26 U.S.C. § 403 — Taxation of employee annuities⚖ mistrial

(a) Taxability of beneficiary under a qualified annuity plan. If an employer buys an annuity contract for an employee under a plan that meets section 404(a)(2), the money actually paid out to the employee is taxed under section 72's annuity rules, in the year it is paid — whether or not the employer deducted the premiums. A special rule tied to section 402(l) means some amounts paid out for health or long-term-care insurance are not taxed this way, to the extent that section allows. "Employee" here also includes certain self-employed people, as defined in section 401(c)(1), and their "employer" is whoever section 401(c)(4) says is their employer. Rollovers: if an employee receives an eligible rollover distribution (as section 402(c)(4) defines it) and moves part of it — in the same form received, if it is property rather than cash — into another eligible retirement plan, that transferred part is not taxed as income for that year; several rollover rules from section 402(c) and section 402(f) apply here too. A direct trustee-to-trustee transfer described in section 401(a)(31) is also not taxed the year it is transferred. An annuity contract does not lose this tax treatment just because it allows the special qualified long-term-care distributions permitted under section 401(a)(39).

(b) Taxability of beneficiary under an annuity bought by a section 501(c)(3) organization or public school. If a tax-exempt charity, a public school employer (for an employee of certain educational organizations), or a minister or their employer buys an annuity that: is not already covered by subsection (a); gives the employee nonforfeitable rights (except for missing future premiums); meets the nondiscrimination requirements in paragraph (12) unless a church bought it; and, if bought under a salary-reduction agreement, meets section 401(a)(30) — then the employer's contributions are left out of the employee's taxable income, up to the limit set in section 415. Money actually paid out is taxed under section 72 when it is paid. Rollover contributions described later in this subsection, or under section 408(d)(3)(A)(ii), do not count as employer contributions for this purpose. The same health and long-term-care carve-out tied to section 402(l) applies here as in subsection (a). "Includible compensation" means the pay the employee got from that employer, counted in gross income (ignoring the foreign-income exclusion in section 911), for the employee's most recent countable year of service within the last five years — not counting the employer's own annuity contributions, but including elective deferrals and certain amounts the employee chose to have withheld tax-free under section 125, 132(f)(4), or 457. In counting "years of service": count one full year for each full year as a full-time employee, plus a fraction of a year (set by regulation) for part-time work or a partial year; the total can never be counted as less than one year. If this subsection covers two or more annuity contracts for the same employee in a year, they are treated as one contract. (An earlier paragraph 6 was repealed by a 2002 law.) Custodial accounts: money an employer pays into a custodial account that meets section 401(f)(2) counts as a contribution to an annuity contract if it is invested in regulated-investment-company (mutual fund^*) shares^* or a qualifying group trust, and the account can only pay out money when the employee dies, turns 59½, leaves the job, becomes disabled, faces financial hardship (under paragraph 17), reaches a 90-day window before a "lifetime income investment" option ends, or qualifies under the section 401(a)(39) rules — and lifetime-income-investment payouts must come out as a qualified distribution or a qualified plan distribution annuity contract. Such a custodial account is treated like a section 401(a) organization for certain tax-code purposes. A "regulated investment company" is a domestic mutual fund as defined in section 851(a). For hardship determinations, the plan administrator^* can rely on the employee's written certification of need and lack of other resources, unless the administrator actually knows otherwise; the Secretary^* can write rules for handling employee misrepresentation. Rollovers work the same way as in subsection (a): moving an eligible rollover distribution, in its original form, to another eligible retirement plan described in section 402(c)(8)(B) is not taxed that year, using the same section 402(c) rules, except that the section 402(f) notice duty falls on the payor instead of a plan administrator. Church retirement income accounts: a "retirement income account" — a defined-contribution program a church or a church association or convention (including certain organizations under section 414(e)(3)(A)) sets up to provide benefits under this section — is treated as an annuity contract, and employer payments into it count as contributions to that annuity contract. Distribution requirements: under Treasury regulations, this subsection's tax break does not apply to a contract, custodial account, or retirement income account unless it follows rules similar to the required-distribution and transfer rules in sections 401(a)(9) and 401(a)(31), and similar to the incidental-death-benefit rules of section 401(a); direct trustee-to-trustee transfers under section 401(a)(31) are still not taxed the year they happen. Timing of salary-reduction distributions: money contributed under a salary-reduction agreement can only be paid out when the employee turns 59½, leaves the job, dies, or becomes disabled; for hardship under paragraph 17; for certain distributions described in section 72(t)(2)(G); around the 90-day lifetime-income-investment window, paid out the qualified way; or under section 401(a)(39). Hardship certifications work the same way described above for custodial accounts. Nondiscrimination requirements (paragraph 12): for contributions not made by salary reduction, the plan must meet several section 401 coverage and nondiscrimination tests as if it were a section 401(a) plan. For salary-reduction contributions: if any employee can choose to have the employer contribute more than $200 under a salary-reduction agreement, every employee must get that same choice — with narrow exceptions: a one-time irrevocable election does not count as "salary reduction"; employees already covered by certain other retirement plans, nonresident aliens, and, subject to conditions, student workers and employees who normally work under 20 hours a week can be excluded; and offering to match student-loan payments, or offering a small incentive not paid from plan assets, does not by itself break this rule. "Church" has the meaning given in section 3121(w)(3)(A) and includes qualified church-controlled organizations. For state and local government plans, most of these nondiscrimination tests do not apply, except the compensation cap in section 401(a)(17). For certain part-time employees who are eligible to participate only because of a specific ERISA provision, the employer does not have to make matching or nonelective contributions for them, and can exclude them from several other section 401 nondiscrimination rules. Trustee-to-trustee transfers used to buy permissive service credit under a government defined-benefit plan are not taxed as income, whether the transfer buys service credit or is a certain kind of repayment. Death benefits paid because of qualifying military service must meet section 401(a)(37)'s requirements to keep this subsection's tax treatment. Multiple-employer plans: except for church plans, using a plan run by more than one employer does not by itself disqualify a contract from this subsection. If some employers in a multiple-employer plan fail its requirements, the plan can still qualify by following rules similar to section 413(e)(2), with extra conditions unless the plan is run solely by government entities. Safe-harbor deferral-only plans: an eligible employer's plan automatically meets the nondiscrimination test if it has automatic enrollment — a uniform default deferral rate between 3 and 15 percent that employees can opt out of or change — and limits contributions to employee elective deferrals only, capped at $6,000 a year, adjusted for inflation starting in 2025, plus an extra catch-up amount for employees 50 and older. An "eligible employer" is generally one with no other qualified retirement plan for that year, with technical exceptions for mixed workforces and business acquisitions. An "eligible employee" is anyone who is not allowed to be excluded under the paragraph 12 nondiscrimination rules. Hardship withdrawals (paragraph 17): salary-reduction contributions, certain "qualified nonelective" and "qualified matching" contributions, and the earnings on any of those, may be withdrawn for hardship. A distribution does not stop counting as a hardship distribution just because the employee did not first take out an available plan loan.

(c) Taxability of beneficiary under nonqualified annuities, or under annuities bought by exempt organizations, that do not meet the rules of subsection (a) or (b). Premiums an employer pays for such a contract are taxed to the employee under section 83 (property transferred for services), using the contract's value instead of fair market value — except for the part excluded under subsection (b). For the part of the contract covered by this subsection, whatever is actually paid or made available to a beneficiary from those premiums is taxed to the beneficiary, under section 72, in the year it is paid or made available.