Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67075

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.

List of Subjects in 12 CFR Part 617

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 

1. The authority citation for part 617 

continues to read as follows:

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:

§ 617.7010 May borrower rights be 

waived?

* * * * *

(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.

Dated: November 10, 2004. 

Jeanette C. Brinkley, 

Secretary, Farm Credit Administration Board.

[FR Doc. 04–25397 Filed 11–15–04; 8:45 am] 

BILLING CODE 6705–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service 

26 CFR Parts 1 and 31

[REG–155608–02] 

RIN 1545–BB64

Revised Regulations Concerning 

Section 403(b) Tax-Sheltered Annuity 

Contracts

AGENCY: Internal Revenue Service (IRS), 

Treasury.

ACTION: Notice of proposed rulemaking, 

notice of proposed rulemaking by crossreference to temporary regulations, and 

notice of public hearing. 

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, 

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 

67076 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

1Since 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).

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.

3Rev. Rul. 73–607, 1973–2 C.B. 145 and Rev. Rul. 

80–139, 1980–1 C.B. 88.

4As 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.

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) 

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 

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67077

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 

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 

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 

67078 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

5See, for example, Rev. Rul. 2000–35, 2000–2 

C.B. 138, relating to automatic enrollment in section 

403(b) plans.

6Other 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) 

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.

7Similarly, the proposed regulations do not 

address the conditions under which a plan is a 

governmental plan under section 414(d).

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 

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

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67079

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). 

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 

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 

67080 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

employee’s annual includible 

compensation based on the former 

employee’s compensation during his or 

her most recent year of service. 

Other Contributions for Former 

Employees 

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 

applies to a governmental plan, within 

the meaning of section 414(d), is the 

limitation on compensation (section 

401(a)(17)). 

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 

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67081

8See proposed § 1.401(k)–1(d)(2), REG–108639–

99, 68 FR 42476 (July 17, 2003).

9See, 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).

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 

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. 

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 

67082 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

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, 

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 

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) 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67083

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 

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 

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. 

67084 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 

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 

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, 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67085

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). * * *

§ 1.414(c)–5 Also issued under 26 U.S.C. 

414(b), (c), and (o). * * *

Par. 2. Section 1.402(b)–1 is amended 

by revising paragraphs (a)(2) and 

(b)(2)(ii) to read as follows:

§ 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. 

(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:

§ 1.403(b)–0 Taxability under an annuity 

purchased by a section 501(c)(3) 

organization or a public school.

§ 1.403(b)–1 General overview of taxability 

under an annuity contract purchased by a 

section 501(c)(3) organization or a public 

school. 

§ 1.403(b)–2 Definitions. 

§ 1.403(b)–3 Exclusion for contributions to 

purchase section 403(b) contracts. 

§ 1.403(b)–4 Contribution limitations. 

§ 1.403(b)–5 Nondiscrimination rules. 

§ 1.403(b)–6 Timing of distributions and 

benefits. 

§ 1. 403(b)–7 Taxation of distributions and 

benefits. 

§ 1.403(b)–8 Funding. 

§ 1.403(b)–9 Special rules for church plans. 

§ 1.403(b)–10 Miscellaneous provisions. 

§ 1.403(b)–11 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 

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. 

67086 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. 

(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 

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67087

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 

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 

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 

67088 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

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 

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 

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67089

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 

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 

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).

67090 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

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 

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 

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67091

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 

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. 

(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 

67092 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

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 2-

semester 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 

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 

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67093

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 

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 12-

month 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 Timing of distributions and 

benefits. 

(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 

§ 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 

67094 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

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 5-

percent 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 

(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, 

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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67095

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 

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 Taxation of distributions and 

benefits. 

(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 

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 20-

percent 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). 

67096 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 

(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. 

(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—

(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 Special rules for church 

plans. 

(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 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67097

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 

(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 

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 

67098 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 

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)).

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.

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Proposed Rules 67099

(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 

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 

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)).

67100 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

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 52

[CA 309–0468b; FRL–7834–4] 

Revisions to the California State 

Implementation Plan, Imperial County 

Air Pollution Control District

AGENCY: Environmental Protection 

Agency (EPA).

ACTION: Proposed rule.

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 

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.

FOR FURTHER INFORMATION CONTACT: Al 

Petersen, Rulemaking Office (AIR–4), 

U.S. Environmental Protection Agency, 

Region IX, (415) 947–4118 or 

petersen.alfred@epa.gov.

SUPPLEMENTARY INFORMATION: 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

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

AGENCY: National Marine Fisheries 

Service (NMFS), National Oceanic and 

Atmospheric Administration (NOAA), 

Commerce.

ACTION: Proposed rule.

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