1) (such as a
hospice) or a section 501(c)(3)
organization whose primary activity is
the prevention of cruelty to individuals
or animals, or which provides
substantial personal services to the
needy as part of its primary activity
(such as a section 501(c)(3) organization
that provides meals to needy
individuals).
(iii) Qualified employee. For purposes
of this paragraph (c)(3), qualified
employee means an employee who has
completed at least 15 years of service (as
defined under paragraph (e) of this
section) taking into account only

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employment with the qualified
organization.
(iv) Coordination with age 50 catchup. In accordance with sections
402(g)(1)(C) and 402(g)(7), any catch-up
amount contributed by an employee
who is eligible for both an age 50 catchup and a special section 403(b) catch-up
is treated first as an amount contributed
as a special section 403(b) catch-up to
the extent a special section 403(b) catchup is permitted, and then as an amount
contributed as an age 50 catch-up (to the
extent the catch-up amount exceeds the
maximum special section 403(b) catchup after taking into account sections
402(g) and 415(c), this paragraph (c)(3),
and any limitations on the special
section 403(b) catch-up that are imposed
by the terms of the plan).
(4) Examples. The provisions of this
paragraph (c) are illustrated by the
following examples:
Example 1. (i) Facts illustrating
application of the basic dollar limit.
Participant B, who is 45, is eligible to
participate in a State university section
403(b) plan in 2006. B is not a qualified
employee, as defined in paragraph (c)(3)(iii)
of this section. The plan permits section
403(b) elective deferrals, but no other
employer contributions are made under the
plan. The plan provides limitations on
section 403(b) elective deferrals up to the
maximum permitted under paragraphs (c)(1)
and (3) of this section and the additional age
50 catch-up amount described in paragraph
(c)(2) of this section. For 2006, B will receive
includible compensation of $42,000 from the
eligible employer. B desires to elect to have
the maximum section 403(b) elective deferral
possible contributed in 2006. For 2006, the
basic dollar limit for section 403(b) elective
deferrals under paragraph (c)(1) of this
section is $15,000 and the additional dollar
amount permitted under the age 50 catch-up
is $5,000.
(ii) Conclusion. B is not eligible for the age
50 catch-up in 2006 because B is 45 in 2006,
or the special section 403(b) catch-up under
paragraph (c)(3) of this section because B is
not a qualified employee. Accordingly, the
maximum section 403(b) elective deferral
that B may elect for 2006 is $15,000.
Example 2. (i) Facts illustrating
application of the includible compensation
limitation. The facts are the same as in
Example 1, except B’s includible
compensation is $14,000.
(ii) Conclusion. Under section 415(c),
contributions may not exceed 100 percent of
includible compensation. Accordingly, the
maximum section 403(b) elective deferral
that B may elect for 2006 is $14,000.
Example 3. (i) Facts illustrating
application of the age 50 catch-up.
Participant C, who is 55, is eligible to
participate in a State university section
403(b) plan in 2006. The plan permits section
403(b) elective deferrals, but no other
employer contributions are made under the
plan. The plan provides limitations on
section 403(b) elective deferrals up to the

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maximum permitted under paragraphs (c)(1)
and (3) of this section and the additional age
50 catch-up amount described in paragraph
(c)(2) of this section. For 2006, C will receive
includible compensation of $48,000 from the
eligible employer. C desires to elect to have
the maximum section 403(b) elective deferral
possible contributed in 2006. For 2006, the
basic dollar limit for section 403(b) elective
deferrals under paragraph (c)(1) of this
section is $15,000 and the additional dollar
amount permitted under the age 50 catch-up
is $5,000. C does not have 15 years of service
and thus is not a qualified employee, as
defined in paragraph (c)(3)(iii) of this section.
(ii) Conclusion. C is eligible for the age 50
catch-up in 2006 because C is 55 in 2006. C
is not eligible for the special section 403(b)
catch-up under paragraph (c)(3) of this
section because C is not a qualified employee
(as defined in paragraph (c)(3)(iii) of this
section). Accordingly, the maximum section
403(b) elective deferral that C may elect for
2006 is $20,000 ($15,000 plus $5,000).
Example 4. (i) Facts illustrating
application of both the age 50 and the special
section 403(b) catch-up. The facts are the
same as in Example 3, except that C is a
qualified employee for purposes of the
special section 403(b) catch-up provisions in
paragraph (c)(3) of this section. For 2006, the
maximum additional section 403(b) elective
deferral for which C qualifies under the
special section 403(b) catch-up under
paragraph (c)(3) of this section is $3,000.
(ii) Conclusion. The maximum section
403(b) elective deferrals that C may elect for
2006 is $23,000. This is the sum of the basic
limit on section 403(b) elective deferrals
under paragraph (c)(1) of this section equal
to $15,000, plus the $3,000 additional special
section 403(b) catch-up amount for which C
qualifies under paragraph (c)(3) of this
section, plus the additional age 50 catch-up
amount of $5,000.
Example 5. (i) Facts illustrating
calculation of years of service with a
predecessor organization for purposes of the
special section 403(b) catch-up. The facts are
the same as in Example 4, except that C has
previously made special section 403(b) catchup deferrals to a section 403(b) plan
maintained by a hospital which was acquired
by C’s current eligible employer which is a
hospital.
(ii) Conclusion. The special section 403(b)
catch-up amount for which C qualifies under
paragraph (c)(3) of this section must be
calculated taking into account C’s prior years
of service and special section 403(b) catch-up
deferrals with the predecessor hospital if and
only if C did not have any severance from
service in connection with the acquisition.
Example 6. (i) Facts illustrating
application of the age 50 catch-up and the
section 415(c) dollar limitation. The facts are
the same as in Example 4, except that the
employer makes a nonelective contribution
for each employee equal to 20 percent of C’s
compensation (which is $48,000). Thus, the
employer makes a nonelective contribution
for C for 2006 equal to $9,600. The plan
provides that a participant is not permitted
to make section 403(b) elective deferrals to
the extent the section 403(b) elective
deferrals would result in contributions in

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67089

excess of the maximum permitted under
section 415 and provides that contributions
are reduced in the following order: the
special section 403(b) catch-up elective
deferrals under paragraph (c)(3) of this
section are reduced first; the age 50 catch-up
elective deferrals under paragraph (c)(2) of
this section are reduced second; and then the
basic section 403(b) elective deferrals under
paragraph (c)(1) of this section are reduced.
For 2006, it is assumed that the applicable
dollar limit under section 415(c)(1)(A) is
$44,000.
(ii) Conclusion. The maximum section
403(b) elective deferral that C may elect for
2006 is $23,000. This is the sum of the basic
limit on section 403(b) elective deferrals
under paragraph (c)(1) of this section equal
to $15,000, plus the $3,000 additional special
section 403(b) catch-up amount for which C
qualifies under paragraph (c)(3) of this
section, plus the additional age 50 catch-up
amount of $5,000. The limit in paragraph (b)
of this section would not be exceeded
because the sum of the $9,600 nonelective
contribution and the $23,000 section 403(b)
elective deferrals does not exceed the lesser
of $49,000 (which is the sum of $44,000 plus
the $5,000 additional age 50 catch-up
amount) or $53,000 (which is the sum of C’s
includible compensation for 2006 ($48,000)
plus the $5,000 additional age 50 catch-up
amount).
Example 7. (i) Facts further illustrating
application of the age 50 catch-up and the
section 415(c) dollar limitation. The facts are
the same as in Example 6, except that C’s
includible compensation for 2006 is $56,000
and the plan provides for a nonelective
contribution equal to 50 percent of includible
compensation, so that the employer
nonelective contribution for C for 2006 is
$28,000 (50 percent of $56,000).
(ii) Conclusion. The maximum section
403(b) elective deferral that C may elect for
2006 is $21,000. A section 403(b) elective
deferral in excess of this amount would
exceed the sum of the limit in section
415(c)(1)(A) plus the additional age 50 catchup amount, because the sum of the
employer’s nonelective contribution of
$28,000 plus a section 403(b) elective
deferral in excess of $21,000 would exceed
$49,000 (the sum of the $44,000 limit in
section 415(c)(1)(A) plus the $5,000
additional age 50 catch-up amount).
Example 8. (i) Facts further illustrating
application of the age 50 catch-up and the
section 415(c) dollar limitation. The facts are
the same as in Example 7, except that the
plan provides for a nonelective contribution
for C equal to $44,000 (which is the limit in
section 415(c)(1)(A)).
(ii) Conclusion. The maximum section
403(b) elective deferral that C may elect for
2006 is $5,000. A section 403(b) elective
deferral in excess of this amount would
exceed the sum of the limit in section
415(c)(1)(A) plus the additional age 50 catchup amount ($5,000), because the sum of the
employer’s nonelective contribution of
$44,000 plus a section 403(b) elective
deferral in excess of $5,000 would exceed
$49,000 (the sum of the $44,000 limit in
section 415(c)(1)(A) plus the $5,000
additional age 50 catch-up amount).

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Example 9. (i) Facts illustrating application
of the age 50 catch-up and the section 415(c)
includible compensation limitation. The facts
are the same as in Example 7, except that C’s
includible compensation for 2006 is $28,000,
so that the employer nonelective contribution
for C for 2006 is $14,000 (50 percent of
$28,000).
(ii) Conclusion. The maximum section
403(b) elective deferral that C may elect for
2006 is $19,000. A section 403(b) elective
deferral in excess of this amount would
exceed the sum of the limit in section
415(c)(1)(B) plus the additional age 50 catchup amount, because C’s includible
compensation is $28,000 and the sum of the
employer’s nonelective contribution of
$14,000 plus a section 403(b) elective
deferral in excess of $19,000 would exceed
$33,000 (which is the sum of 100 percent of
C’s includible compensation plus the $5,000
additional age 50 catch-up amount).
Example 10. (i) Facts illustrating that
section 403(b) elective deferrals cannot
exceed compensation otherwise payable.
Employee D is age 60, has includible
compensation of $14,000, and wishes to
contribute section 403(b) elective deferrals of
$20,000 for the year. No nonelective
contributions are made for Employee D.
(ii) Conclusion. The maximum limit on
section 403(b) elective deferrals for a
participant with compensation less than the
maximum dollar limit in section 415(c) is
100 percent of includible compensation, plus
the $5,000 additional age 50 catch-up
amount. However, because a contribution is
a section 403(b) elective deferral only if it is
a result of a compensation reduction, D
cannot make section 403(b) elective deferrals
in excess of D’s actual compensation.
Example 11. (i) Facts illustrating
calculation of the special section 403(b)
catch-up. For 2006, employee E, who is age
50, is eligible to participate in a section
403(b) plan of hospital H, which is a section
501(c)(3) organization. H’s plan permits
section 403(b) elective deferrals and provides
for an employer contribution of 10 percent of
a participant’s compensation with that
employer for the taxable year. The plan
provides limitations on section 403(b)
elective deferrals up to the maximum
permitted under paragraphs (c)(1), (2), and
(3) of this section. For 2006, E’s includible
compensation is $50,000. E wishes to elect to
have the maximum section 403(b) elective
deferral possible contributed in 2006. E has
previously made $62,000 of section 403(b)
elective deferrals under the plan, but has
never made an election for a special section
403(b) catch-up elective deferral. For 2006,
the basic dollar limit for section 403(b)
elective deferrals under paragraph (c)(1) of
this section is $15,000, the additional dollar
amount permitted under the age 50 catch-up
is $5,000, E’s employer will make a
nonelective contribution of $5,000 (10% of
$50,000 compensation), and E is a qualified
employee of a qualified employer as defined
in paragraph (c)(3) of this section.
(ii) Conclusion. The maximum section
403(b) elective deferrals that E may elect for
2006 is $23,000. This is the sum of the basic
limit on section 403(b) elective deferrals for
2006 under paragraph (c)(1) of this section

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equal to $15,000, plus the $3,000 maximum
additional special section 403(b) catch-up
amount for which D qualifies in 2006 under
paragraph (c)(3) of this section, plus the
additional age 50 catch-up amount of $5,000.
The limitation on the additional special
section 403(b) catch-up amount is not less
than $3,000 because the limitation at
paragraph (c)(3)(i)(B) of this section is
$15,000 ($15,000 minus zero) and the
limitation at paragraph (c)(3)(i)(C) of this
section is $13,000 ($5,000 times 15, minus
$62,000 of total deferrals in prior years).
Example 12. (i) Facts illustrating
calculation of the special section 403(b)
catch-up in the next calendar year. The facts
are the same as in Example 11, except that,
for 2007, E has includible compensation of
$60,000. For 2007, E now has previously
made $85,000 of section 403(b) elective
deferrals ($62,000 deferred before 2006, plus
the $15,000 in basic section 403(b) elective
deferrals in 2006, the $3,000 maximum
additional special section 403(b) catch-up
amount in 2006, plus the $5,000 age 50
catch-up amount in 2006). However, the
$5,000 age 50 catch-up amount deferred in
2006 is disregarded for purposes of applying
the limitation at paragraph (c)(3)(i)(B) of this
section to determine the special section
403(b) catch-up amount. Thus, for 2007, only
$80,000 of section 403(b) elective deferrals
are taken into account in applying the
limitation at paragraph (c)(3)(i)(B) of this
section. For 2007, the basic dollar limit for
section 403(b) elective deferrals under
paragraph (c)(1) of this section is assumed to
be $16,000, the additional dollar amount
permitted under the age 50 catch-up is
assumed to be $5,000, and E’s employer
contributes $6,000 (10% of $60,000
compensation) as a non-elective contribution.
(ii) Conclusion. The maximum section
403(b) elective deferral that D may elect for
2007 is $21,000. This is the sum of the basic
limit on section 403(b) elective deferrals
under paragraph (c)(1) of this section equal
to $16,000, plus the additional age 50 catchup amount of $5,000. E is not entitled to any
additional special section 403(b) catch-up
amount for 2007 under paragraph (c)(3) due
to the limitation at paragraph (c)(3)(i)(C) of
this section (16 times $5,000 equals $80,000,
minus D’s total prior section 403(b) elective
deferrals of $80,000 equals zero).

(d) Employer contributions for former
employees—(1) Includible
compensation deemed to continue for
nonelective contributions. For purposes
of applying paragraph (b) of this section,
a former employee is deemed to have
monthly includible compensation for
the period through the end of the
taxable year of the employee in which
he or she ceases to be an employee and
through the end of each of the next five
taxable years. The amount of the
monthly includible compensation is
equal to one twelfth of the former
employee’s includible compensation
during the former employee’s most
recent year of service. Accordingly,
nonelective employer contributions for
a former employee must not exceed the

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limitation of section 415(c)(1) up to the
lesser of the dollar amount in section
415(c)(1)(A) or the former employee’s
annual includible compensation based
on the former employee’s average
monthly compensation during his or her
most recent year of service.
(2) Examples. The provisions of
paragraph (d)(1) of this section are
illustrated by the following examples:
Example 1. (i) Facts. College M is a section
501(c)(3) organization operated on the basis
of a June 30 fiscal year that maintains a
section 403(b) plan for its employees. In
2004, M amends the plan to provide for a
temporary early retirement incentive under
which the college will make a nonelective
contribution for any participant who satisfies
certain minimum age and service conditions
and who retires before June 30, 2006. The
contribution will equal 110 percent of the
participant’s rate of pay for one year and will
be payable over a period ending no later than
the end of the fifth fiscal year that begins
after retirement. It is assumed for purposes of
this Example 1 that, in accordance with
§ 1.401(a)(4)–10(b) and under the facts and
circumstances, the post-retirement
contributions made for participants who
satisfy the minimum age and service
conditions and retire before June 30, 2006 do
not discriminate in favor of former
employees who are highly compensated
employees. Employee A retires under the
early retirement incentive on March 12, 2006,
and A’s annual includible compensation for
the period from March 1, 2005 through
February 28, 2006 (which is A’s most recent
one year of service) is $30,000. The
applicable dollar limit under section
415(c)(1)(A) is assumed to be $44,000 for
2006 and $45,000 for 2007. The college
contributes $30,000 for A for 2006 and
$3,000 for A for 2007 (totaling $33,000 or 110
percent of $30,000). No other contributions
are made to a section 403(b) contract for A
for those years.
(ii) Conclusion. The contributions made for
A do not exceed A’s includible compensation
for 2006 or 2007.
Example 2. (i) Facts. College N is a section
501(c)(3) organization that maintains a
section 403(b) plan for its employees. The
plan provides for N to make monthly
nonelective contributions equal to 20 percent
of the monthly includible compensation for
each eligible employee. In addition, the plan
provides for contributions to continue for 5
years following the retirement of any
employee after age 64 and completion of at
least 20 years of service (based on the
employee’s average annual rate of base salary
in the preceding 3 calendar years ended
before the date of retirement). It is assumed
for purposes of this Example 2 that, in
accordance with § 1.401(a)(4)–10(b) and
under the facts and circumstances, the postretirement contributions made for
participants who satisfy the minimum age
and service conditions do not discriminate in
favor of former employees who are highly
compensated employees. Employee B retires
on July 1, 2006, at age 64 after completion
of 20 or more years of service. At that date,
B’s annual includible compensation for the

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most recently ended fiscal year of N is
$72,000 and B’s average monthly rate of base
salary for 2003 through 2005 is $5,000. N
contributes $1,200 per month (20 percent of
1/12th of $72,000) from January of 2006
through June of 2006 and contributes $1,000
(20 percent of $5,000) per month for B from
July of 2006 through June of 2011. The
applicable dollar limit under section
415(c)(1)(A) is assumed to be at least $44,000
for 2006 through 2011. No other
contributions are made to a section 403(b)
contract for B for those years.
(ii) Conclusion. The contributions made for
B do not exceed B’s includible compensation
for any of the years from 2006 through 2010.

(3) Disabled employees. See also
section 415(c)(3)(C) which sets forth a
special rule under which compensation
may be treated as continuing for
purposes of section 415 for certain
former employees who are disabled.
(e) Special rules for determining years
of service—(1) In general. For purposes
of determining a participant’s includible
compensation under paragraph (b)(2) of
this section and a participant’s years of
service under paragraphs (c)(3) (special
section 403(b) catch-up for qualified
employees of certain organizations) and
(d) (employer contributions for former
employees) of this section, an
employee’s number of years of service
depend on whether the employee has a
full year during which the individual is
a full-time employee of the eligible
employer, and any fraction of a year for
each part of a year during which the
individual is a full-time or part-time
employee of the eligible employer. An
individual’s number of years of service
equals the aggregate of the annual work
periods during which the individual is
employed by the eligible employer.
(2) Work period. A year of service is
based on the employer’s annual work
period, not the employee’s taxable year.
For example, in determining whether a
university professor is employed full
time, the annual work period is the
school’s academic year. However, in no
case may an employee accumulate more
than one year of service in a twelvemonth period.
(3) Service with more than one eligible
employer—(i) General rule. With respect
to any section 403(b) contract of an
eligible employer, except as provided in
paragraph (e)(3)(ii) of this section, any
period during which an individual is
not an employee of that eligible
employer is disregarded for purposes of
this paragraph (e).
(ii) Special rule for church employees.
With respect to any section 403(b)
contract of an eligible employer that is
a church-related organization, any
period during which an individual is an
employee of that eligible employer and
any other eligible employer that is a

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church-related organization that has an
association (as defined in section
414(e)(3)(D)) with that eligible employer
is taken into account on an aggregated
basis, but any period during which an
individual is not an employee of a
church-related organization or is an
employee of a church-related
organization that does not have an
association with that eligible employer
is disregarded for purposes of this
paragraph (e).
(4) Full-time employee for full year.
Each annual work period during which
an individual is employed full time by
the eligible employer constitutes one
year of service. In determining whether
an individual is employed full-time, the
amount of work which he or she
actually performs is compared with the
amount of work that is normally
required of individuals performing
similar services from which
substantially all of their annual
compensation is derived.
(5) Other employees. (i) An individual
is treated as performing a fraction of a
year of service for each annual work
period during which he or she is a fulltime employee for part of the annual
work period and for each annual work
period during which he or she is a parttime employee either for the entire
annual work period or for a part of the
annual work period.
(ii) In determining the fraction that
represents the fractional year of service
for an individual employed full time for
part of an annual work period, the
numerator is the period of time (e.g.,
weeks or months) during which the
individual is a full-time employee
during that annual work period, and the
denominator is the period of time that
is the annual work period.
(iii) In determining the fraction that
represents the fractional year of service
of an individual who is employed part
time for the entire annual work period,
the numerator is the amount of work
performed by the individual, and the
denominator is the amount of work
normally required of individuals who
perform similar services and who are
employed full time for the entire annual
work period.
(iv) In determining the fraction
representing the fractional year of
service of an individual who is
employed part time for part of an annual
work period, the fractional year of
service that would apply if the
individual were a part-time employee
for a full annual work period is
multiplied times the fractional year of
service that would apply if the
individual were a full-time employee for
the part of an annual work period.

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67091

(6) Work performed. For purposes of
this paragraph (e), in measuring the
amount of work of an individual
performing particular services, the work
performed is determined based on the
individual’s hours of service (as defined
under section 410(a)(3)(C)), except that
a plan may use a different measure of
work if appropriate under the facts and
circumstances. For example, a plan may
provide for a university professor’s work
to be measured by the number of
courses taught during an annual work
period in any case in which that
individual’s work assignment is
generally based on a specified number
of courses to be taught.
(7) Most recent one-year period of
service. For purposes of paragraph (d) of
this section, in the case of a part-time
employee or a full-time employee who
is employed for only part of the year
determined on the basis of the
employer’s annual work period, the
employee’s most recent periods of
service are aggregated to determine his
or her most recent one-year period of
service. In such a case, there is first
taken into account his or her service
during the annual work period for
which the last year of service’s
includible compensation is being
determined; then there is taken into
account his or her service during his
next preceding annual work period
based on whole months; and so forth,
until the employee’s service equals, in
the aggregate, one year of service.
(8) Less than one year of service
considered as one year. If, at the close
of a taxable year, an employee has, after
application of all of the other rules in
this paragraph (e), some portion of one
year of service (but has accumulated
less than one year of service), the
employee is deemed to have one year of
service. Except as provided in this
paragraph (e)(8), fractional years of
service are not rounded up.
(9) Examples. The provisions of this
paragraph (e) are illustrated by the
following examples:
Example 1. (i) Facts. Individual C is
employed half-time in 2004 and 2005 as a
clerk by H, a hospital which is a section
501(c)(3) organization. C earns $20,000 from
H in each of those years, and retires on
December 31, 2005.
(ii) Conclusion. For purposes of
determining C’s includible compensation
during C’s last year of service under
paragraph (d) of this section, C’s most recent
periods of service are aggregated to determine
C’s most recent one-year period of service. In
this case, since C worked half-time in 2004
and 2005, the compensation C earned in
those two years are aggregated to produce C’s
includible compensation for C’s last full year
in service. Thus, in this case, the $20,000 that
C earned in 2004 and 2005 for C’s half-time

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work are aggregated, so that C has $40,000 of
includible compensation for C’s most recent
one-year of service for purposes of applying
paragraphs (b)(2), (c)(3), and (d) of this
section.
Example 2. (i) Facts. Individual A is
employed as a part-time professor by public
University U during the first semester of its
two-semester 2004–2005 academic year.
While A teaches one course generally for 3
hours a week during the first semester of the
academic year, U’s full-time faculty members
generally teach for 9 hours a week during the
full academic year.
(ii) Conclusion. For purposes of calculating
how much of a year of service A performs in
the 2004–05 academic year (before
application of the special rules of paragraphs
(e)(7) and (8) of this section concerning less
than one year of service), paragraph (e)(5)(iv)
of this section is applied as follows: since A
teaches one course at U for 3 hours per week
for 1 semester and other faculty members at
U teach 9 hours per week for 2 semesters, A
is considered to have completed 3⁄18 or 1⁄6 of
a year of service during the 2004–05
academic year, determined as follows:
(A) The fractional year of service if A were
a part-time employee for a full year is 3⁄9
(number of hours employed divided by the
usual number of hours of work required for
that position).
(B) The fractional year of service if A were
a full-time employee for half of a year is 1⁄2
(one semester, divided by the usual 2semester annual work period).
(C) These fractions are multiplied to obtain
the fractional year of service: 3⁄9 times 1⁄2, or
3⁄18, equals 1⁄6 of a year of service.

(f) Excess contributions or deferrals—
(1) In general. Any contribution made
for a participant to a section 403(b)
contract for the taxable year that
exceeds either the maximum annual
contribution limit set forth in paragraph
(b) of this section or the maximum
annual section 403(b) elective deferral
limit set forth in paragraph (c) of this
section constitutes an excess
contribution that is included in gross
income for that taxable year. A contract
does not fail to satisfy the requirements
of § 1.403(b)–3, the distribution rules of
§§ 1.403(b)–6 or 1.403(b)–9, or the
funding rules of § 1.403(b)–8 solely by
reason of a distribution made under this
paragraph (f). See also section 4973 for
an excise tax applicable with respect to
excess contributions to a custodial
account.
(2) Excess section 403(b) elective
deferrals. A section 403(b) contract may
provide that any excess deferral as a
result of a failure to comply with the
limitation under paragraph (c) of this
section for a taxable year with respect to
any section 403(b) elective deferral
made for a participant by the employer
will be distributed to the participant,
with allocable net income, no later than
April 15 of the following taxable year or
otherwise in accordance with section

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402(g). See section 402(g)(2)(A) for rules
permitting the participant to allocate
excess deferrals among the plans in
which the participant has made elective
deferrals, and see section 402(g)(2)(C)
for special rules to determine the tax
treatment of such a distribution.
(3) Special rule for small excess
amount. See section 4979(f)(2)(B) for a
special rule applicable if excess
matching contributions, excess after-tax
contributions, and excess section 403(b)
elective deferrals do not exceed $100.
(4) Example. The provisions of this
paragraph (f) are illustrated by the
following example:
Example. (i) Facts. Individual D makes
section 403(b) elective deferrals totaling
$15,500 for 2006, when D is age 45 and the
applicable limit on section 403(b) elective
deferrals is $15,000. On April 14, 2007, the
plan refunds the $500 excess along with
applicable earnings of $65.
(ii) Conclusion. The $565 payment
constitutes a distribution of an excess
deferral under paragraph (f)(2) of this section.
Under section 402(g), the $500 excess
deferral is included in D’s gross income for
2006. The additional $65 is included in D’s
gross income for 2007 and, because the
distribution is made by April 15, 2007 (as
provided in section 402(g)(2)), the $65 is not
subject to the additional 10 percent income
tax on early distributions under section 72(t).
§ 1.403(b)–5

Nondiscrimination rules.

(a) Nondiscrimination rules for
contributions other than section 403(b)
elective deferrals—(1) General rule.
Under section 403(b)(12)(A)(i),
employer contributions and employee
after-tax contributions must satisfy all of
the following requirements (the
nondiscrimination requirements) in the
same manner as a qualified plan under
section 401(a):
(i) Section 401(a)(4) (relating to
nondiscrimination in contributions and
benefits), taking section 401(a)(5) into
account.
(ii) Section 401(a)(17) (limiting the
amount of compensation that can be
taken into account).
(iii) Section 401(m) (relating to
matching and after-tax contributions).
(iv) Section 410(b) (relating to
minimum coverage).
(2) Nonapplication to section 403(b)
elective deferrals. The requirements of
this paragraph (a) do not apply to
section 403(b) elective deferrals.
(3) Compensation for testing. Except
as may otherwise be specifically
permitted under the sections referenced
in paragraph (a)(1) of this section,
compliance with those provisions is
tested using compensation as defined in
section 414(s) (and without regard to
section 415(c)(3)(E)).
(4) Employer aggregation rules. See
regulations under section 414 for rules

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treating entities as a single employer for
purposes of the nondiscrimination
requirements.
(5) Special rules for governmental
plans. Paragraphs (a)(1)(i), (iii), and (iv)
of this section do not apply to a
governmental plan as defined in section
414(d) (but contributions to a
governmental plan must comply with
paragraphs (a)(1)(ii) and (b) of this
section).
(b) Universal availability required for
section 403(b) elective deferrals—(1)
General rule. Under section
403(b)(12)(A)(ii), all employees of the
eligible employer must be permitted to
have section 403(b) elective deferrals
contributed on their behalf if any
employee of the eligible employer may
elect to have the organization make
section 403(b) elective deferrals. The
employee’s right to have section 403(b)
elective deferrals made on his or her
behalf includes the right to section
403(b) elective deferrals up to the lesser
of the applicable limits in § 1.403(b)–
4(c) (including any permissible catch-up
elective deferrals under § 1.403(b)–
4(c)(2) and (3)) or the applicable limits
under the contract with the largest
limitation, and applies to part-time
employees as well as full-time
employees.
(2) Effective opportunity required. A
section 403(b) plan satisfies this
paragraph (b) only if the plan provides
an employee with an effective
opportunity to make (or change) a cash
or deferred election (as defined at
§ 1.401(k)–1(a)(3)) at least once during
each plan year. Whether an employee
has an effective opportunity is
determined based on all the relevant
facts and circumstances, including
notice of the availability of the election,
the period of time during which an
election may be made, and any other
conditions on elections. An effective
opportunity is not considered to exist if
there are any other rights or benefits that
are conditioned (directly or indirectly)
upon a participant making or failing to
make a cash or deferred election with
respect to a contribution to a section
403(b) contract.
(3) Special rules. (i) In the case of a
section 403(b) plan that covers the
employees of more than one section
501(c)(3) organization, the universal
availability requirement of this
paragraph (b) applies separately to each
common law entity, i.e., to each section
501(c)(3) organization. In the case of a
section 403(b) plan that covers the
employees of more than one State
entity, this requirement applies
separately to each entity that is not part
of a common payroll. An employer may
condition the employee’s right to have

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section 403(b) elective deferrals made
on his or her behalf on the employee
electing a section 403(b) elective
deferral of more than $200 for a year.
(ii) For purposes of this paragraph
(b)(3), an employer that historically has
treated one or more of its various
geographically distinct units as separate
for employee benefit purposes may treat
each unit as a separate organization if
the unit is operated independently on a
day-to-day basis. Units are not
geographically distinct if such units are
located within the same Standard
Metropolitan Statistical Area (SMSA).
(4) Special exclusions—(i) Exclusions
for special types of employees. A plan
does not fail to satisfy the universal
availability requirement of this
paragraph (b) merely because it
excludes one or more of the types of
employees listed in paragraph (b)(4)(ii)
of this section. If any employee listed in
paragraph (b)(4)(ii)(A) through (E) of
this section has the right to have section
403(b) elective deferrals made on his or
her behalf, then no employees listed in
that subparagraph may be excluded
under this paragraph (b)(4).
(ii) List of special types of excludible
employees. The following types of
employees are listed in this paragraph
(b)(4)(ii):
(A) Employees who are eligible under
a section 457(b) eligible governmental
plan of the employer which permits an
amount to be contributed or deferred at
the election of the employee.
(B) Employees who are eligible to
make a cash or deferred election (as
defined at § 1.401(k)–1(a)(3)) under a
section 401(k) plan of the employer.
(C) Employees who are non-resident
aliens described in section 410(b)(3)(C).
(D) Subject to the conditions
applicable under section 410(b)(4)
(including section 410(b)(4)(B)
permitting separate testing for
employees not meeting minimum age
and service requirements), employees
who are students performing services
described in section 3121(b)(10).
(E) Subject to the conditions
applicable under section 410(b)(4),
employees who normally work fewer
than 20 hours per week. For this
purpose, an employee normally works
fewer than 20 hours per week if and
only if—
(1) For the 12-month period beginning
on the date the employee’s employment
commenced, the employer reasonably
expects the employee to work fewer
than 1,000 hours of service (as defined
in section 410(a)(3)(C)) in such period;
and
(2) For each plan year ending after the
close of the 12-month period beginning
on the date the employee’s employment

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commenced (or, if the plan so provides,
each subsequent 12-month period), the
employee worked fewer than 1,000
hours of service in the preceding 12month period. (See, however, section
202(a)(1) of the Employee Retirement
Income Security Act of 1974 (ERISA)
(88 Stat. 829) Public Law 93–406, and
regulations under section 410(a) of the
Internal Revenue Code applicable with
respect to plans that are subject to Title
I of ERISA.)
(c) Plan required. Contributions to an
annuity contract do not satisfy the
requirements of this section unless the
contributions are made pursuant to a
plan, as defined in § 1.403(b)–3(b)(3),
and the terms of the plan satisfy this
section.
(d) Certain requirements not
applicable to a church plan. This
section does not apply to a section
403(b) contract purchased by a church
(as defined in § 1.403(b)–2).
(e) Other rules. This section only
reflects requirements of the Internal
Revenue Code applicable for purposes
of section 403(b) and does not include
other requirements. Specifically, this
section does not reflect the requirements
of the ERISA that may apply with
respect to section 403(b), such as the
vesting requirements at 29 U.S.C. 1053.
§ 1.403(b)–6
benefits.

Timing of distributions and

(a) Distributions generally. This
section includes special rules regarding
the timing of distributions from, and the
benefits that may be provided under, a
section 403(b) contract, including
limitations on when early distributions
can be made (in paragraphs (b) through
(d) of this section), required minimum
distributions (in paragraph (e) of this
section), and special rules relating to
loans (in paragraph (f) of this section)
and incidental benefits (in paragraph (g)
of this section).
(b) Distributions from contracts other
than custodial accounts or amounts
attributable to section 403(b) elective
deferrals. Except as provided in
paragraph (c) of this section relating to
distributions from custodial accounts,
paragraph (d) of this section relating to
distributions attributable to section
403(b) elective deferrals, § 1.403(b)–4(f)
(relating to correction of excess
deferrals), or § 1.403(b)–10(a) (relating to
plan termination), a section 403(b)
contract is permitted to distribute
retirement benefits to the participant no
earlier than upon the earliest of the
participant’s severance from
employment or upon the prior
occurrence of some event, such as after
a fixed number of years, the attainment
of a stated age, or disability. See

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67093

§ 1.401–1(b)(1)(ii) for additional
guidance.
(c) Distributions from custodial
accounts that are not attributable to
section 403(b) elective deferrals. Except
as provided in § 1.403(b)–4(f) (relating
to correction of excess deferrals) or
§ 1.403(b)–10(a) (relating to plan
termination), distributions from a
custodial account, as defined in
§ 1.403(b)–8(d)(2), may not be paid to a
participant before the participant has a
severance from employment, dies,
becomes disabled (within the meaning
of section 72(m)(7)), or attains age 591⁄2.
Any amounts transferred out of a
custodial account to an annuity contract
or retirement income account, including
earnings thereon, continue to be subject
to this paragraph (c). This paragraph (c)
does not apply to distributions that are
attributable to section 403(b) elective
deferrals.
(d) Distribution of section 403(b)
elective deferrals—(1) Limitation on
distributions—(i) General rule. Except as
provided in paragraph (d)(2) of this
section (relating to distributions on
account of hardship), § 1.403(b)–4(f)
(relating to correction of excess
deferrals), or § 1.403(b)–10(a) (relating to
plan termination), distributions of
amounts attributable to section 403(b)
elective deferrals may not be paid to a
participant earlier than the earliest of
the date on which the participant has a
severance from employment, dies, has a
hardship, becomes disabled (within the
meaning of section 72(m)(7)), or attains
age 591⁄2.
(ii) Special rule for pre-1989 section
403(b) elective deferrals. For special
rules relating to amounts held as of the
close of the taxable year beginning
before January 1, 1989 (which does not
apply to earnings thereon), see section
1123(e)(3) of the Tax Reform Act of 1986
(100 Stat. 2085, 2475) Public Law 99–
514, and section 1011A(c)(11) of the
Technical and Miscellaneous Revenue
Act of 1988 (102 Stat. 3342, 3476)
Public Law 100–647.
(2) Hardship rules. A hardship
distribution under this paragraph (d) is
defined as, and is subject to the rules in,
§ 1.401(k)–1(d)(3) (including limiting
the amount of a distribution in the case
of hardship to the amount necessary to
satisfy the hardship). In addition, a
hardship distribution is limited to the
aggregate dollar amount of the
participant’s section 403(b) elective
deferrals under the contract (and may
not include any income thereon),
reduced by the aggregate dollar amount
of the distributions previously made to
the participant from the contract.
(3) Failure to keep separate accounts.
If a section 403(b) contract includes

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both section 403(b) elective deferrals
and other contributions and the section
403(b) elective deferrals are not
maintained in a separate account, then
distributions may not be made earlier
than the later of:
(i) Any date permitted under this
paragraph (d) with respect to 403(b)
elective deferrals; and
(ii) Any date permitted under
paragraph (b) or (c) of this section with
respect to contributions that are not
section 403(b) elective deferrals
(whichever applies to the contributions
that are not section 403(b) elective
deferrals).
(e) Minimum required distributions
for eligible plans—(1) In general. Under
section 403(b)(10), a section 403(b)
contract must meet the minimum
distribution requirements of section
401(a)(9) (in both form and operation).
See section 401(a)(9) and the regulations
thereunder for these requirements.
(2) Treatment as IRAs. For purposes
of applying the distribution rules of
section 401(a)(9) to section 403(b)
contracts, section 403(b) contracts are
treated as individual retirement
annuities described in section 408(b)
and individual retirement accounts
described in section 408(a) (IRAs).
Consequently, except as otherwise
provided in paragraphs (e)(3) through
(e)(5) of this section, the distribution
rules in section 401(a)(9) are applied to
section 403(b) contracts in accordance
with the provisions in § 1.408–8 for
purposes of determining required
minimum distributions.
(3) Required beginning date. The
required beginning date for purposes of
section 403(b)(10) is April 1 of the
calendar year following the later of the
calendar year in which the employee
attains 701⁄2 or the calendar year in
which the employee retires from
employment with the employer
maintaining the plan. However, for any
section 403(b) contract that is not part
of a government plan or church plan,
the required beginning date for a 5percent owner is April 1 of the calendar
year following the earlier of the calendar
year in which the employee attains 701⁄2
or the calendar year in which the
employee retires from employment with
the employer maintaining the plan.
(4) Surviving spouse rule does not
apply. The special rule in § 1.408–8, A–
5 (relating to spousal beneficiaries),
does not apply to a section 403(b)
contract. Thus, the surviving spouse of
a participant is not permitted to treat a
section 403(b) contract as the spouse’s
own section 403(b) contract, even if the
spouse is the sole beneficiary.
(5) Retirement income accounts. For
purposes of § 1.401(a)(9)–6, A–4

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(relating to annuity contracts), annuity
payments provided with respect to
retirement income accounts do not fail
to satisfy the requirements of section
401(a)(9) merely because the payments
are not made under an annuity contract
purchased from an insurance company,
provided that the relationship between
the annuity payments and the
retirement income accounts is not
inconsistent with any rules prescribed
by the Commissioner in revenue rulings,
notices, or other guidance published in
the Internal Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter).
See § 1.403(b)–9(a)(5).
(6) Special rules for benefits accruing
before December 31, 1986. (i) The
distribution rules provided in section
401(a)(9) do not apply to the
undistributed portion of the account
balance under the section 403(b)
contract valued as of December 31,
1986, exclusive of subsequent earnings
(pre-’87 account balance). The
distribution rules provided in section
401(a)(9) apply to all benefits under
section 403(b) contracts accruing after
December 31, 1986 (post-’86 account
balance), including earnings after
December 31, 1986. Consequently, the
post-’86 account balance includes
earnings after December 31, 1986, on
contributions made before January 1,
1987, in addition to the contributions
made after December 31, 1986, and
earnings thereon.
(ii) The issuer or custodian of the
section 403(b) contract must keep
records that enable it to identify the pre’87 account balance and subsequent
changes as set forth in paragraph
(d)(6)(iii) of this section and provide
such information upon request to the
relevant employee or beneficiaries with
respect to the contract. If the issuer or
custodian does not keep such records,
the entire account balance is treated as
subject to section 401(a)(9).
(iii) In applying the distribution rules
in section 401(a)(9), only the post-’86
account balance is used to calculate the
required minimum distribution for a
calendar year. The amount of any
distribution from a contract is treated as
being paid from the post-’86 account
balance to the extent the distribution is
required to satisfy the minimum
distribution requirement with respect to
that contract for a calendar year. Any
amount distributed in a calendar year
from a contract in excess of the required
minimum distribution for a calendar
year with respect to that contract is
treated as paid from the pre-’87 account
balance, if any, of that contract.
(iv) If an amount is distributed from
the pre-’87 account balance and rolled
over to another section 403(b) contract,

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the amount is treated as part of the post’86 account balance in that second
contract. However, if the pre-’87
account balance under a section 403(b)
contract is directly transferred to
another section 403(b) contract (as
permitted under § 1.403(b)–10(b)), the
amount transferred retains its character
as a pre-’87 account balance, provided
the issuer of the transferee contract
satisfies the recordkeeping requirements
of paragraph (e)(6)(ii) of this section.
(v) The distinction between the pre’87 account balance and the post-’86
account balance provided for under this
paragraph (e)(6) of this section has no
relevance for purposes of determining
the portion of a distribution that is
includible in income under section 72.
(vi) The pre-’87 account balance must
be distributed in accordance with the
incidental benefit requirement of
§ 1.401–1(b)(1)(i). Distributions
attributable to the pre-’87 account
balance are treated as satisfying this
requirement if all distributions from the
section 403(b) contract (including
distributions attributable to the post-’86
account balance) satisfy the
requirements of § 1.401–1(b)(1)(i)
without regard to this section, and
distributions attributable to the post-’86
account balance satisfy the rules of this
paragraph (e). Distributions attributable
to the pre-’87 account balance are
treated as satisfying the incidental
benefit requirement if all distributions
from the section 403(b) contract
(including distributions attributable to
both the pre-’87 account balance and the
post-’86 account balance) satisfy the
rules of this paragraph (e).
(7) Application to multiple contracts
for an employee. The required
minimum distribution must be
separately determined for each section
403(b) contract of an employee.
However, because, as provided in
paragraph (e)(2) of this section, the
distribution rules in section 401(a)(9)
apply to section 403(b) contracts in
accordance with the provisions in
§ 1.408–8, the required minimum
distribution from one section 403(b)
contract of an employee is permitted to
be distributed from another section
403(b) contract in order to satisfy
section 401(a)(9). Thus, as provided in
§ 1.408–8, A–9, with respect to IRAs, the
required minimum distribution amount
from each contract is then totaled and
the total minimum distribution taken
from any one or more of the individual
section 403(b) contracts. However,
consistent with the rules in § 1.408–8,
A–9, only amounts in section 403(b)
contracts that an individual holds as an
employee may be aggregated. Amounts
in section 403(b) contracts that an

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules
individual holds as a beneficiary of the
same decedent may be aggregated, but
such amounts may not be aggregated
with amounts held in section 403(b)
contracts that the individual holds as
the employee or as the beneficiary of
another decedent. Distributions from
section 403(b) contracts do not satisfy
the minimum distribution requirements
for IRAs, nor do distributions from IRAs
satisfy the minimum distribution
requirements for section 403(b)
contracts.
(f) Loans. The determination of
whether the availability of a loan, the
making of a loan, or a failure to repay
a loan made from an issuer of a section
403(b) contract to a participant or
beneficiary is treated as a distribution
(directly or indirectly) for purposes of
this section, and the determination of
whether the availability of the loan, the
making of the loan, or a failure to repay
the loan is in any other respect a
violation of the requirements of section
403(b) and these regulations, depends
on the facts and circumstances. Among
the facts and circumstances are whether
the loan has a fixed repayment schedule
and bears a reasonable rate of interest,
and whether there are repayment
safeguards to which a prudent lender
would adhere. Thus, for example, a loan
must bear a reasonable rate of interest in
order to be treated as not being a
distribution. However, a plan loan offset
is a distribution for purposes of this
section. See § 1.72(p)–1, Q&A–13. See
also § 1.403(b)–7(d) relating to the
application of section 72(p) with respect
to the taxation of a loan made under a
section 403(b) contract. (Further, see 29
CFR 2550.408b–1 of the Department of
Labor regulations concerning additional
requirements applicable with respect to
plans that are subject to Title I of
ERISA.)
(g) Death benefits and other
incidental benefits. An annuity is not a
section 403(b) contract if it fails to
satisfy the incidental benefit
requirement of § 1.401–1(b)(1)(i). For
this purpose, to the extent the incidental
benefit requirement of § 1.401–1(b)(1)(i)
requires a distribution of the
participant’s or beneficiary’s
accumulated benefit, that requirement is
deemed to be satisfied if distributions
satisfy the minimum distribution
requirements of section 401(a)(9).
(h) Special rule regarding severance
from employment. For purposes of this
section, severance from employment
occurs on any date on which an
employee ceases to be an employee of
an eligible employer (e.g., by the section
501(c)(3) organization that maintains the
plan, assuming that only one section
501(c)(3) organization maintains the

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plan), even though the employee may
continue to be employed either by
another entity that is treated as the same
employer where either that other entity
is not an entity that can be an eligible
employer (such as transferring from a
section 501(c)(3) organization to a forprofit subsidiary of the section 501(c)(3)
organization) or in a capacity that is not
employment with an eligible employer
(e.g., ceasing to be an employee
performing services for a public school
but continuing to work for the same
State employer).
(i) Certain limitations do not apply to
rollover contributions. The limitations
on distributions in paragraphs (b)
through (d) of this section do not apply
to amounts held in a separate account
for eligible rollover distributions as
described in § 1.403(b)–10(d).
§ 1.403(b)–7
benefits.

Taxation of distributions and

(a) General rules for when amounts
are included in gross income. Except as
provided in this section (or in
§ 1.403(b)–10(c) relating to payments
pursuant to a qualified domestic
relations order), amounts actually
distributed from a section 403(b)
contract are includible in the gross
income of the recipient participant or
beneficiary (in the year in which so
distributed) under section 72 (relating to
annuities). For an additional income tax
that may apply to certain early
distributions that are includible in gross
income, see section 72(t).
(b) Rollovers to individual retirement
arrangements and other eligible
retirement plans—(1) Timing of taxation
of rollovers. In accordance with sections
402(c), 403(b)(8), and 403(b)(10), a
direct transfer in accordance with
section 401(a)(31) (generally referred to
as a direct rollover) is not includible in
the gross income of a participant or
beneficiary in the year transferred. In
addition, any payment made in the form
of an eligible rollover distribution (as
defined in section 402(c)(4)) is not
includible in gross income in the year
paid to the extent the payment is
transferred to an eligible retirement plan
(as defined in section 402(c)(8)(B))
within 60 days, including the transfer to
the eligible retirement plan of any
property distributed. For this purpose,
the rules of section 402(c)(2) through (7)
and (c)(9) apply. Any direct rollover
under this paragraph (b)(1) is a
distribution that is subject to the
distribution requirements of § 1.403(b)–
6.
(2) Requirement that contract provide
rollover options for eligible rollover
distributions. As required in § 1.403(b)–
3(a)(7), an annuity contract is not a

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67095

section 403(b) contract unless the
contract provides that if the distributee
of an eligible rollover distribution elects
to have the distribution paid directly to
an eligible retirement plan (as defined
in section 402(c)(8)(B)) and specifies the
eligible retirement plan to which the
distribution is to be paid, then the
distribution will be paid to that eligible
retirement plan in a direct rollover. For
purposes of determining whether a
contract satisfies this requirement, the
provisions of section 401(a)(31) apply to
the annuity as though it were a plan
qualified under section 401(a) unless
otherwise provided in section
401(a)(31). In applying the provisions of
this paragraph (b)(2), the payor of the
eligible rollover distribution from the
contract is treated as the plan
administrator.
(3) Requirement that contract payor
provide notice of rollover option to
distributees. To ensure that the
distributee of an eligible rollover
distribution from a section 403(b)
contract has a meaningful right to elect
a direct rollover, section 402(f) requires
that the distributee be informed of the
option. Thus, within a reasonable time
period before making the initial eligible
rollover distribution, the payor must
provide an explanation to the
distributee of his or her right to elect a
direct rollover and the income tax
withholding consequences of not
electing a direct rollover. For purposes
of satisfying the reasonable time period
requirement, the plan timing rule
provided in section 402(f)(1) and the
regulations thereunder applies to
section 403(b) contracts.
(4) Mandatory withholding upon
certain eligible rollover distributions
from contracts. If a distributee of an
eligible rollover distribution from a
section 403(b) contract does not elect to
have the eligible rollover distribution
paid directly to an eligible retirement
plan in a direct rollover, the eligible
rollover distribution is subject to 20percent income tax withholding
imposed under section 3405(c). See
section 3405(c) and the regulations
thereunder for provisions regarding the
withholding requirements relating to
eligible rollover distributions.
(5) Automatic rollover for certain
mandatory distributions under section
401(a)(31)(B). [Reserved].
(c) Special rules for certain corrective
distributions. See section 402(g)(2)(C)
for special rules to determine the tax
treatment of a distribution of excess
deferrals, and see § 1.401(m)–1(e)(3)(v)
for the tax treatment of corrective
distributions of after-tax and matching
contributions to comply with section
401(m).

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(d) Amounts taxable under section
72(p)(1). In accordance with section
72(p), the amount of any loan from a
section 403(b) contract to a participant
or beneficiary (including any pledge or
assignment treated as a loan under
section 72(p)(1)(B)) is treated as having
been received as a distribution from the
contract under section 72(p)(1), except
to the extent set forth in section 72(p)(2)
(relating to loans that do not exceed a
maximum amount and that are
repayable in accordance with certain
terms) and § 1.72(p)–1. Thus, except to
the extent a loan satisfies section
72(p)(2), any amount loaned from a
section 403(b) contract to a participant
or beneficiary (including any pledge or
assignment treated as a loan under
section 72(p)(1)(B)) is includible in the
gross income of the participant or
beneficiary for the taxable year in which
the loan is made. See generally
§ 1.72(p)–1.
§ 1.403(b)–8

Funding.

(a) Investments permitted. Section
403(b) and § 1.403(b)–3 only apply to
amounts held in an annuity contract (as
defined in § 1.403(b)–2), including a
custodial account that is treated as an
annuity contract under this section or a
retirement income account that is
treated as an annuity contract under
§ 1.403(b)–9.
(b) Contributions to the plan.
Contributions to a section 403(b) plan
must be transferred to the insurance
company issuing the annuity contract
(or the entity holding assets of any
custodial or retirement income account
that is treated as an annuity contract)
within a period that is not longer than
is reasonable for the proper
administration of the plan. For purposes
of this requirement, the plan may
provide for section 403(b) elective
deferrals for a participant under the
plan to be transferred to the annuity
contract within a specified period after
the date the amounts would otherwise
have been paid to the participant. For
example, the plan could provide for
section 403(b) elective deferrals under
the plan to be contributed within 15
business days following the month in
which these amounts would otherwise
have been paid to the participant.
(c) Annuity contracts—(1) Generally.
As defined in § 1.403(b)–2, and except
as otherwise permitted under this
section, an annuity contract means a
contract that is issued by an insurance
company qualified to issue annuities in
a State and that includes payment in the
form of an annuity. This paragraph (c)
sets forth additional rules regarding
annuity contracts.

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(2) Certain insurance contracts.
Neither a life insurance contract, as
defined in section 7702, an endowment
contract, a health or accident insurance
contract, nor a property, casualty, or
liability insurance contract meets the
definition of an annuity contract. See
§ 1.401(f)–4(e). Also see § 1.403(b)–11(d)
for a transition rule.
(3) Special rule for certain contracts.
This paragraph (c)(3) applies in the case
of a contract issued under a State
section 403(b) plan established on or
before May 17, 1982, or for an employee
who becomes covered for the first time
under the plan after May 17, 1982,
unless the Commissioner had before
that date issued any written
communication (either to the employer
or financial institution) to the effect that
the arrangement under which the
contract was issued did not meet the
requirements of section 403(b). The
requirement that the contract be issued
by an insurance company qualified to
issue annuities in a State does not apply
to that contract if one of the following
two conditions is satisfied and that
condition has been satisfied
continuously since May 17, 1982—
(i) Benefits under the contract are
provided from a separately funded
retirement reserve that is subject to
supervision of the State insurance
department; or
(ii) Benefits under the contract are
provided from a fund that is separate
from the fund used to provide statutory
benefits payable under a State
retirement system and that is part of a
State teachers retirement system to
purchase benefits that are unrelated to
the basic benefits provided under the
retirement system, and the death benefit
provided under the contract does not at
any time exceed the larger of the reserve
or the contribution made for the
employee.
(d) Custodial accounts—(1) Treatment
as a section 403(b) contract. Under
section 403(b)(7), a custodial account is
treated as an annuity contract for
purposes of §§ 1.403(b)–1 through
1.403(b)–11. See section 403(b)(7)(B) for
special rules regarding the tax treatment
of custodial accounts and section
4973(c) for an excise tax that applies to
excess contributions to a custodial
account.
(2) Custodial account defined. A
custodial account means a plan, or a
separate account under a plan, in which
an amount attributable to section 403(b)
contributions (or amounts rolled over to
a section 403(b) contract, as described in
§ 1.403(b)–10(d)) is held by a bank or a
person who satisfies the conditions in
section 401(f)(2), if—

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(i) All of the amounts held in the
account are invested in stock of a
regulated investment company (as
defined in section 851(a) relating to
mutual funds);
(ii) The requirements of § 1.403(b)–
6(c) (imposing restrictions on
distributions with respect to a custodial
account) § 1.403(b)–6(d) are satisfied
with respect to the amounts held in the
account;
(iii) The assets held in the account
cannot be used for, or diverted to,
purposes other than for the exclusive
benefit of plan participants or their
beneficiaries (for which purpose, assets
are treated as diverted to the employer
if the employer borrows assets from the
account); and
(iv) The account is not part of a
retirement income account.
(3) Effect of definition. The
requirement in paragraph (d)(2)(i) of this
section is not satisfied if the account
includes any assets that other than stock
of a regulated investment company.
(e) Retirement income accounts. See
§ 1.403(b)–9 for special rules under
which a retirement income account for
employees of a church-related
organization is treated as a section
403(b) contract for purposes of
§§ 1.403(b)–1 through 1.403(b)–11.
(f) Combining assets. To the extent
permitted by the Commissioner in
revenue rulings, notices, or other
guidance published in the Internal
Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter),
trust assets held under a custodial
account and trust assets held under a
retirement income account, as described
in § 1.403(b)–9(a)(6), may be invested in
a group trust with trust assets held
under a qualified plan or individual
retirement plan. For this purpose, a trust
includes a custodial account that is
treated as a trust under section 401(f).
§ 1.403(b)–9
plans.

Special rules for church

(a) Retirement income accounts—(1)
Treatment as a section 403(b) contract.
Under section 403(b)(9), a retirement
income account for employees of a
church-related organization (as defined
in § 1.403(b)–2) is treated as an annuity
contract for purposes of §§ 1.403(b)–1
through 1.403(b)–11.
(2) Retirement income account
defined—(i) In general. A retirement
income account means a defined
contribution program established or
maintained by a church-related
organization under which—
(A) There is separate accounting for
the retirement income account’s interest
in the underlying assets (i.e., there must
be sufficient separate accounting for it

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules
to be possible at all times to determine
the retirement income account’s interest
in the underlying assets and to
distinguish that interest from any
interest that is not part of the retirement
income account);
(B) Investment performance is based
on gains and losses on those assets; and
(C) The assets held in the account
cannot be used for, or diverted to,
purposes other than for the exclusive
benefit of plan participants or their
beneficiaries. For this purpose, assets
are treated as diverted to the employer
if the employer borrows assets from the
account.
(ii) Plan required. A retirement
income account must be maintained
pursuant to a program which is a plan
(as defined in § 1.403(b)–3(b)(3)) and the
plan document must state (or otherwise
evidence in a similarly clear manner)
the intent to constitute a retirement
income account.
(3) Ownership or use constitutes
distribution. Any asset of a retirement
income account that is owned or used
by a participant or beneficiary is treated
as having been distributed to that
participant or beneficiary. See
§§ 1.403(b)–6 and 1.403(b)–7 for rules
relating to distributions.
(4) Coordination of retirement income
account with custodial account rules. A
retirement income account that is
treated as an annuity contract is not a
custodial account (defined in
§ 1.403(b)–8(d)(2)), even if it is invested
solely in stock of a regulated investment
company.
(5) Life annuities. A retirement
income account may distribute benefits
in a form that includes a life annuity
only if—
(i) The amount of the distribution
form has an actuarial present value, at
the annuity starting date, equal to the
participant’s or beneficiary’s
accumulated benefit, based on
reasonable actuarial assumptions,
including regarding interest and
mortality; and
(ii) The plan sponsor guarantees
benefits in the event that a payment is
due that exceeds the participant’s or
beneficiary’s accumulated benefit.
(6) Combining retirement income
account assets with other assets. For
purposes of § 1.403(b)–8(f) relating to
combining assets, retirement income
account assets held in trust (including a
custodial account that is treated as a
trust under section 401(f)) are subject to
the same rules regarding combining of
assets as custodial account assets. In
addition, retirement income account
assets are permitted to be commingled
in a common fund with amounts
devoted exclusively to church purposes

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(such as a fund from which unfunded
pension payments are made to former
employees of the church). However,
unless otherwise permitted by the
Commissioner, no assets of the plan
sponsor, other than retirement income
account assets, may be combined with
custodial account assets or any other
assets permitted to be combined under
§ 1.403(b)–8(f). This paragraph (a)(6) is
subject to any additional rules issued by
the Commissioner in revenue rulings,
notices, or other guidance published in
the Internal Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter).
(7) Trust treated as tax exempt. A
trust (including a custodial account that
is treated as a trust under section 401(f))
that includes no assets other than assets
of a retirement income account is
treated as an organization that is exempt
from taxation under section 501(a).
(b) No compensation limitation up to
$10,000. See section 415(c)(7) for
special rules regarding certain employer
contributions not exceeding $10,000.
(c) Special deduction rule for selfemployed ministers. See section
404(a)(10) for a special rule regarding
the deductibility of a contribution made
by a self-employed minister.
§ 1.403(b)–10

Miscellaneous provisions.

(a) Plan terminations and frozen
plans—(1) In general. An employer may
amend its section 403(b) plan to
eliminate future contributions for
existing participants. Alternatively, an
employer may amend its section 403(b)
plan to limit participation to existing
participants and employees (to the
extent consistent with § 1.403(b)–5). A
section 403(b) plan may contain
provisions that permit plan termination
and permit accumulated benefits to be
distributed on termination. However, in
the case of a section 403(b) contract that
is subject to the distribution restrictions
in § 1.403(b)–6(c) or (d) (relating to
custodial accounts and section 403(b)
elective deferrals), termination of the
plan and the distribution of
accumulated benefits is permitted only
if the employer (taking into account all
entities that are treated as the employer
under section 414 on the date of the
termination) does not make
contributions to an alternative section
403(b) contract that is not part of the
plan. For purposes of this rule,
contributions are made to an alternative
section 403(b) contract if and only if
contributions are made to a section
403(b) contract during the period
beginning on the date of plan
termination and ending 12 months after
distribution of all assets from the
terminated plan. However, if at all times
during the period beginning 12 months

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67097

before the termination and ending 12
months after distribution of all assets
from the terminated plan, fewer than 2
percent of the employees who were
eligible under the section 403(b) plan as
of the date of plan termination are
eligible under the alternative section
403(b) contract, the alternative section
403(b) contract is disregarded. In order
for a section 403(b) plan to be
considered terminated, all accumulated
benefits under the plan must be
distributed to all participants and
beneficiaries as soon as administratively
practicable after termination of the plan.
A distribution includes delivery of a
fully paid individual insurance annuity
contract. The mere provision for, and
making of, distributions to participants
or beneficiaries upon plan termination
does not cause a contract to cease to be
a section 403(b) contract. See § 1.403(b)–
7 for rules regarding the tax treatment of
distributions.
(2) Employers that cease to be eligible
employers. An employer that ceases to
be an eligible employer may no longer
contribute to a section 403(b) contract
for any subsequent period, and the
contract will fail to satisfy § 1.403(b)–
3(a) if any further contributions are
made with respect to a period after the
employer ceases to be an eligible
employer.
(b) Contract exchanges and plan-toplan transfers—(1) Contract exchanges
and transfers—(i) General rule. If the
conditions in paragraph (b)(2) of this
section are met, a section 403(b)
contract held under a section 403(b)
plan may be exchanged for another
section 403(b) contract held under that
section 403(b) plan. Further, if the
conditions in paragraph (b)(3) of this
section are met, a section 403(b) plan
may provide for the transfer of its assets
(i.e., the section 403(b) contracts held
thereunder, including any assets held in
a custodial account or retirement
income account that are treated as
section 403(b) contracts) to another
section 403(b) plan. In addition, if the
conditions in paragraph (b)(4) of this
section (relating to permissive service
credit and repayments under section
415) are met, a section 403(b) plan may
provide for the transfer of its assets to
a qualified plan under section 401(a).
However, neither a qualified plan nor an
eligible plan under section 457(b) may
transfer assets to a section 403(b) plan,
and a section 403(b) plan may not
accept such a transfer. In addition, a
section 403(b) contract may not be
exchanged for an annuity contract that
is not a section 403(b) contract. Neither
a plan-to-plan transfer nor a contract
exchange permitted under this
paragraph (b) is treated as a distribution

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules

for purposes of the distribution
restrictions at § 1.403(b)–6. Therefore,
such a transfer or exchange may be
made before severance from
employment or another distribution
event. Further, no amount is includible
in gross income by reason of such a
transfer or exchange.
(ii) ERISA rules. See § 1.414(l)–1 for
other rules that are applicable to section
403(b) plans that are subject to section
208 of the Employee Retirement Income
Security Act of 1974 (88 Stat. 829, 865).
(2) Requirements for contract
exchange within the same plan. A
section 403(b) contract of a participant
or beneficiary may be exchanged under
paragraph (b)(1) of this section for
another section 403(b) contract of that
participant or beneficiary under the
same section 403(b) plan if the
following conditions are met—
(i) The plan under which the contract
is issued provides for the exchange;
(ii) The participant or beneficiary has
an accumulated benefit immediately
after the transfer at least equal to the
accumulated benefit of that participant
or beneficiary immediately before the
exchange (taking into account the
accumulated benefit of that participant
or beneficiary under both section 403(b)
contracts immediately before the
exchange); and
(iii) The other contract provides that,
to the extent a contract that is
exchanged is subject to any distribution
restrictions under § 1.403(b)–6, the other
contract imposes restrictions on
distributions to the participant or
beneficiary that are not less stringent
than those imposed on the contract
being exchanged.
(3) Requirements for plan-to-plan
transfers. A plan-to-plan transfer under
paragraph (b)(1) of this section from a
section 403(b) plan to another section
403(b) plan is permitted if the following
conditions are met—
(i) The participant or beneficiary
whose assets are being transferred is an
employee of the employer providing the
receiving plan;
(ii) The transferor plan provides for
transfers;
(iii) The receiving plan provides for
the receipt of transfers;
(iv) The participant or beneficiary
whose assets are being transferred has
an accumulated benefit immediately
after the transfer at least equal to the
accumulated benefit with respect to that
participant or beneficiary immediately
before the transfer.
(v) The receiving plan provides that,
to the extent any amount transferred is
subject to any distribution restrictions
under § 1.403(b)–6, the receiving plan
imposes restrictions on distributions to

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the participant or beneficiary whose
assets are being transferred that are not
less stringent than those imposed on the
transferor plan.
(vi) If a plan-to-plan transfer does not
constitute a complete transfer of the
participant’s or beneficiary’s interest in
the section 403(b) plan, the transferee
plan treats the amount transferred as a
continuation of a pro rata portion of the
participant’s or beneficiary’s interest in
the section 403(b) plan (e.g., a pro rata
portion of the participant’s or
beneficiary’s interest in any after-tax
employee contributions).
(4) Purchase of permissive service
credit by contract-to-plan transfers from
a section 403(b) contract to a qualified
plan—(i) General rule. If the conditions
in paragraph (b)(4)(ii) of this section are
met, a section 403(b) plan may provide
for the transfer of assets held thereunder
to a qualified defined benefit
governmental plan (as defined in
section 414(d)).
(ii) Conditions for plan-to-plan
transfers. A transfer may be made under
this paragraph (b)(4) only if the transfer
is either—
(A) For the purchase of permissive
service credit (as defined in section
415(n)(3)(A)) under the receiving
defined benefit governmental plan; or
(B) A repayment to which section 415
does not apply by reason of section
415(k)(3).
(c) Qualified domestic relations
orders. In accordance with the second
sentence of section 414(p)(9), any
distribution from an annuity contract
under section 403(b) (including a
distribution from a custodial account or
retirement income account that, under
section 403(b)(7) or (9), is treated as a
section 403(b) contract) pursuant to a
qualified domestic relations order is
treated in the same manner as a
distribution from a plan to which
section 401(a)(13) applies. Thus, for
example, a section 403(b) plan does not
fail to satisfy the distribution
restrictions set forth in § 1.403(b)–6(b),
(c), or (d) merely as a result of
distribution made pursuant to a
qualified domestic relations order under
section 414(p), so that such a
distribution is permitted without regard
to whether the employee from whose
contract the distribution is made has
had a severance from employment or
other event permitting a distribution to
be made under section 403(b).
(d) Rollovers to a section 403(b)
contract. A section 403(b) contract may
accept contributions that are eligible
rollover distributions (as defined in
section 402(c)(4)) made from another
eligible retirement plan (as defined in
section 402(c)(8)(B)).

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Amounts contributed to a section
403(b) contract as eligible rollover
distributions are not taken into account
for purposes of the limits in § 1.403(b)–
4, but, except as otherwise specifically
provided (for example, at § 1.403(b)–
6(i)), are otherwise treated in the same
manner as amounts held under a section
403(b) contract for purposes of
§§ 1.403(b)–3 through 1.403(b)–9 and
this section.
(e) Deemed IRAs. See regulations
under section 408(q) for special rules
relating to deemed IRAs.
(f) Defined benefit plans—(1) TEFRA
church defined benefit plans. See
section 251(e)(5) of the Tax Equity and
Fiscal Responsibility Act of 1982, Public
Law 97–248, for a provision permitting
certain arrangements established by a
church-related organization and in
effect on September 3, 1982 (a TEFRA
church defined benefit plan) to be
treated as section 403(b) contract even
though it is a defined benefit
arrangement. In accordance with section
403(b)(1), for purposes of applying
section 415 to a TEFRA church defined
benefit plan, the accruals under the plan
are limited to the maximum amount
permitted under section 415(c) when
expressed as an annual addition, and,
for this purpose, the rules at § 1.402(b)–
1(a)(2) for determining the present value
of an accrual under a nonqualified
defined benefit plan also apply for
purposes of converting the accrual
under a TEFRA church defined benefit
plan to an annual addition. See section
415(b) for additional limits for TEFRA
church defined benefit plans.
(2) Other defined benefit plans.
Except for a TEFRA church defined
benefit plan, section 403(b) does not
apply to any contributions or accrual
under a defined benefit plan.
(g) Other rules relating to section
501(c)(3) organizations. See section
501(c)(3) and regulations thereunder for
the substantive standards for taxexemption under that section, including
the requirement that no part of the
organization’s net earnings inure to the
benefit of any private shareholder or
individual. See also sections 4941 (self
dealing), 4945 (taxable expenditures),
and 4958 (excess benefit transactions),
and the regulations thereunder, for rules
relating to excise taxes imposed on
certain transactions involving
organizations described in section
501(c)(3).
§ 1.403(b)–11

Effective dates.

(a) Except as otherwise provided in
this section, §§ 1.403(b)–1 through
1.403(b)–10 apply for taxable years
beginning after December 31, 2005.

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules
(b) In the case of a section 403(b)
contract maintained pursuant to a
collective bargaining agreement that is
ratified and in effect on the date of
publication of final regulations in the
Federal Register, §§ 1.403(b)–1 through
1.403(b)–10 do not apply before the date
on which the collective bargaining
agreement terminates (determined
without regard to any extension thereof
after the date of publication of final
regulations in the Federal Register).
(c) In the case of a section 403(b)
contract maintained by a church-related
organization for which the authority to
amend the contract is held by a church
convention (within the meaning of
section 414(e)), §§ 1.403(b)–1 through
1.403(b)–10 do not apply before the
earlier of—
(1) January 1, 2007; or
(2) 60 days following the earliest
church convention that occurs after the
date of publication of final regulations
in the Federal Register.
(d) Section 1.403(b)–8(c)(2) does not
apply to a contract issued before
February 14, 2005.
Par. 6. Section 1.414(c)–5 is
redesignated as § 1.414(c)–6 and new
§ 1.414(c)–5 is added to read as follows:
§ 1.414(c)–5 Certain tax-exempt
organizations.

(a) Application. This section applies
to an organization that is exempt from
tax under section 501(a). The rules of
this section are in addition to the rules
otherwise applicable under section
414(b) and 414(c). Except to the extent
set forth in paragraphs (d), (e), and (f) of
this section, this section does not apply
to any church, as defined in section
3121(w)(3)(A), or any qualified churchcontrolled organization, as defined in
section 3121(w)(3)(B).
(b) General rule. In the case of an
organization that is exempt from tax
under section 501(a) (an exempt
organization) whose employees
participate in a plan, the employer with
respect to that plan includes the exempt
organization and any other organization
that is under common control with the
exempt organization whose employees
participate in the plan. For this purpose,
common control exists between exempt
organizations if at least 80 percent of the
directors or trustees of one organization
are either representatives of, or directly
or indirectly controlled by, the other
organization. A trustee or director is
treated as a representative of another
exempt organization if he or she also is
a trustee, director, agent, or employee of
the other exempt organization.
Existence of control is determined based
on the facts and circumstances. A
trustee or director is controlled by

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another organization if the other
organization has the power to remove
such trustee or director and designate a
new trustee or director. For example, if
exempt organization A appoints at least
80 percent of the trustees of exempt
organization B (which is the owner of
the outstanding shares of corporation C,
which is not an exempt organization)
and has the power to control at least 80
percent of the directors of exempt
organization D, then, under this
paragraph (b) and § 1.414(b)–1, entities
A, B, C, and D are treated as the same
employer with respect to any plan
maintained by A, B, C, or D for purposes
of the sections referenced in sections
414(b), 414(c), and 414(t).
(c) Permissive aggregation with
entities having a common exempt
purpose. For purposes of this section,
exempt organizations that maintain a
single plan covering one or more
employees from each organization may
treat themselves as under common
control for purposes of section 414(c) if
each of the organizations regularly
coordinate their day-to-day exempt
activities. For example, an entity that
provides a type of emergency relief
within one geographic region and
another exempt organization that
provides that type of emergency relief
within another geographic region may
treat themselves as under common
control if they have a single plan
covering employees of both entities and
regularly coordinate their day-to-day
exempt activities. Similarly, a hospital
that is an exempt organization and
another exempt organization with
which it coordinates the delivery of
medical services or medical research
may treat themselves as under common
control if there is a single plan covering
employees of the hospital and
employees of the other exempt
organization and the coordination is a
regular part of their day-to-day exempt
activities.
(d) Permissive disaggregation between
qualified church controlled
organizations and other entities. In the
case of a church plan (as defined in
section 414(e)) to which contributions
are made by more than one common law
entity, any employer may apply
paragraphs (b) and (c) of this section to
those entities that are not a church (as
defined in section 403(b)(12)(B) and
§ 1.403(b)–2) separately from those
entities that are churches. For example,
in the case of a group of entities
consisting of a church (as defined in
section 3121(w)(3)(A)), a secondary
school (that is treated as a church under
§ 1.403(b)–2), and a nursing home that
receives more than 25 percent of its
support from fees paid by residents (so

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67099

that it is not treated as a qualified
church-controlled organization under
§ 1.403(b)–2 and section 3121(w)(3)(B)),
the nursing home may treat itself as not
being under common control with the
church and the school, even though
under the nursing home may be under
common control with the school and the
church under paragraph (b) of this
section.
(e) Application to certain church
entities. [Reserved].
(f) Anti-abuse rule. In any case in
which the Commissioner determines
that the structure of one or more exempt
organizations (including an exempt
organization and an entity that is not
exempt from income tax) or the
positions taken by those organizations
has the effect of avoiding or evading
§ 1.403(b)–5(a) or another requirement
imposed under section 401(a), 403(b), or
457(b), or any applicable section (as
defined in section 414(t)), the
Commissioner may treat an entity as
under common control with the exempt
organization.
(g) Examples. The provisions of this
section are illustrated by the following
examples:
Example 1. (i) Facts. Organization A is a
tax-exempt organization under section
501(c)(3) which owns 80% or more of the
total value of all classes of stock of
corporation B, which is a for profit
organization.
(ii) Conclusion. Under paragraph (a) of this
section, this section does not alter the rules
of section 414(b) and (c), so that organization
A and corporation B are under common
control under § 1.414(c)–2(b).
Example 2. (i) Facts. Organization M is a
hospital which is a tax-exempt organization
under section 501(c)(3) and organization N is
a medical clinic which is also a tax-exempt
organization under section 501(c)(3). N is
located in a city and M is located in a nearby
suburb. There is a history of regular
coordination of day-to-day activities between
M and N, including periodic transfers of staff,
coordination of staff training, common
sources of income, and coordination of
budget and operational goals. A single
section 403(b) plan covers professional and
staff employees of both the hospital and the
medical clinic. While a number of members
of the board of directors of M are also on the
board of directors of N, there is less than 80%
overlap in board membership. Both
organizations have approximately the same
percentage of employees who are highly
compensated and have appropriate business
reasons for being maintained in separate
entities.
(ii) Conclusion. M and N are not under
common control under this section, but,
under paragraph (c) of this section, may
choose to treat themselves as under common
control, assuming both of them act in a
manner that is consistent with that choice for
purposes of § 1.403(b)–5(a), sections 401(a),
403(b), and 457(b), and any other applicable
section (as defined in section 414(t)).

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Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules

(h) Effective date. This section applies
for taxable years beginning after
December 31, 2005.
PART 31—EMPLOYMENT TAXES
Par. 7. The authority citation for part
31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 8. Section 31.3121(a)(5)–2 is
added to read as follows:
§ 31.3121(a)(5)–2 Payments under or to an
annuity contract described in section
403(b).

[The text of proposed § 31.3121(a)(5)–
2 is the same as the text of
§ 31.3121(a)(5)–2T published elsewhere
in this issue of the Federal Register].
Nancy Jardini,
Acting Deputy Commissioner for Services and
Enforcement.
[FR Doc. 04–25237 Filed 11–15–04; 8:45 am]
BILLING CODE 4830–01–P

of the submitted rule revisions and TSD
at the following locations:
Air and Radiation Docket and
Information Center, U.S.
Environmental Protection Agency,
(Mail Code 6102T), Room B–102,
1301 Constitution Avenue, NW.,
Washington, DC 20460.
California Air Resources Board,
Stationary Source Division, Rule
Evaluation Section, 1001 ‘‘I’’ Street,
Sacramento, CA 95814.
Imperial County Air Pollution Control
District, 150 South 9th Street, El
Centro, CA 92243.
A copy of the rules may also be
available via the Internet at http://
www.arb.ca.gov/drdb/drdbltxt.htm.
Please be advised that this is not an EPA
Web site and may not contain the same
version of the rule that was submitted
to EPA.

40 CFR Part 52

Al
Petersen, Rulemaking Office (AIR–4),
U.S. Environmental Protection Agency,
Region IX, (415) 947–4118 or
petersen.alfred@epa.gov.

[CA 309–0468b; FRL–7834–4]

SUPPLEMENTARY INFORMATION:

FOR FURTHER INFORMATION CONTACT:

ENVIRONMENTAL PROTECTION
AGENCY

Revisions to the California State
Implementation Plan, Imperial County
Air Pollution Control District
Environmental Protection
Agency (EPA).
ACTION: Proposed rule.
AGENCY:

SUMMARY: EPA is proposing to approve
revisions to the Imperial County Air
Pollution Control District (ICAPCD)
portion of the California State
Implementation Plan (SIP). These
revisions concern the emission of
particulate matter (PM–10) and sulfur
compounds into the atmosphere from
industrial processes. We are proposing
to approve local rules that administer
regulations and regulate emission
sources under the Clean Air Act as
amended (CAA or the Act).
DATES: Any comments on this proposal
must arrive by December 16, 2004.
ADDRESSES: Mail or e-mail comments to
Andy Steckel, Rulemaking Office Chief
(AIR–4), U.S. Environmental Protection
Agency, Region IX, 75 Hawthorne
Street, San Francisco, CA 94105, or email to steckel.andrew@epa.gov, or
submit comments at http://
www.regulations.gov.
You can inspect a copy of the
submitted rule revisions and EPA’s
technical support document (TSD) at
our Region IX office during normal
business hours. You may also see a copy

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This
proposal addresses the following local
rules: ICAPCD Rules 403 and 405. In the
Rules and Regulations section of this
Federal Register, we are approving
these local rules in a direct final action
without prior proposal because we
believe these SIP revisions are not
controversial. If we receive adverse
comments, however, we will publish a
timely withdrawal of the direct final
rule and address the comments in
subsequent action based on this
proposed rule. Please note that if we
receive adverse comment on an
amendment, paragraph, or section of
this rule and if that provision may be
severed from the remainder of the rule,
we may adopt as final those provisions
of the rule that are not the subject of an
adverse comment.
We do not plan to open a second
comment period, so anyone interested
in commenting should do so at this
time. If we do not receive adverse
comments, no further activity is
planned. For further information, please
see the direct final action.

Dated: October 13, 2004.
Keith Takata,
Acting Regional Administrator, Region IX.
[FR Doc. 04–25301 Filed 11–15–04; 8:45 am]
BILLING CODE 6560–50–P

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DEPARTMENT OF COMMERCE
National Oceanic and Atmospheric
Administration
50 CFR Part 600
[Docket No. 041029298–4298–01; I.D.
052004A]
RIN 0648–AS38

Magnuson-Stevens Act Provisions;
Fishing Capacity Reduction Program;
Pacific Coast Groundfish Fishery;
California, Washington, and Oregon
Fisheries for Coastal Dungeness Crab
and Pink Shrimp; Industry Fee System
for Fishing Capacity Reduction Loan
National Marine Fisheries
Service (NMFS), National Oceanic and
Atmospheric Administration (NOAA),
Commerce.
ACTION: Proposed rule.
AGENCY:

SUMMARY: NMFS proposes regulations to
implement an industry fee system for
repaying a $35,662,471 Federal loan
partially financing a fishing capacity
reduction program in the Pacific Coast
groundfish fishery. The fee system
involves future landings in the trawl
portion (excluding whiting catcher processors) of the Pacific Coast
groundfish fishery as well as the
California, Washington, and Oregon
fisheries for coastal Dungeness crab and
pink shrimp. This action’s intent is to
implement the fee system.
DATES: Comments on this proposed rule
must be received by December 16, 2004.
ADDRESSES: You may submit comments
by any of the following methods:
• E-mail: 0648–AS38@noaa.gov.
Include in the subject line the following
identifier: Pacific Coast Groundfish
Buyback RIN 0648–AS38. E-mail
comments, with or without attachments,
are limited to 5 megabytes.
• Federal e-Rulemaking Portal:
http:www.regulations.gov.
• Mail: Michael L. Grable, Chief,
Financial Services Division, National
Marine Fisheries Service, 1315 EastWest Highway, Silver Spring, MD
20910–3282.
• Fax: (301) 713–1306.
Comments involving the burden-hour
estimates or other aspects of the
collection-of-information requirements
contained in this proposed rule should
be submitted in writing to Michael L.
Grable, at the above address, and to
David Rostker, Office of Management
and Budget (OMB), by e-mail at
DavidlRostker@omb.eop.gov or by fax
to 202–395–7285.
Copies of the Environmental
Assessment, Regulatory Impact Review

E:\FR\FM\16NOP1.SGM

16NOP1