41128 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

1See TD 8619, September 22, 1995 (60 FR 49199). 

2See TD 8987, April 17, 2002 (67 FR 18987). 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1, 31, 54, and 602 

[TD 9340] 

RIN 1545–BB64 

Revised Regulations Concerning 

Section 403(b) Tax-Sheltered Annuity 

Contracts 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document promulgates 

final regulations under section 403(b) of 

the Internal Revenue Code and under 

related provisions of sections 402(b), 

402(g), 402A, and 414(c). The 

regulations provide updated guidance 

on section 403(b) contracts of public 

schools and tax-exempt organizations 

described in section 501(c)(3). These 

regulations will affect sponsors of 

section 403(b) contracts, administrators, 

participants, and beneficiaries. 

DATES: Effective Date: July 26, 2007. 

Applicability Date: These regulations 

generally apply for taxable years 

beginning after December 31, 2008. 

However, see the ‘‘Applicability date’’ 

section in this preamble for additional 

information regarding the applicability 

of these regulations. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the regulations, John 

Tolleris, (202) 622–6060; concerning the 

regulations as applied to church-related 

entities, Robert Architect (202) 283– 

9634 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information in 

§ 1.403(b)–10(b)(2)(i)(C) of these final 

regulations has been approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545– 

2068. Responses to this collection of 

information are required in order to 

provide certain benefits. 

The estimated burden per respondent 

varies among the plan administrator/ 

payor/recordkeeper, depending upon 

individual respondents’ circumstances, 

with an estimated average of 4.1 hours. 

Comments concerning the accuracy of 

this burden estimate and suggestions for 

reducing this burden should be sent to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224, and to the Office of Management 

and Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503. 

The collection of information in 

§ 1.403(b)–10(b)(2)(i)(C) of these final 

regulations was not contained in the 

prior notice of proposed rulemaking. 

For this reason, this additional 

collection of information has been 

reviewed and, pending receipt and 

evaluation of public comments, 

approved by the Office of Management 

and Budget in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)) under control number 

1545–2068. Comments concerning this 

additional collection of information 

should be sent to the Internal Revenue 

Service, Attn: IRS Reports Clearance 

Officer, SE:W:CAR:MP:T:T:SP, 

Washington, DC 20224, and to the 

Office of Management and Budget, Attn: 

Desk Officer for the Department of the 

Treasury, Office of Information and 

Regulatory Affairs, Washington, DC 

20503. Comments on the collection of 

information should be received by 

September 24, 2007. Comments are 

specifically requested concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Internal Revenue Service, including 

whether the information will have 

practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information (see above); 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collections of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of service to provide 

information. 

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. 

The estimated burden per respondent 

varies among the plan administrator/ 

payor/recordkeeper, depending upon 

individual respondents’ circumstances, 

with an estimated average of 4.1 hours. 

Books or records relating to a 

collection of information must be 

retained as long as their contents might 

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 originally published in the 

Federal Register (29 FR 18356) on 

December 24, 1964 (1965–1 CB 180). 

Those 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 were issued under section 

403(b) to reflect rules relating to certain 

eligible rollover distributions 1 and 

required minimum distributions under 

section 401(a)(9).2 See § 601.601(d)(2) 

relating to objectives and standards for 

publishing regulations, revenue rulings 

and revenue procedures in the Internal 

Revenue Bulletin. 

On November 16, 2004, a notice of 

proposed rulemaking (REG–155608–02) 

was published in the Federal Register 

(69 FR 67075) that proposed a 

comprehensive update of the 

regulations under section 403(b) (2004 

proposed regulations), including: 

amending the 1964 and subsequent 

regulations to 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. The 2004 proposed regulations 

also included controlled group rules 

under section 414(c) for entities that are 

tax-exempt under section 501(a). 

Following publication of the 2004 

proposed regulations, comments were 

received and a public hearing was held 

on February 15, 2005. After 

consideration of the comments received, 

the 2004 proposed regulations are 

adopted by this Treasury decision, 


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Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 41129 

3Other differences between the rules applicable 

to section 403(b) plans and qualified plans include 

the following: the definition of compensation 

(including the five-year rule) in section 403(b)(3); 

the special section 403(b) catch-up elective deferral 

in section 402(g)(7); and the section 415 aggregation 

rules. An additional difference relates to when a 

severance from employment occurs for purposes of 

section 403(b) plans maintained by State and local 

government employers. See § 1.403(b)–6(h) of these 

regulations. 

subject to a number of changes, some of 

which are summarized below in this 

preamble. 

Section 403(b) was also amended by 

sections 811, 821, 822, 824, 826, and 

829 of the Pension Protection Act of 

2006 (PPA ’06) (120 Stat. 780), Public 

Law 109–280. These final regulations 

reflect these amendments. 

Sections 403(b) and 414(c) Statutory 

Provisions 

Section 403(b) provides an exclusion 

from gross income for certain 

contributions made by specific types of 

employers for their employees and by 

certain ministers to specified types of 

funding arrangements. The employers 

are limited to public schools and section 

501(c)(3) organizations. 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 

and certain ministers. Except as 

otherwise indicated, an annuity 

contract, for purposes of these final 

regulations, includes a custodial 

account that is invested solely in mutual 

funds. 

The exclusion applies to employer 

nonelective contributions (including 

matching contributions) and elective 

deferrals (other than designated Roth 

contributions) within the meaning of 

section 402(g)(3)(C) (which applies to 

section 403(b) contributions made 

pursuant to a salary reduction 

agreement). The exclusion applies only 

if certain requirements relating to 

availability, nondiscrimination, and 

distribution are satisfied. Section 403(b) 

arrangements may also include after-tax 

employee contributions. 

Section 403(b)(1)(C) requires that the 

contract be nonforfeitable (except for the 

failure to pay future premiums), 

regardless of the type of contribution 

used to purchase the contract. Section 

403(b)(1)(E) requires a section 403(b) 

contract purchased under a salary 

reduction agreement to satisfy the 

requirements of section 401(a)(30) 

relating to limitations on elective 

deferrals under section 402(g)(1). In 

addition, all contributions to a section 

403(b) arrangement, when expressed as 

annual additions under section 

415(c)(2), must not exceed the 

applicable limit of section 415. 

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 for purposes of the 

requirements of section 403(b). Other 

aggregation rules apply both on an 

individual and aggregate basis. For 

example, the section 402(g) limitations 

on elective deferrals apply to all elective 

deferrals during the year with respect to 

an individual and the limitations of 

section 401(a)(30) apply to all elective 

deferrals made by an employer to that 

employer’s plans with respect to an 

individual during the year. The 

contribution limitations of section 415 

generally apply on an employer-byemployer basis. 

Section 403(b)(12) requires a section 

403(b) contract that provides for elective 

deferrals 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 in this 

preamble under the heading ‘‘Section 

403(b) Nondiscrimination and Universal 

Availability Rules.’’

A section 403(b) contract is also 

required to provide that it will satisfy 

the required minimum distribution 

requirements of section 401(a)(9), the 

incidental benefit requirements of 

section 401(a), and the rollover 

distribution rules of section 402(c). 

Many section 403(b) arrangements of 

employers that are section 501(c)(3) 

organizations are subject to the 

Employee Retirement Income Security 

Act of 1974 (ERISA), which includes 

rules substantially identical to the rules 

for qualified plans, including rules 

parallel to the section 414(l) transfer 

rules, the section 401(a)(11) qualified 

joint and survivor annuity (QJSA) 

transferee plan rules, and the anticutback rules of section 411(d)(6) 

(which apply to transfers). See sections 

204(g), 205, and 208 of ERISA. However, 

as discussed in this preamble under the 

heading ‘‘Interaction Between Title I of 

ERISA and Section 403(b) of the Code,’’

Title I of ERISA does not apply to 

governmental plans, certain church 

plans, or a tax-exempt employer’s 

section 403(b) program that is not 

considered to constitute the 

establishment or maintenance of an 

‘‘employee pension benefit plan’’ under 

Title I of ERISA. 

Section 414(c) authorizes the 

Secretary of the Treasury to issue 

regulations treating all employees of 

trades or businesses which are under 

common control as employed by a 

single employer. 

Explanation of Provisions 

Overview 

Like the 2004 proposed regulations, 

these final regulations are a 

comprehensive update of the current 

regulations under section 403(b). These 

regulations replace the existing final 

regulations that were adopted in 1964 

and reflect the numerous legal changes 

that have been made in section 403(b) 

since then and many of the positions 

that have been taken in interpretive 

guidance that has been issued under 

section 403(b). 

As was noted in the preamble to the 

2004 proposed regulations, the effect of 

the various amendments made to 

section 403(b) within the past 40 years 

has been to diminish the extent to 

which the rules governing section 

403(b) plans differ from the rules 

governing other tax-favored employerbased retirement plans, including 

arrangements that include salary 

reduction contributions, such as section 

401(k) plans and section 457(b) plans 

for state and local governmental entities. 

However, there remain significant 

differences between section 403(b) plans 

and section 401(a) and governmental 

section 457(b) plans. For example, 

section 403(b) is limited to certain 

specific employers and employees 

(namely, employees of a public school, 

employees of a section 501(c)(3) 

organization, and certain ministers) and 

to certain funding arrangements 

(namely, an insurance annuity contract, 

a custodial account that is limited to 

mutual fund shares, or a church 

retirement income account). Also, 

section 403(b) contains the universal 

availability requirement for section 

403(b) elective deferrals and provides 

consequences for failing to satisfy 

certain of the section 403(b) rules 

(described in this preamble under the 

heading ‘‘Effect of a Failure to Satisfy 

Section 403(b)’’) 3 that differ in 

significant respects from the 

consequences applicable to qualified 

plans. 

The final regulations, as did the 2004 

proposed regulations, require the 

section 403(b) contract to satisfy both in 

form and operation the applicable 

requirements for exclusion. The final 

regulations also require that the contract 


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41130 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

be maintained pursuant to a written 

plan as described in the next section. 

The final regulations, like the 

proposed regulations, provide rules 

under which tax-exempt entities are 

aggregated and treated as a single 

employer under section 414(c). These 

rules apply to plans referenced in 

section 414(b), (c), (m), (o), and (t), such 

as plans qualified under section 401(a) 

or 403(a), as well as section 403(b) 

plans. 

Comments on the 2004 proposed 

regulations raised a number of questions 

and concerns about: 

• The requirement in the 2004 

proposed regulations under which a 

section 403(b) contract would be 

required to be maintained pursuant to a 

written plan; 

• The elimination of certain nonstatutory exclusions that a section 

403(b) plan was permitted to have under 

Notice 89–23 (1989–1 CB 654) for 

purposes of the universal availability 

rule; 

• The elimination of Rev. Rul. 90–24 

(1990–1 CB 97), which allowed a 

section 403(b) contract to be exchanged 

for another contract; and 

• The controlled group rules under 

section 414(c) for entities that are taxexempt under section 501(a). 

These final regulations include a 

number of revisions to reflect the 

comments received, as described further 

in this preamble. 

Written Plan Requirement 

These regulations retain the 

requirement from the 2004 proposed 

regulations that a section 403(b) contract 

be issued pursuant to a written plan 

which, in both form and operation, 

satisfies the requirements of section 

403(b) and these regulations. This 

requirement implements the statutory 

requirements of section 403(b)(1)(D), 

which provides that the contract must 

be purchased ‘‘under a plan’’ that 

satisfies the nondiscrimination 

requirements delineated in section 

403(b)(12). 

The existence of a written plan 

facilitates the allocation of plan 

responsibilities among the employer, 

the issuer of the contract, and any other 

parties involved in implementing the 

plan. Without such a central document 

for a comprehensive summary of 

responsibilities, there is a risk that many 

of the important responsibilities 

required under the statute and final 

regulations may not be allocated to any 

party. While a section 403(b) contract 

issued to an employee can provide for 

the issuer to perform many of these 

functions by itself, the contract cannot 

satisfy the function of setting forth the 

eligibility criteria for other employees, 

nor can the issuer by itself coordinate 

those Code requirements that depend on 

other contracts, such as the loan 

limitations under section 72(p). The 

issuer must rely on information or 

representations provided by either the 

employer or the employee for 

employment-based information that is 

essential for compliance with section 

403(b) provisions, such as the 

limitations on elective deferrals in 

section 402(g) and the requirements of 

section 72(p)(2) for a plan loan that is 

not a taxable deemed distribution. In 

addition to providing a central locus to 

coordinate those functions, the 

maintenance of a written plan also 

benefits participants by providing a 

central document setting forth their 

rights and enables government agencies 

to determine whether the arrangements 

satisfy applicable law and, in particular, 

for determining which employees are 

eligible to participate in the plan. 

The 2004 proposed regulations would 

have required that the section 403(b) 

plan 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. The 

proposed regulations would not have 

required that there be a single plan 

document. However, under the 

proposed regulations, the written plan 

requirement would be satisfied by 

complying with the plan document 

rules applicable to qualified plans. 

Some comments raised concerns that 

the written plan requirement would 

impose additional administrative 

burdens. In response, the final 

regulations make a number of 

clarifications, including that the plan is 

permitted to allocate to the employer or 

another person the responsibility for 

performing functions to administer the 

plan, including functions to comply 

with section 403(b). Any such allocation 

must identify who is responsible for 

compliance with the requirements of the 

Code that apply based on the aggregated 

contracts issued to a participant, 

including loans under section 72(p) and 

the requirements for obtaining a 

hardship withdrawal under § 1.403(b)–6 

of these regulations. 

Additional comments recommended 

that certain responsibilities be permitted 

to be allocated to employees. The IRS 

and Treasury Department have 

concluded that it is generally 

inappropriate to allocate these 

responsibilities to employees for a 

number of reasons. First, employees 

often lack the expertise to systematically 

meet these responsibilities and may not 

recognize the importance of performing 

these actions (including not fully 

appreciating the tax consequences of 

failing to perform the responsibility). 

Second, an individual employee may 

have a self-interest in a particular 

transaction. In addition, while there are 

various factors that will often cause an 

employer or issuer to have an interest in 

procedures that ensure that the 

requirements of section 403(b) are 

satisfied (including income tax 

withholding requirements), an 

employee generally bears the income tax 

exposure and other risks of failing to 

comply with rules set forth in the plan. 

The IRS and Treasury Department 

believe it is important to prevent 

failures in advance so as to minimize 

the cases in which the adverse effects of 

a failure fall on the employee. See the 

discussion in this preamble under the 

heading ‘‘Contract Exchanges.’’

In response to comments, the final 

regulations clarify the requirement that 

the plan include all of the material 

provisions by permitting the plan to 

incorporate by reference other 

documents, including the insurance 

policy or custodial account, which as a 

result of such reference would become 

part of the plan. As a result, a plan may 

include a wide variety of documents, 

but it is important for the employer that 

adopts the plan to ensure that there is 

no conflict with other documents that 

are incorporated by reference. If a plan 

does incorporate other documents by 

reference, then, in the event of a conflict 

with another document, except in rare 

and unusual cases, the plan would 

govern. In the case of a plan that is 

funded through multiple issuers, it is 

expected that an employer would adopt 

a single plan document to coordinate 

administration among the issuers, rather 

than having a separate document for 

each issuer. 

Finally, comments also indicated that, 

while section 403(b) contracts that are 

subject to ERISA are maintained 

pursuant to written plans, there may be 

a potential cost associated with 

satisfying the written plan requirement 

for those employers that do not have 

existing plan documents, such as public 

schools. To address this concern, the 

IRS and Treasury Department expect to 

publish guidance which includes model 

plan provisions that may be used by 

public school employers for this 

purpose. Because the requirement for a 

written plan will not go into effect until 

2009 (see the discussion under the 

heading ‘‘Applicability date’’), 

employers would be expected to adopt 

a written plan (including applicable 

amendments) no later than the 

applicability date of these regulations. 


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Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 41131 

Contract Exchanges, Plan-to-Plan 

Transfers, and Purchases of Permissive 

Service Credit 

The final regulations, like the 2004 

proposed regulations, provide for three 

specific kinds of non-taxable exchanges 

or transfers of amounts in section 403(b) 

contracts. Specifically, under the final 

regulations, a non-taxable exchange or 

transfer is permitted for a section 403(b) 

contract if either: (1) It is a mere change 

of investment within the same plan 

(contract exchange); (2) it constitutes a 

plan-to-plan transfer, so that there is 

another employer plan receiving the 

exchange; or (3) it is a transfer to 

purchase permissive service credit (or a 

repayment to a defined benefit 

governmental plan). If an exchange or 

transfer does not constitute a change of 

investment within the plan, a plan-toplan transfer, or a purchase of 

permissive service credit, the exchange 

or transfer would be treated as a taxable 

distribution of benefits in the form of 

property if the exchange occurs after a 

distributable event (assuming the 

distribution is not rolled over to an 

eligible retirement plan) or as a taxable 

conversion to a section 403(c) 

nonqualified annuity contract if a 

distributable event has not occurred. 

See the ‘‘Effect of a Failure to Satisfy 

Section 403(b)’’ section in this preamble 

for discussion of section 403(c) 

nonqualified annuity contracts. In any 

case in which a distributable event has 

occurred, a participant in a section 

403(b) plan can always change the 

investment through a distribution and 

non-taxable rollover from a section 

403(b) contract to an IRA annuity, as 

long as the distribution is an eligible 

rollover distribution. Note, however, 

that an IRA annuity cannot include 

provisions permitting participant loans. 

See section 408(e)(3) and (4) and 

§§ 1.408–1(c)(5) and 1.408–3(c). 

Any contract exchange, plan-to-plan 

transfer, or purchase of permissive 

service credit that is permitted under 

the final regulations is not treated as a 

distribution for purposes of the section 

403(b) distribution restrictions (so that 

such an exchange or transfer may be 

made before severance from 

employment or another distribution 

event). 

Contract Exchanges 

Rev. Rul. 73–124 (1973–1 CB 200) and 

Rev. Rul. 90–24 (1990–1 CB 97) dealt 

with contract exchanges. Rev. Rul. 73–

124 had allowed section 403(b) 

contracts to be exchanged, without 

income inclusion, if, pursuant to an 

agreement with the employer, the 

employee cashed in the first contract 

and immediately transmitted the cash 

proceeds for contribution to the 

successor contract to which all 

subsequent employer contributions 

would be made. This ruling was 

replaced by Rev. Rul. 90–24 which does 

not provide for the first contract to be 

cashed in but allows section 403(b) 

contracts to be exchanged, without 

income inclusion, so long as the 

successor contract includes distribution 

restrictions that are the same or more 

stringent than the distribution 

restrictions in the contract that is being 

exchanged. 

The 2004 proposed regulations would 

have imposed additional restrictions on 

contract exchanges by limiting tax-free 

contract exchanges to situations in 

which the new contract is provided 

under the plan. The proposal was 

intended to improve compliance with 

the Code requirements that apply on an 

aggregated basis because, without 

coordination, it is difficult, if not 

impossible, for a plan to comply with 

those tax requirements. These 

requirements include certain 

distribution restrictions, including the 

rule that requires the suspension of 

deferrals for a plan that uses the 

hardship withdrawal suspension safe 

harbor rules for elective deferrals, and 

the section 72(p) rules for loans. In 

addition, these changes make it easier 

for employers to respond to an IRS 

inquiry or audit. For example, where 

assets have been transferred to an 

insurance carrier or mutual fund that 

has no subsequent connection to the 

plan or the employer, IRS audits and 

related investigations have revealed that 

employers encounter substantial 

difficulty in demonstrating compliance 

with hardship withdrawal and loan 

rules. These problems are particularly 

acute when an individual’s benefits are 

held by numerous carriers. Such 

multiple contract issuers are commonly 

associated with plans in which Rev. 

Rul. 90–24 exchanges have occurred. 

Commentators generally objected to 

the proposal to limit exchanges allowed 

under Rev. Rul. 90–24. They argued that 

such exchanges enable participants to 

change funding arrangements and 

claimed that these exchanges have 

generally been responsible for improved 

efficiency and lower cost in the section 

403(b) market. Comments often 

included specific suggestions, such as 

limiting any restrictions on exchanges to 

active employees and effectuating 

compliance with loan restrictions by 

alternative methods, such as having the 

issuer report loans on, for example, a 

Form 1099–R (Distributions From 

Pensions, Annuities, Retirement or 

Profit-Sharing Plans, IRA, Insurance 

Contracts), or notify the employer about 

loans. Other comments included a 

recommendation that the employer be 

involved to ensure that the exchange is 

within the plan. Comments also 

suggested that a grandfather may be 

necessary for exchanges made before the 

applicability date of the restrictions 

imposed by the final regulations. 

These final regulations include a 

number of changes to reflect these 

comments. The regulations allow 

contract exchanges with certain 

characteristics associated with Rev. Rul. 

90–24, but under rules that are generally 

similar to those applicable to qualified 

plans. 

Unlike the 2004 proposed regulations, 

these regulations permit an exchange of 

one contract for another to constitute a 

mere change of investment within the 

same plan, but only if certain conditions 

are satisfied in order to facilitate 

compliance with tax requirements. 

Specifically, the other contract must 

include distribution restrictions that are 

not less stringent than those imposed on 

the contract being exchanged and the 

employer must enter into an agreement 

with the issuer of the other contract 

under which the employer and the 

issuer will from time to time in the 

future provide each other with certain 

information. This includes information 

concerning the participant’s 

employment and information that takes 

into account other section 403(b) 

contracts or qualified employer plans, 

such as whether a severance from 

employment has occurred for purposes 

of the distribution restrictions and 

whether the hardship withdrawal rules 

in the regulations are satisfied. 

Additional information that is required 

is information necessary for the 

resulting contract or any other contract 

to which contributions have been made 

by the employer to satisfy other tax 

requirements, such as whether a plan 

loan constitutes a deemed distribution 

under section 72(p). 

These regulations also authorize the 

IRS to issue guidance of general 

applicability allowing exchanges in 

other cases. This authority is limited to 

cases in which the resulting contract has 

procedures that the IRS determines are 

reasonably designed to ensure 

compliance with those requirements of 

section 403(b) or other tax provisions 

that depend on either information 

concerning the participant’s 

employment or information that takes 

into account other section 403(b) 

contracts or qualified employer plans. 

For example, the procedures must be 

reasonably designed to determine 

whether a severance from employment 

has occurred for purposes of the 


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41132 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

4A technical correction was made to section 

402(g)(7)(A)(ii) by section 407(a) the Gulf 

Opportunity Zone Act of 2005 (119 Stat. 2577), Pub. 

L 109–135, to clarify that the aggregate $15,000 

limit on such contributions was reduced not only 

by pre-tax elective deferrals made pursuant to the 

special section 403(b) catch-up rules, but also by 

designated Roth contributions. Treasury has 

recommended that this language be further changed 

to reflect the intent that the reduction for 

designated Roth contributions at section 

402(g)(7)(A)(ii)(II) be limited to designated Roth 

contributions that have been made pursuant to the 

special section 403(b) catch-up rules. 

distribution restrictions, whether the 

hardship withdrawal rules are satisfied, 

and whether a plan loan constitutes a 

deemed distribution under section 

72(p). By contrast, procedures that rely 

on an employee certification, such as 

whether a severance from employment 

has occurred or whether the participant 

has other outstanding loans, would 

generally not be adequate to meet this 

standard, because such a certification is 

not disinterested, and also because of 

the lack of employer oversight in the 

certification process to ensure accuracy. 

Plan-to-Plan Transfers 

The final regulations expand the rules 

in the 2004 proposed regulations under 

which plan-to-plan transfers would 

have been permitted only if the 

participant was an employee of the 

employer maintaining the receiving 

plan. Under the final regulations, planto-plan transfers are permitted if the 

participant whose assets are being 

transferred is an employee or former 

employee of the employer (or business 

of the employer) that maintains the 

receiving plan and certain additional 

requirements are met. However, the 

final regulations retain the rules that 

were in the 2004 proposed regulations 

prohibiting a plan-to-plan transfer to a 

qualified plan, an eligible plan under 

section 457(b), or any other type of plan 

that is not a section 403(b) plan, except 

as described in the next paragraph. 

Similarly, a section 403(b) plan is not 

permitted to accept a transfer from a 

qualified plan, an eligible plan under 

section 457(b), or any other type of plan 

that is not a section 403(b) plan. 

Purchases of Permissive Service Credit 

and Certain Repayments 

The final regulations, like the 2004 

proposed regulations, include an 

exception permitting a section 403(b) 

plan to 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. 

Limitations on Contributions 

The final regulations, like the 2004 

proposed regulations, provide that the 

section 403(b) exclusion 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 limits under 

section 415. The final regulations retain 

the rule in the 2004 proposed 

regulations that 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), relating to nonqualified 

annuity contracts, 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 (which is the portion that 

includes the amount that is not in 

excess of the section 415 limitations). 

With respect to section 403(b) elective 

deferrals, section 403(b) applies only if 

the contract is purchased under a plan 

that includes the elective deferral limits 

under section 402(g), including 

aggregation of all plans, contracts, or 

arrangements of the employer that are 

subject to the limits of section 402(g). As 

in the 2004 proposed regulations, the 

final regulations require a section 403(b) 

contract to include this limit on section 

403(b) elective deferrals, as imposed 

under sections 401(a)(30) and 402(g). 

For purposes of the final regulations, the 

term ‘‘elective deferral’’ includes a 

designated Roth contribution as well as 

a pre-tax elective contribution. These 

rules are generally the same as the rules 

for qualified cash or deferred 

arrangements (CODAs) under section 

401(k). 

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 limits 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 

final regulations, like the 2004 proposed 

regulations, provide that the section 

403(b) plan (including contracts under 

the 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). 

Catch-Up Contributions 

A section 403(b) plan 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 ($5,000 for 2007). In 

addition, a section 403(b) plan may 

provide that 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 amount not included in gross 

income for prior taxable years by reason 

of the special section 403(b) catch-up 

rules, plus elective deferrals that are 

designated Roth contributions; 4 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 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. 

The 2004 proposed regulations 

defined a health and welfare service 

agency 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). In response to several 

commentators’ requests, the final 

regulations expand this definition to 

include an adoption agency and an 

agency that provides either home health 

services or assistance to individuals 

with substance abuse problems or that 

provides help to the disabled. 

Like the 2004 proposed regulations, 

the final regulations provide that any 


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5See, for example, Rev. Rul. 56–693 (1956–2 CB 

282). 

6See, for example, Rev. Rul. 61–121 (1961–2 CB 

65); Rev. Rul. 68–304 (1968–1 CB 179); Rev. Rul. 

72–240 (1972–1 CB 108); Rev. Rul. 72–241 (1972–

1 CB 108); Rev. Rul. 73–239 (1973–1 CB 201); and 

Rev. Rul. 74–115 (1974–1 CB 100). 

catch-up contribution for an employee 

who is eligible for both an age 50 catchup and the special section 403(b) catchup 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). 

Timing of Distributions and Benefits 

The final regulations, like the 2004 

proposed regulations, contain 

provisions reflecting the statutory rules 

regarding when distributions can be 

made from a section 403(b) plan. 

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). 

In addition, amounts held in a custodial 

account 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 to an annuity contract or 

retirement income account, including 

earnings thereon. 

The final regulations, as did the 2004 

proposed regulations, include a number 

of exceptions to the timing restrictions. 

For example, 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. 

The final regulations, as did the 2004 

proposed regulations, reflect the direct 

rollover rules of section 401(a)(31) and 

the related requirements of section 

402(f) concerning the written 

explanation requirement for 

distributions that qualify as eligible 

rollover distributions, including 

conforming the timing rule to the rule 

for qualified plans. 

In addition to the restrictions 

described in this preamble, the final 

regulations generally retain, with certain 

modifications, the additional rules from 

the 2004 proposed regulations relating 

to when distributions are permitted to 

be made from a section 403(b) plan, 

including the restrictions described in 

this preamble imposed by section 

403(b)(7)(A)(ii) and (11) on distribution 

of amounts held in custodial accounts 

and elective deferrals, and the tax 

treatment of distributions from section 

403(b) plans. Comments raised no 

objections to the various rules that were 

proposed in 2004, other than concerning 

the general rule requiring the 

occurrence of a stated event. The 2004 

proposed regulations generally would 

have required the occurrence of a stated 

event in order to commence 

distributions of amounts attributable to 

employer contributions to section 403(b) 

plans other than elective deferrals or 

distributions from custodial accounts. 

The stated event rule is substantially the 

same as the rule applicable to qualified 

defined contribution plans that are not 

money purchase pension plans (under 

§ 1.401–1(b)(1)(ii)), so that a plan is 

permitted to provide for a distribution 

upon completion of a fixed number of 

years (such as five years of 

participation), the attainment of a stated 

age, or upon the occurrence of some 

other identified event (such as the 

occurrence of a financial need,5

including a need to buy a home). 

However, the final regulations make a 

number of changes relating to 

distributions. First, the final regulations 

clarify that after-tax employee 

contributions are not subject to any inservice distribution restrictions. Second, 

the regulations address comments that 

were made regarding certain disability 

arrangements by clarifying that, if an 

insurance contract includes provisions 

under which contributions will be 

continued in the event a participant 

becomes disabled, then that benefit is 

treated as an incidental benefit that 

must satisfy the incidental benefit 

requirement applicable to qualified 

plans (at § 1.401–1(b)(1)(ii)). Third, 

changes were made to reflect elective 

deferrals that are designated Roth 

contributions, discussed further later in 

this preamble under the heading, 

‘‘Requirement of Certain Separate 

Accounts Under Section 403(b).’’ 

Fourth, § 1.403(b)–7(b)(5) has been 

added referencing the automatic 

rollover rules of section 401(a)(31), in 

accordance with section 403(b)(10). See 

Notice 2005–5, 2005–1 CB 337, for rules 

interpreting this requirement. Fifth, a 

cross-reference to certain employment 

tax rules was added, discussed under 

the heading ‘‘Employment Taxes.’’ 

Sixth, in response to comments, the 

final regulations provide that the 

general rule requiring the occurrence of 

a stated event in order for distributions 

to commence does not apply to 

insurance contracts issued before 

January 1, 2009, and a special rule has 

been added allowing conforming 

amendments to be adopted by plans that 

are subject to ERISA. Section 1.403(b)– 

10(c) has been clarified to indicate that 

in order to be treated as a distribution 

under this section, the distribution must 

be pursuant to a QDRO as described in 

section 206(d)(3) of ERISA and the 

Department of Labor’s guidance. 

Severance From Employment 

The final regulations, like the 2004 

proposed regulations, define severance 

from employment in a manner that is 

generally the same as the regulations 

under section 401(k) (see § 1.401(k)– 

1(d)(2)), but provide that, for purposes 

of distributions from a section 403(b) 

plan, 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 final regulations, like the 2004 

proposed regulations, require section 

403(b) plans to comply with rules 

similar to those in the existing 

regulations relating to the required 

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. 

Guidance concerning the application of 

the incidental benefit requirements to 

permissible nonretirement benefits such 

as life, accident, or health benefits is 

contained in revenue rulings.6


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Loans 

The final regulations adopt the 

provisions in the 2004 proposed 

regulations relating to loans to 

participants from a section 403(b) 

contract. 

QDROs 

The final regulations also adopt the 

2004 proposed regulations’’ limited 

rules relating to 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 

the section 414(p) QDRO rules apply to 

a section 403(b) contract. The final 

regulations, like the proposed 

regulations, clarify that the QDRO rules 

under section 414(p) apply to section 

403(b) plans. The Secretary of Labor has 

authority to interpret the QDRO 

provisions, section 206(d)(3), and its 

parallel provision at section 414(p) of 

the Code, and to issue QDRO 

regulations in consultation with the 

Secretary of the Treasury. 29 U.S.C. 

1056(d)(3)(N). Under section 401(n) of 

the Internal Revenue Code, the 

Secretary of the Treasury has authority 

to issue rules and regulations necessary 

to coordinate the requirements of 

section 414(p) (and the regulations 

issued by the Secretary of Labor 

thereunder) with the other provisions of 

Chapter I of Subtitle A of the Code. 

Taxation of Distributions and Benefits 

From a Section 403(b) Contract 

The final regulations, like the 2004 

proposed regulations, reflect the 

statutory provisions regarding the 

taxation of distributions and benefits 

from section 403(b) contracts, including 

the provision that generally only 

amounts actually distributed from a 

section 403(b) contract are includible in 

the gross income of the recipient under 

section 72 for the year in which 

distributed. The final 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 

rolled over 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. 

Section 403(b) Nondiscrimination and 

Universal Availability Rules 

Nondiscrimination 

Section 403(b)(12)(A)(i) requires that 

employer contributions, other than 

elective deferrals, and after-tax 

employee 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 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 employee 

contributions). 

Notice 89–23 discusses these 

requirements and provides a good faith 

reasonable standard for satisfying these 

requirements. The 2004 proposed 

regulations would have eliminated the 

good faith reasonable standard for 

satisfying the nondiscrimination 

requirements of section 403(b)(12)(A)(i) 

for non-governmental plans. Comments 

acknowledged the need for and the 

IRS’s authority to make this change. 

Accordingly, these final regulations do 

not include the Notice 89–23 good faith 

reasonable standard. 

However, as discussed in this 

preamble under the heading ‘‘Treatment 

of Controlled Groups that Include 

Certain Entities,’’ the Notice 89–23 good 

faith reasonable standard will continue 

to apply to State and local public 

schools (and certain church entities) for 

determining the controlled group. 

Although the general nondiscrimination 

requirements do not apply to 

governmental plans (within the meaning 

of section 414(d)), these plans are 

required to limit the amount of 

compensation to the amount permitted 

under section 401(a)(17) for all purposes 

under the plan, including, for example 

the amount of compensation taken into 

account for employer contributions, and 

are required to satisfy the universal 

availability rule (described in this 

preamble under the heading ‘‘Universal 

Availability for Elective Deferrals’’). A 

non-governmental section 403(b) plan 

that provides for nonelective employer 

contributions must satisfy the coverage 

requirements of section 410(b) and the 

nondiscrimination requirements of 

section 401(a)(4) with respect to such 

contributions. 

These final regulations, like the 2004 

proposed regulations, require a section 

403(b) plan to comply with the 

nondiscrimination requirements for 

matching contributions in the same 

manner as a qualified plan. Thus, a nongovernmental section 403(b) plan that 

provides for matching contribution must 

satisfy the nondiscrimination 

requirements of section 401(m). 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 under the heading 

‘‘Treatment of Controlled Groups that 

Include Certain Entities.’’

The nondiscrimination requirements 

do not apply to section 403(b) elective 

deferrals. Instead, a universal 

availability requirement, discussed 

further in the next section, applies to all 

section 403(b) elective deferrals 

(including elective deferrals made under 

a governmental section 403(b) plan). 

Universal Availability for Elective 

Deferrals 

The universal availability requirement 

of section 403(b)(12)(A)(ii) provides that 

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 2004 proposed regulations, the 

universal availability requirement 

would not have been satisfied unless the 

contributions were made pursuant to a 

section 403(b) plan and the plan 

permitted all employees of an employer 

an opportunity to make elective 

deferrals if any employee of that 

employer has the right to make elective 

deferrals. 

The rules in the final regulations 

relating to the universal availability 

requirement are substantially similar to 

those in the 2004 proposed regulations. 

The final regulations clarify that the 

employee’s right to make elective 

deferrals also includes the right to 

designate section 403(b) elective 

deferrals as designated Roth 

contributions (if any employee of the 

eligible employer may elect to have the 

organization make section 403(b) 

elective deferrals as designated Roth 

contributions). 

The preamble to the 2004 proposed 

regulations requested comments 

regarding certain exclusions that have 

been permitted under transitional 

guidance issued in 1989. Specifically, 

Notice 89–23 had allowed, pending 

issuance of regulatory guidance, the 

exclusion of the following classes of 

employees for purposes of the universal 

availability rule: Employees who are 


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Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 41135 

covered by a collective bargaining 

agreement; employees who make a onetime 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; and 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. 

The comments submitted in response 

to the request generally requested to 

have these exclusions continue to be 

allowed. However, after consideration of 

the comments received, the IRS and 

Treasury Department have concluded 

that these exclusions are inconsistent 

with the statute and, accordingly, they 

are not permitted under these 

regulations. Nonetheless, as described 

further in the following paragraphs, 

other rules may provide relief with 

respect to individuals who are under a 

vow of poverty and to certain university 

professors affected. 

Rev. Rul. 68–123 (1968–1 CB 35), as 

clarified by Rev. Rul. 83–127 (1983–2 

CB 25), generally excludes from gross 

income, and from wage withholding, 

income of an individual working under 

a vow of poverty for an employer 

controlled by a church and the 

individual is treated as working as an 

agent of the church, not as an employee. 

While these regulations do not provide 

an exclusion from the universal 

availability requirement for individuals 

working under a vow of poverty, 

individuals who work for an institution 

that is controlled by the church 

organization and whose compensation 

from the employer is not treated as 

wages for purposes of income tax 

withholding under Rev. Rul. 68–123 

may be excluded from the section 403(b) 

plan without violating the universal 

availability requirement because they 

are not treated as employees of the 

entity maintaining the section 403(b) 

plan. 

With respect to an exclusion relating 

to visiting professors, if an individual is 

rendering services to a university as a 

visiting professor, but continues to 

receive his or her compensation from 

his or her home university and elective 

deferrals on his or her behalf are made 

under the home university’s section 

403(b) plan, the final regulations do not, 

for purposes of section 403(b) and in 

any case in which such treatment is 

appropriate, preclude the plan 

maintained by the home university from 

treating the visiting professor as an 

eligible employee of the home 

university. 

The discussion in this preamble 

under the heading ‘‘Applicability date’’

describes transition relief for any 

existing plan that excludes, in 

accordance with Notice 89–23, 

collective bargaining employees, 

visiting professors, government 

employees who make a one-time 

election, or employees who work under 

a vow of poverty. 

Rules Relating to Funding Arrangements 

These regulations retain, with certain 

modifications, the rules in the 2004 

proposed regulations relating to the 

permitted investments for a section 

403(b) contract. In general, a section 

403(b) plan must be funded either by an 

annuity contract issued by an insurance 

company qualified to issue annuities in 

a State or a custodial account held by 

a bank (or a person who satisfies the 

conditions in section 401(f)(2)) where 

all of the amounts in the account are 

held for the exclusive benefit of plan 

participants or their beneficiaries in 

regulated investment companies 

(mutual funds) and certain other 

conditions are satisfied (including 

restrictions on distributions). Additional 

rules apply with respect to retirement 

income accounts for plans of a church 

or a convention or association of 

churches as discussed in the next 

section. 

Special Rules for Church Plans’ 

Retirement Income Accounts 

The final regulations, like the 2004 

proposed regulations, include a number 

of special rules for church plans. Under 

section 403(b)(9), a retirement income 

account for employees of a churchrelated organization is treated as an 

annuity contract for purposes of section 

403(b). Under these regulations, the 

rules for a retirement income account 

are based largely on the provisions of 

section 403(b)(9) and the legislative 

history of TEFRA. The 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 (namely, it must 

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), 

(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 regulations also 

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 final regulations, 

like the 2004 proposed regulations, 

permit a life annuity to be paid from 

such an account if certain conditions are 

satisfied. The conditions are that the 

distribution from the account has 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. 

Termination of a Section 403(b) Plan 

The final regulations adopt the 

provisions of the 2004 proposed 

regulations permitting an employer to 

amend its section 403(b) plan to 

eliminate future contributions for 

existing participants, and allowing plan 

provisions that permit plan termination 

and a resulting distribution of 

accumulated benefits, with the 

associated right to roll over eligible 

rollover distributions to an eligible 

retirement plan, such as an individual 

retirement account or annuity (IRA). 

Comments on the rules in the 2004 

proposed regulations regarding plan 

termination were favorable. In general, 

the distribution of accumulated benefits 

is permitted under these regulations 

only if the employer (taking into 

account all entities that are treated as a 


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41136 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

7These rules are not related to segregated asset 

accounts under section 817(h). 

8REG–146459–05, published in the Federal 

Register (71 FR 4320) on January 26, 2006. 

single employer under section 414 on 

the date of the termination) does not 

make contributions to any section 

403(b) contract that is not part of the 

plan 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 

other 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 

for this purpose includes delivery of a 

fully paid individual insurance annuity 

contract. 

Effect of a Failure To Satisfy Section 

403(b) 

These regulations include revisions to 

the 2004 proposed regulations that 

address the effects of a failure to satisfy 

section 403(b). Section 403(b)(5) 

provides for all of the contracts 

purchased for an employee by an 

employer to be treated as a single 

contract for purposes of section 403(b). 

Thus, if a contract fails to satisfy any of 

the section 403(b) requirements, then 

not only that contract but also any other 

contract purchased for that individual 

by that employer would fail to be a 

contract that qualifies for tax-deferral 

under section 403(b). 

Under these regulations, as under the 

2004 proposed regulations, if a contract 

includes any amount that fails to satisfy 

the requirements of these regulations, 

then, except for special rules relating to 

vesting conditions and excess 

contributions (under section 415 or 

section 402(g)), that contract and any 

other contract purchased for that 

individual by that employer does not 

constitute a section 403(b) contract. In 

addition, if a contract is not established 

pursuant to a written plan, then the 

contract does not satisfy section 403(b). 

Thus, if an employer fails to have a 

written plan, any contract purchased by 

that employer would not be a section 

403(b) contract. Similarly, if an 

employer is not an eligible employer for 

purposes of section 403(b), none of the 

contracts purchased by that employer is 

a section 403(b) contract. If a plan fails 

to satisfy the nondiscrimination rules 

(including a failure to operate the plan 

in accordance with its coverage 

provisions or a failure to operate the 

plan in a manner that satisfies the 

nondiscrimination rules), none of the 

contracts issued under the plan would 

be section 403(b) contracts. 

However, under these regulations, any 

operational failure, other than those 

described in the preceding paragraph, 

that is solely within a specific contract 

generally will not adversely affect the 

contracts issued to other employees that 

qualify in form and operation with 

section 403(b). Thus, for example, if an 

employee’s elective deferrals under a 

contract, when aggregated with any 

other contract, plan, or arrangement of 

the employer for that employee during 

a calendar year, exceed the maximum 

deferral amount permitted under section 

402(g)(1)(A) (as made applicable by 

section 403(b)(1)(E)), the failure would 

adversely affect the contracts issued to 

the employee by that employer, but 

would not adversely affect any other 

employee’s contracts. 

Requirement of Certain Separate 

Accounts Under Section 403(b) 

The final regulations, like the 2004 

proposed regulations, include technical 

provisions addressing certain situations 

in which a separate account 7 is 

necessary under section 403(b). For 

example, a separate bookkeeping 

account is required for any contract in 

which only a portion of the employee’s 

interest is vested because, in such a 

case, separate accounting for each type 

of contribution (and earnings thereon) 

that is subject to a different vesting 

schedule is necessary to determine 

which vested contributions, including 

earnings thereon, are treated as held 

under a section 403(b) contract. In 

addition, the final regulations also 

clarify that if the section 403(b) plan 

fails to establish a separate account for 

contributions in excess of the section 

415(c) limitation under section 403(c) 

(relating to nonqualified annuity 

contracts whose present values are 

generally subject to current taxation), so 

that such excess contributions are 

commingled in a single insurance 

contract with contributions intended to 

qualify under section 403(b) without 

maintaining a separate account for each 

amount, then none of the amounts held 

under the insurance contract qualify for 

tax deferral under section 403(b). Any 

such separate account must be 

established by the time the excess 

contribution is made to the plan. The 

separate account for excess 

contributions under section 415(c) is 

necessary to effectuate differences in the 

tax treatment of distributions (for 

example, because of the need to 

properly allocate basis under section 72 

and separately identify amounts that 

can be rolled over). Similarly, a separate 

account is required for elective deferrals 

to be treated as held in a designated 

Roth account, as described in the 

following paragraph. 

Designated Roth Accounts 

These regulations also include final 

regulations relating to elective deferrals 

that are designated Roth contributions 

under a section 403(b) plan. These 

regulations, however, do not address the 

taxation of a distribution of designated 

Roth contributions from a section 403(b) 

plan. See § 1.402A–1 for those rules. 

The final regulations relating to elective 

deferrals under a section 403(b) plan 

that are designated Roth contributions 

are substantially unchanged from the 

proposed regulations that were issued in 

January of 2006 regarding designated 

Roth accounts under a section 403(b) 

plan.8

Interaction Between Title I of ERISA and 

Section 403(b) of the Code 

The Treasury Department and the IRS 

consulted with the Department of Labor 

in connection with both the 2004 

proposed regulations and these final 

regulations concerning the interaction 

between Title I of ERISA and section 

403(b) of the Internal Revenue Code. In 

particular, the consultation focused on 

whether the requirements imposed on 

employers in these regulations would 

exceed the scope of the Department of 

Labor’s safe harbor regulation at 29 CFR 

2510.3–2(f) and result in all section 

403(b) programs sponsored by taxexempt employers (other than 

governmental plans and certain church 

plans) falling under the purview of 

ERISA. 

According to the Department of Labor, 

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. 

ERISA section 4(b)(1) and (2). Therefore, 


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9Treas. Reg. § 1.512(b)–1(1)(4)(i)(b) uses a similar 

test to determine control of a non-stock 

organization. Note that those regulations do not 

reflect amendments that were made in section 

512(b)(13) by section 1041(a) of the Taxpayer Relief 

Act of 1997 (111 Stat. 788). 

10See 29 U.S.C. 462. 

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 

Internal Revenue 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 promulgated a 

regulation in 1975, 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. 

As described in the preamble to the 

2004 proposed regulations, the 

Department of Labor advised the 

Treasury Department and the IRS that 

the proposed regulations did not appear 

to require, but left open the possibility 

that an employer may undertake, 

responsibilities in connection with a 

section 403(b) program that would 

exceed the limits in the safe harbor and 

constitute establishing and maintaining 

an ERISA-covered plan. Comments 

submitted on the proposal supported 

the continued availability of non-Title I 

section 403(b) programs to employees of 

tax-exempt employers and asked for 

additional guidance for employers who 

offer their employees access to such 

programs. 

According to the Department of Labor, 

review of the final section 403(b) 

regulations has not led the Department 

of Labor to change its view on the 

principles that apply in determining 

whether any given section 403(b) 

program is covered by Title I of ERISA. 

Even though the differences between the 

tax rules for section 403(b) programs 

and those governing other ERISAcovered pension plans may have 

diminished as a result of the final 

section 403(b) regulations, the 

Department of Labor continues to be of 

the view that tax-exempt employers can 

comply with the requirements in the 

section 403(b) regulations and remain 

within the Department of Labor’s safe 

harbor for tax-sheltered annuity 

programs funded solely by salary 

deferrals. The Department of Labor 

notes, however, that the new section 

403(b) regulations offer employers 

considerable flexibility in shaping the 

extent and nature of their involvement. 

The question of whether any particular 

employer, in complying with the section 

403(b) regulations, has established or 

maintained a plan covered under Title 

I of ERISA must be analyzed on a caseby-case basis applying the criteria set 

forth in 29 CFR § 2510.3–2(f) and 

section 3(2) of ERISA. To assist 

employers interested in offering their 

employees access to a tax sheltered 

annuity program that would not be an 

ERISA-covered plan, the Department of 

Labor is issuing, in conjunction with the 

final publication of this regulation, a 

Field Assistance Bulletin to provide 

additional guidance on the interaction 

of the safe harbor and the requirements 

in these final regulations. The Field 

Assistance Bulletin can be found at 

http://www.dol.gov/ebsa. 

Treatment of Controlled Groups That 

Include Tax-Exempt Entities 

The final regulations retain the basic 

rules in the 2004 proposed regulations 

regarding controlled groups for entities 

that are tax-exempt under section 

501(a), but with a number of 

modifications to reflect the comments 

that were made. As in the 2004 

proposed regulations, these rules are not 

limited to section 403(b) plans, but 

apply more broadly for purposes of 

determining when tax-exempt entities 

are treated as a single employer under 

section 414(b), (c), (m), and (o). Thus, 

for example, these rules apply for 

purposes of plans maintained by a taxexempt entity that are intended to be 

qualified under section 401(a). These 

rules can apply to treat two section 

501(c) organizations as a single 

employer, or a section 501(c) 

organization and a non-section 501(c) 

organization as a single employer, if the 

organizations are under common 

control. For a section 501(c)(3) 

organization that makes contributions to 

a section 403(b) plan, these rules would 

be generally relevant for purposes of the 

nondiscrimination requirements, as well 

as for the section 415 contribution 

limitations, the special section 403(b) 

catch-up contributions, and the section 

401(a)(9) minimum distribution rules. 

Under the rules in the 2004 proposed 

regulations, the employer for a plan 

maintained by a section 501(c) 

organization would include not only the 

organization whose employees 

participate in the plan, but also any 

other organization that is under 

common control with the tax-exempt 

organization. Under the 2004 proposed 

regulations, the existence of control 

would be determined based on the facts 

and circumstances. For this purpose, 

common control would exist between a 

tax-exempt organization and another 

organization if at least 80 percent of the 

directors or trustees of one organization 

were either representatives of, or 

directly or indirectly controlled by, the 

other organization.9 The 2004 proposed 

regulations permitted tax-exempt 

organizations to choose to be aggregated 

(permissive aggregation) if they 

maintained a single plan covering one 

or more employees from each 

organization and the organizations 

regularly coordinated their day-to-day 

exempt activities. These rules were 

subject to an overall anti-abuse rule. The 

final regulations retain the basic rules in 

the 2004 proposed regulations and the 

anti-abuse rule, and add an example to 

illustrate when the anti-abuse rule 

might apply. 

Comments on the 2004 proposed 

regulations generally approved of the 

proposed controlled group rules, but 

some comments argued for expanding 

the category of entities that can use the 

permissive aggregation rules. These 

comments typically did not recommend 

an overall standard for when permissive 

aggregation should be permitted, but 

identified certain specific practices 

which would be facilitated by 

permissive aggregation. In response, 

these regulations authorize the IRS to 

issue published guidance permitting 

other types of combinations of entities 

that include tax-exempt entities to elect 

to be treated as under common control 

for one or more specified purposes. This 

authority is limited to situations in 

which there are substantial business 

reasons for maintaining each entity in a 

separate trust, corporation, or other 

form, and under which common control 

treatment would be consistent with the 

anti-abuse standards in the regulations. 

It is expected that this authority would 

not be exercised unless the IRS 

determines that the organizations are so 

integrated in their operations as to 

effectively constitute a single 

coordinated employer for purposes of 

sections 414(b), (c), (m), and (o), 

including common employee benefit 

plans. 

A comment was also received stating 

that a legally required trusteeship for a 

labor union that has been imposed in 

order to correct corruption or financial 

malpractice 10 should not constitute 

control. In response, a change was made 

to the regulations to reflect the intent 


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41138 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

11When these regulations go into effect, the 

following guidance will be outdated or superseded 

by these regulations and it is expected that 

guidance will be issued in the future to formally 

supersede these items: Rev. Rul. 64–333 (1964–2 CB 

114); Rev. Rul. 65–200 (1965–2 CB 141); Rev. Rul. 

66–254 (1966–2 CB. 125); Rev. Rul. 66–312 (1966–

2 CB 127); Rev. Rul. 67–78 (1967–1 CB 94); Rev. 

Rul. 67–69 (1967–1 CB 93); Rev. Rul. 67–361 (1967–

2 CB 153); Rev. Rul. 67–387 (1967–2 CB 153); Rev. 

Rul. 67–388 (1967–2 CB 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 CB 188); Rev. Rul. 69–629 (1969–2 CB 

101)_; Rev. Rul. 70–243 (1970–1 CB 107); Rev. Rul. 

87–114 (1987–2 CB 116); Rev. Rul. 90–24 (1990–1 

CB 97); Notice 90–73 (1990–2 CB 353); Notice 92–

36 (1992–2 CB 364); and Announcement 95–48 

(1995–23 IRB 13). In addition, Notice 89–23 (1989–

1 CB 654) is likewise superseded as a result of these 

regulations, except to the extent described above 

under the heading ‘‘Treatment of Controlled Groups 

that Include Tax-Exempt Entities.’’ 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 CB 125); Rev. Rul. 68–

33 (1968–1 CB 175); Rev. Rul 68–58 (1968–1 CB 

176); Rev. Rul. 68–116 (1968–1 CB 177); Rev. Rul. 

68–648 (1968–2 CB 49); Rev. Rul. 68–488 (1968–2 

CB 188); and Rev. Rul. 69–146 (1969–1 CB 132). 

12Rev. Rul. 73–607 (1973–2 CB 145) and Rev. 

Rul. 80–139 (1980–1 CB 88). 

13However, see § 1.403(b)–10(f)(2) of these 

regulations for a special rule applicable to certain 

church defined benefit plans that were in effect on 

September 3, 1982. 

that whether a person has the power to 

appoint and replace a trustee or director 

is based on facts and circumstances. For 

example, that power would generally 

not exist if that power was extremely 

limited due to the application of other 

laws, such as where a labor union was 

put under trusteeship pursuant to a 

court order, the trusteeship is for the 

sole purpose of correcting corruption, 

financial malpractice, or similar 

circumstances, and the replacement 

trustees were permitted to serve only for 

the time necessary for that purpose. 

These controlled group rules for taxexempt entities generally do not apply 

to certain church entities under section 

3121(w)(3). These rules also do not 

apply to a State or local government or 

a federal government entity. Until 

further guidance is issued, church 

entities under section 3121(w)(3)(A) and 

(B) and State or local government public 

schools that sponsor section 403(b) 

plans can continue to rely on the rules 

in Notice 89–23 for determining the 

controlled group. 

Employment Taxes 

These regulations include several new 

cross-references to certain rules 

concerning the application of 

employment taxes. For example, the 

definition of an elective deferral at 

§ 1.403(b)–2(a)(7) of these regulations 

refers to § 1.402(g)(3)–1 of these 

regulations, which in turn refers to 

section 3121(a)(5)(D). See 

§ 31.3121(a)(5)–2T of the temporary 

regulations for additional guidance on 

section 3121(a)(5)(D) (defining salary 

reduction agreement for purposes of the 

Federal Insurance Contributions Act 

(FICA)). 

As another example, § 1.403(b)–7(f) of 

these regulations generally references 

the special income tax withholding 

rules under section 3405 for purposes of 

income tax withholding on distributions 

from section 403(b) contracts and also 

references the special rules at § 1.72(p)–

l, Q&A–15, and § 35.3405(c)–1, Q&A–11, 

relating to income tax withholding for 

loans deemed distributed from qualified 

employer plans, including section 

403(b) contracts. However, the general 

income tax withholding rules apply for 

purposes of income tax withholding for 

annuity contracts or custodial accounts 

that are not section 403(b) contracts, as 

well as for cases in which an annuity 

contract or custodial account ceases to 

qualify as a section 403(b) contract. See 

section 3401 and §§ 1.83–8(a) and 

35.3405–1T, Q&A–18. 

Effect of These Regulations on Other 

Guidance 

Since the existing regulations were 

issued in 1964, a number of revenue 

rulings and other items of 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 regulations of much of the 

guidance that the IRS has issued 

regarding section 403(b), these 

regulations effectively supersede or 

substantially modify a number of 

revenue rulings and notices that have 

been issued under section 403(b). Thus, 

as indicated in the preamble to the 2004 

proposed regulations, the IRS 

anticipates taking action in the future to 

obsolete many revenue rulings, notices, 

and other guidance under section 

403(b).11

However, the positions taken in 

certain rulings and other outstanding 

guidance are expected to be retained. 

For example, it is intended that the 

existing rules 12 for determining when 

employees are performing services for a 

public school will continue to apply. 

Further, as discussed above in the 

preamble under the heading, 

‘‘Treatment of Controlled Groups that 

Include Tax-Exempt Entities,’’ church 

entities under section 3121(w)(3)(A) and 

(B) and public schools that sponsor 

section 403(b) plans can continue to rely 

on the rules in Notice 89–23 for 

determining the controlled group. In 

addition, certain positions taken in prior 

guidance are expected to be reevaluated 

in light of these regulations, such as 

Rev. Rul. 2004–67 (2004–28 IRB 28), 

which revised the group trust rules of 

Rev. Rul. 81–100 (1981–1 CB 326). With 

the issuance of these regulations, a 

number of conforming changes will be 

considered for the compliance programs 

maintained by the IRS, as most recently 

published in Rev. Proc. 2006–27 (2006–

22 IRB 945) (EPCRS), including, for 

example, to reflect the written plan 

requirement and the positions described 

above in this preamble under the 

heading, ‘‘Effect of a Failure to Satisfy 

Section 403(b).’’

The prior regulations under section 

403(b) had included certain 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 under section 415(c) are 

no longer coordinated with accruals 

under a defined benefit plan.13

However, the rules for determining the 

amount of contributions made for an 

employee under a defined benefit plan 

in the prior regulations under section 

403(b) had also been used for purposes 

of section 402(b) (relating to 

nonqualified plans funded through 

trusts). These regulations replace those 

rules with regulations under section 

402(b) that provide for the same rules 

(those in the section 403(b) regulations 

that were in effect prior to these 

regulations) to continue to apply for 

purposes of section 402(b). However, 

these section 402(b) regulations also 

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). 

Applicability Date 

These regulations are generally 

applicable for taxable years beginning 

after December 31, 2008. Thus, because 

individuals will almost uniformly be on 

a calendar taxable year, these 

regulations will generally apply on 

January 1, 2009. However, these 

regulations include a number of explicit 

transition rules. 

For a section 403(b) plan maintained 

pursuant to one or more collective 

bargaining agreements that have been 

ratified and are in effect on July 26, 

2007, the regulations do not apply until 

the earlier of: (1) The date on which the 

last of such collective bargaining 

agreements terminates (determined 


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Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 41139 

without regard to any extension thereof 

after July 26, 2007); or (2) July 26, 2010. 

For a section 403(b) plan maintained by 

a church-related organization for which 

the authority to amend the plan is held 

by a church convention (within the 

meaning of section 414(e)), the 

regulations do not apply before the 

beginning of the first plan year 

following December 31, 2009. 

There are also special applicability 

dates for several of the specific 

provisions in these regulations. First, 

special rules apply to plans which may 

have included one or more of the 

exclusions that Notice 89–23 permitted 

for the universal availability rule, but 

which are no longer permitted under 

these regulations. Specifically, a special 

rule applies if a plan has eligibility 

conditions for elective deferrals relating 

to 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 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 

school, or 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. 

If, as permitted by Notice 89–23, a plan 

excludes any of these three classes of 

employees from eligibility to make 

elective deferrals on July 26, 2007, the 

plan is permitted to continue that 

exclusion until taxable years beginning 

on or after January 1, 2010. In addition, 

if a plan excludes employees covered by 

a collective bargaining agreement from 

eligibility to make elective deferrals on 

July 26, 2007, the plan is permitted to 

continue that exclusion until the later of 

(i) the first day of the first taxable year 

that begins after December 31, 2008, or 

(ii) the earlier of (I) the date that such 

agreement terminates (determined 

without regard to any extension thereof 

after July 26, 2007) or (II) July 26, 2010. 

In the case of a governmental plan (as 

defined in section 414(d)) for which the 

authority to amend the plan is held by 

a legislative body that meets in 

legislative session, the plan is permitted 

to continue the exclusion until the 

earlier of: (i) The close of the first 

regular legislative session of the 

legislative body with the authority to 

amend the plan that begins on or after 

January 1, 2009; or (ii) January 1, 2011. 

These regulations (at § 1.403(b)–6(b)) 

also provide that a section 403(b) 

contract is permitted to distribute 

retirement benefits to the participant no 

earlier than the earliest of the 

participant’s severance from 

employment or upon the prior 

occurrence of some event, subject to a 

number of exceptions (relating to 

distributions from custodial accounts, 

distributions attributable to section 

403(b) elective deferrals, correction of 

excess deferrals, distributions at plan 

termination, and payment of after-tax 

employee contributions). This rule does 

not apply for contracts issued before 

January 1, 2009. In addition, in order to 

permit plans to comply with the rules 

relating to in-service distributions for 

contracts issued before January 1, 2009, 

the regulations provide that an 

amendment adopted before January 1, 

2009, to comply with these rules does 

not violate the anti-cutback rules of 

section 204(g) of ERISA. 

These regulations (at § 1.403(b)–

8(c)(2)) also do not permit a life 

insurance contract, an endowment 

contract, a health or accident insurance 

contract, or a property, casualty, or 

liability insurance contract to constitute 

an annuity contract for purposes of 

section 403(b). This rule does not apply 

for contracts issued before September 

24, 2007. 

These regulations also include 

specific rules relating to contract 

exchanges that were permitted under 

Rev. Rul. 90–24. These new rules do not 

apply to contracts received in an 

exchange that occurred on or before 

September 24, 2007, assuming that the 

exchange (including the contract 

received in the exchange) satisfies 

applicable pre-existing legal 

requirements (including Rev. Rul. 90–

24). 

Finally, these regulations include 

special applicability date rules to 

coordinate with recently issued 

regulations under sections 402A and 

415. 

For periods following July 26, 2007 

and before the applicable date, 

taxpayers can rely on these regulations, 

except that (1) such reliance must be on 

a consistent and reasonable basis and (2) 

the special rule at § 1.403(b)–10(a) of 

these regulations permitting 

accumulated benefits to be distributed 

on plan termination can be relied upon 

only if all of the contracts issued under 

the plan at that time satisfy all of the 

applicable requirements of these 

regulations (other than the requirement 

at § 1.403(b)–3(b)(3)(i) of these 

regulations that there be a written plan). 

Special Analyses 

It has been determined that this 

Treasury decision 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 4.1 hours per year) complying with 

the contract exchange requirements in 

these regulations, and small entities are 

generally expected to spend much less 

time. Thus, the cost of complying with 

this statutory requirement is small, even 

for small entities. 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 

Code, the notice of proposed rulemaking 

preceding these regulations was 

submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small businesses. 

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, 

Reporting and recordkeeping 

requirements, Social security, 

Unemployment compensation. 

26 CFR Part 54 

Excise taxes, Pensions, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR parts 1, 31, 54, 

and 602 are amended as follows: 


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41140 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

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 * * * 

Section 1.403(b)–6 also issued under 26 

U.S.C. 403(b)(10). * * * 

Section 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, then, except as set forth in 

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), 

such amount shall be either—

(i) The excess of—

(A) The amount determined as of the 

end of such taxable year in accordance 

with the formula described in 

§ 1.403(b)–1(d)(4), as it appeared in the 

April 1, 2006, edition of 26 CFR Part 1; 

over 

(B) The amount determined as of the 

end of the prior taxable year in 

accordance with the formula described 

in paragraph (a)(2)(i)(A) of this section; 

or 

(ii) The amount determined under any 

other method utilizing recognized 

actuarial principles that are consistent 

with the provisions of the plan under 

which such contributions are made and 

the method adopted by the employer for 

funding the benefits under the plan. 

(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 section 

3121(a)(5)(D). 

(b) Special rule. Notwithstanding 

paragraph (a) of this section, for 

purposes of section 403(b), 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 plans or a contribution made 

as a condition of employment that 

reduces the employee’s compensation. 

(c) Applicable date. This section is 

applicable for taxable years beginning 

after December 31, 2008. 

■ Par. 4. Section 1.402A–1, A–1 is 

revised to read as follows: 

§ 1.402A–1 Designated Roth Accounts. 

* * * * * 

A–1. A designated Roth account is a 

separate account under a qualified cash 

or deferred arrangement under a section 

401(a) plan, or under a section 403(b) 

plan, to which designated Roth 

contributions are permitted to be made 

in lieu of elective contributions and that 

satisfies the requirements of § 1.401(k)–

1(f) (in the case of a section 401(a) plan) 

or § 1.403(b)–3(c) (in the case of a 

section 403(b) plan). 

* * * * * 

■ Par. 5. 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. 

This section lists the headings that 

appear in §§ 1.403(b)–1 through 

1.403(b)–11. 

§ 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. 

(a) Application of definitions. 

(b) Definitions. 

§ 1.403(b)–3 Exclusion for contributions to 

purchase section 403(b) contracts. 

(a) Exclusion for section 403(b) contracts. 

(b) Application of requirements. 

(c) Special rules for designated Roth 

section 403(b) contributions. 

(d) Effect of failure. 

§ 1.403(b)–4 Contribution limitations. 

(a) Treatment of contributions in excess of 

limitations. 

(b) Maximum annual contribution. 

(c) Section 403(b) elective deferrals. 

(d) Employer contributions for former 

employees. 

(e) Special rules for determining years of 

service. 

(f) Excess contributions of deferrals. 

§ 1.403(b)–5 Nondiscrimination rules. 

(a) Nondiscrimination rules for 

contributions other than section 403(b) 

elective deferrals. 

(b) Universal availability required for 

section 403(b) elective deferrals. 

(c) Plan required. 

(d) Church plans exception. 

(e) Other rules. 

§ 1.403(b)–6 Timing of distributions and 

benefits. 

(a) Distributions generally. 

(b) Distributions from contracts other than 

custodial accounts or amounts attributable to 

section 403(b) elective deferrals. 

(c) Distributions from custodial accounts 

that are not attributable to section 403(b) 

elective deferrals. 

(d) Distribution of section 403(b) elective 

deferrals. 

(e) Minimum required distributions for 

eligible plans. 

(f) Loans. 

(g) Death benefits and other incidental 

benefits. 

(h) Special rule regarding severance from 

employment. 

§ 1.403(b)–7 Taxation of distributions and 

benefits. 

(a) General rules for when amounts are 

included in gross income. 

(b) Rollovers to individual retirement 

arrangements and other eligible retirement 

plans. 

(c) Special rules for certain corrective 

distributions. 

(d) Amounts taxable under section 

72(p)(1). 

(e) Special rules relating to distributions 

from a designated Roth account. 

(f) Certain rules relating to employment 

taxes. 

§ 1.403(b)–8 Funding. 

(a) Investments. 

(b) Contributions to the plan. 

(c) Annuity contracts. 

(d) Custodial accounts. 

(e) Retirement income accounts. 

(f) Combining assets. 

§ 1.403(b)–9 Special rules for church 

plans. 

(a) Retirement income accounts. 

(b) Retirement income account 

defined. 

(c) Special deduction rule for selfemployed ministers. 


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§ 1.403(b)–10 Miscellaneous 

provisions. 

(a) Plan terminations and frozen 

plans. 

(b) Contract exchanges and plan-toplan transfers. 

(c) Qualified domestic relations 

orders. 

(d) Rollovers to a section 403(b) 

contract. 

(e) Deemed IRAs. 

(f) Defined benefit plans. 

(g) Other rules relating to section 

501(c)(3) organizations. 

§ 1.403(b)–11 Applicable date. 

(a) General rule. 

(b) Collective bargaining agreements. 

(c) Church conventions. 

(d) Special rules for plans that 

exclude certain types of employees from 

elective deferrals. 

(e) Special rules for plans that permit 

in-service distributions. 

(f) Special rule for life insurance 

contracts. 

(g) Special rule for contracts received 

in an exchange. 

■ Par. 6. 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) Application of definitions. The 

definitions set forth in this section are 

applicable for purposes of § 1.403(b)–1, 

this section and §§ 1.403(b)–3 through 

1.403(b)–11. 

(b) Definitions—(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 a convention or 

association of churches, including an 

organization described in section 

414(e)(3)(A). 

(7) Elective deferral means an elective 

deferral under § 1.402(g)–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. 

(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, this 

section and §§ 1.403(b)–3 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 or other 

amount contributed or deferred by the 

eligible employer at the election of the 

employee that would be includible in 

the gross income of the employee but for 

the rules of section 125, 132(f)(4), 

402(e)(2), 402(h)(1)(B), 402(k), or 457(b). 

The amount of includible compensation 

is determined without regard to any 

community property laws. See section 

415(c)(3)(A) through (D) for additional 

rules, and 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 accumulated benefit under the 

contract. 

(13) Plan means a plan as described 

in § 1.403(b)–3(b)(3). 


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(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 that satisfies the 

requirements of § 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)–1, this section, and 

§§ 1.403(b)–3 through 1.403(b)–11. 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; 

designated Roth contribution—(i) 

Section 403(b) elective deferral means 

an elective deferral that is an employer 

contribution to a section 403(b) plan for 

an employee. See § 1.403(b)–5(b) for 

additional rules with respect to a 

section 403(b) elective deferral. 

(ii) Designated Roth contribution 

under a section 403(b) plan means a 

section 403(b) elective deferral that 

satisfies § 1.403(b)–3(c). 

(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 § 1.401(k)–1(d) 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. 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) Year 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. 

§ 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 (as defined at 

§ 1.401(k)–1(a)(3)) 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. 

However, the preceding two sentences 

generally do not apply to designated 

Roth contributions; see paragraph (c) of 

this section and § 1.403(b)–7(e) for 

special taxation rules that apply with 

respect to designated Roth contributions 

under a section 403(b) plan. 

(1) Not a contract issued under 

qualified plan or eligible governmental 

plan. The annuity contract is not 

purchased under a qualified plan (under 

section 401(a) or 403(a)) or an eligible 

governmental plan under section 457(b). 

(2) Nonforfeitability. The rights of the 

employee under the annuity contract 

(disregarding rights to future premiums) 

are nonforfeitable. An employee’s rights 

under a contract fail to be nonforfeitable 

unless the employee for whom the 

contract is purchased has at all times a 

fully vested and nonforfeitable right (as 

defined in regulations under section 

411) to all benefits provided under the 

contract. See paragraph (d)(2) of this 

section for additional rules regarding 

the nonforfeitability requirement of this 

paragraph (a)(2). 

(3) Nondiscrimination. In the case of 

an annuity 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 requirements, 

including universal availability). 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 that all elective deferrals for an 

employee 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. See § 1.401(a)–30. 

(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) and (f). 

(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 


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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 (as further 

described in paragraph (d)(1) of this 

section) and the remaining portion of 

the contract is a section 403(b) contract. 

This paragraph (b)(2) is not satisfied 

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. (i) 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 

§ 1.403(b)–1, § 1.403(b)–2, this section, 

and §§ 1.403(b)–4 through 1.403(b)–11. 

For purposes of § 1.403(b)–1, § 1.403(b)–

2, this section, and §§ 1.403(b)–4 

through 1.403(b)–11, 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 § 1.403(b)–1, § 1.403(b)–2, 

this section, and §§ 1.403(b)–4 through 

1.403(b)–11, a plan may contain certain 

optional features that are consistent 

with but 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)–11. 

(ii) The plan may allocate 

responsibility for performing 

administrative functions, including 

functions to comply with the 

requirements of section 403(b) and other 

tax requirements. Any such allocation 

must identify responsibility for 

compliance with the requirements of the 

Internal Revenue Code that apply on the 

basis of the aggregated contracts issued 

to a participant under a plan, including 

loans under section 72(p) and the 

conditions for obtaining a hardship 

withdrawal under § 1.403(b)–6. A plan 

is permitted to assign such 

responsibilities to parties other than the 

eligible employer, but not to 

participants (other than employees of 

the employer a substantial portion of 

whose duties are administration of the 

plan), and may incorporate by reference 

other documents, including the 

insurance policy or custodial account, 

which thereupon become part of the 

plan. 

(iii) 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 for 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. The exclusion from 

gross income provided by section 403(b) 

applies to contributions made for former 

employees with respect to 

compensation described in § 1.415(c)–

2(e)(3)(i) (relating to certain 

compensation paid by the later of 21⁄2

months after severance from 

employment or the end of the limitation 

year that includes the date of severance 

from employment), and compensation 

described in § 1.415(c)–2(e)(4), 

§ 1.415(c)–2(g)(4), or § 1.415(c)–2(g)(7) 

(relating to compensation paid to 

participants who are permanently and 

totally disabled or relating to qualified 

military service under section 414(u)). 

(c) Special rules for designated Roth 

section 403(b) contributions. (1) The 

rules of § 1.401(k)–1(f)(1) and (2) for 

designated Roth contributions under a 

qualified cash or deferred arrangement 

apply to designated Roth contributions 

under a section 403(b) plan. Thus, a 

designated Roth contribution under a 

section 403(b) plan is a section 403(b) 

elective deferral that is designated 

irrevocably by the employee at the time 

of the cash or deferred election as a 

designated Roth contribution that is 

being made in lieu of all or a portion of 

the section 403(b) elective deferrals the 

employee is otherwise eligible to make 

under the plan; that is treated by the 

employer as includible in the 

employee’s gross income at the time the 

employee would have received the 

amount in cash if the employee had not 

made the cash or deferred election (such 

as by treating the contributions as wages 

subject to applicable withholding 

requirements); and that is maintained in 

a separate account (within the meaning 

of § 1.401(k)–1(f)(2)). 

(2) A designated Roth contribution 

under a section 403(b) plan must satisfy 

the requirements applicable to section 

403(b) elective deferrals. Thus, for 

example, designated Roth contributions 

under a section 403(b) plan must satisfy 

the requirements of § 1.403(b)–6(d). 

Similarly, a designated Roth account 

under a section 403(b) plan is subject to 

the rules of section 401(a)(9)(A) and (B) 

and § 1.403(b)–6(e). 

(d) Effect of failure—(1) General rules. 

(i) If a contract includes any amount 

that fails to satisfy the requirements of 

section 403(b), § 1.403(b)–1, § 1.403(b)–

2, this section, or §§ 1.403(b)–4 through 

1.403(b)–11, then, except as otherwise 

provided in paragraph (d)(2) of this 

section (relating to failure to satisfy 

nonforfeitability requirements) or 

§ 1.403(b)–4(f) (relating to excess 

contributions under section 415 and 

excess deferrals under section 402(g)), 

the contract is not a section 403(b) 

contract. In addition, section 403(b)(5) 

and paragraph (b)(1) of this section 

provide that, for purposes of 

determining whether a contract satisfies 

section 403(b), all section 403(b) 

contracts purchased for an individual by 

an employer are treated as purchased 

under a single contract. Thus, except as 

provided in paragraph (b)(2) of this 

section or as otherwise provided in this 

paragraph (d), a failure to satisfy section 

403(b) with respect to any contract 

issued to an individual by an employer 

adversely affects all contracts issued to 

that individual by that employer. 

(ii) In accordance with paragraph 

(b)(3) of this section, a failure to operate 

in accordance with the terms of a plan 

adversely affects all of the contracts 

issued by the employer to the employee 

or employees with respect to whom the 

operational failure occurred. Such a 

failure does not adversely affect any 

other contract if the failure is neither a 

failure to satisfy the nondiscrimination 

requirements of § 1.403(b)–5 (a 

nondiscrimination failure) nor a failure 

of the employer to be an eligible 

employer as defined in § 1.403(b)–2 (an 

employer eligibility failure). However, 

any failure that is not an operational 

failure adversely affects all contracts 

issued under the plan, including: a 

failure to have contracts issued pursuant 

to a written defined contribution plan 


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41144 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

which, in form, satisfies the 

requirements of § 1.403(b)–1, § 1.403(b)–

2, this section and §§ 1.403(b)–4 through 

1.403(b)–11 (a written plan failure); a 

nondiscrimination failure; or an 

employer eligibility failure. 

(iii) See other applicable Internal 

Revenue Code provisions for the 

treatment of a contract that is not a 

section 403(b) contract, such as sections 

61, 83, 402(b), and 403(c). Thus, for 

example, section 403(c) (relating to 

nonqualified annuities) applies if any 

annuity contract issued by an insurance 

company fails to satisfy section 403(b), 

based on the value of the contract at the 

time of the failure. However, see 

paragraph (d)(2) of this section for 

special rules with respect to the 

nonforfeitability requirement of 

paragraph (a)(2) of this section. 

(2) Failure to satisfy nonforfeitability 

requirement—(i) Treatment before 

contract becomes nonforfeitable. 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. See 

§ 1.403(b)–8(d)(4) for a rule under which 

a custodial account that fails to satisfy 

the nonforfeitability requirement of 

paragraph (a)(2) of this section is treated 

as a section 401(a) qualified plan for 

certain purposes. 

(ii) Treatment when contract becomes 

nonforfeitable—(A) In general. 

Notwithstanding paragraph (d)(2)(i) of 

this section, on or after the date on 

which the participant’s interest in a 

contract described in paragraph (d)(2)(i) 

of this section 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 (as defined 

in section 83) before becoming 

nonforfeitable, each contribution under 

the contract that is subject to a different 

vesting schedule is maintained in a 

separate account, 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. See also § 1.403(b)–10(a)(1) 

for a special rule in connection with 

termination of a section 403(b) plan. 

(B) Partial vesting. For purposes of 

applying this paragraph (d), if only a 

portion of a participant’s interest in a 

contract becomes nonforfeitable in a 

year, 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 (d), 

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 

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). See 

§ 1.403(b)–4(f) for additional rules. 

■ Par. 7. Sections 1.403(b)–4, 1.403(b)–

5, 1.403(b)–6, 1.403(b)–7, 1.403(b)–8, 

1.403(b)–9, 1.403(b)–10, and 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 

excess contributions and deferrals. 

Rollover contributions made to a section 

403(b) contract, as described in 

§ 1.403(b)–10(d), are not taken into 

account for purposes of the limits 

imposed by section 415, § 1.403(b)–

3(a)(9), section 402(g), § 1.403(b)–3(a)(4), 

and this section, but after-tax employee 

contributions are taken into account 

under section 415, § 1.403(b)–3(a)(9), 

and paragraph (b) of this section. 

(b) Maximum annual contribution—

(1) General rule. In accordance with 

section 415(a)(2) and § 1.403(b)–3(a)(9), 

the contributions for any participant 

under a section 403(b) contract (namely, 

employer nonelective contributions 

(including matching contributions), 

section 403(b) elective deferrals, and 

after-tax employee contributions) are 

not permitted to exceed the limitations 

imposed by section 415. Under section 

415(c), contributions are permitted to be 

made for participants in a defined 

contribution plan, subject to the 

limitations set forth therein (which are 

generally the lesser of a dollar limit for 

a year or the participant’s compensation 

for the year). For purposes of section 

415, contributions made for a 

participant are aggregated to the extent 

applicable under section 414(b), (c), (m), 

(n), and (o). For purposes of section 

415(a)(2), §§ 1.403(b)–1 through 

1.403(b)–3, this section, and 

§§ 1.403(b)–5 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) (relating to 

compensation) 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 $15,000, adjusted for 

cost-of-living after 2006 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 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 catch-up limit under 


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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 $5,000, 

adjusted for cost-of-living after 2006 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 elective deferrals 

described in section 402(g)(7)(A)(ii) 

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 

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—

(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); 

(4) A church-related organization; or 

(5) Any organization described in 

section 414(e)(3)(B)(ii). 

(B) All entities that are in a churchrelated organization or an organization 

controlled by a church-related 

organization under section 

414(e)(3)(B)(ii) 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 or other entity within a churchrelated organization or an organization 

controlled by the 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 or 

organization controlled by a churchrelated organization). 

(C) For purposes of this paragraph 

(c)(3)(ii), a health and welfare service 

agency means—

(1) An organization whose primary 

activity is to provide services that 

constitute medical care as defined in 

section 213(d)(1) (such as a hospice); 

(2) A section 501(c)(3) organization 

whose primary activity is the prevention 

of cruelty to individuals or animals; 

(3) An adoption agency; or 

(4) An agency that provides 

substantial personal services to the 

needy as part of its primary activity 

(such as a section 501(c)(3) organization 

that either provides meals to needy 

individuals, is a home health service 

agency, provides services to help 

individuals who have substance abuse, 

or provides help to the disabled). 

(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 

employment with the qualified 

organization. Thus, an employee who 

has not completed at least 15 years of 

service (as defined under paragraph (e) 

of this section) taking into account only 

employment with the qualified 

organization is not a qualified 

employee. 

(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) Coordination with designated Roth 

contributions. See regulations under 

section 402A for rules for determining 

whether an elective deferral is a pre-tax 

elective deferral or a designated Roth 

contribution. 

(5) 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. 

B is also not eligible for 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 (c)(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 


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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. Participant A is an 

employee of hospital H and is eligible to 

participate in a section 403(b) plan of H in 

2006. A does not have 15 years of service 

with H, but A has previously made special 

section 403(b) catch-up deferrals to a section 

403(b) plan maintained by hospital P which 

has since been acquired by H. 

(ii) Conclusion. The special section 403(b) 

catch-up amount for which A qualifies under 

paragraph (c)(3) of this section must be 

calculated taking into account A’s prior years 

of service and section 403(b) elective 

deferrals with the predecessor hospital if and 

only if A 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, 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 $58,000 

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 

$29,000 (50 percent of $58,000). 

(ii) Conclusion. The maximum section 

403(b) elective deferral that C may elect for 

2006 is $20,000. 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 

$29,000 plus a section 403(b) elective 

deferral in excess of $20,000 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). (Note 

that a section 403(b) elective deferral in 

excess of $20,000 would also exceed the 

limitations of section 402(g) unless a special 

section 403(b) catch-up were permitted.) 

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). 

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. Because a contribution is a 

section 403(b) elective deferral only if it 

relates to an amount that would otherwise be 

included in the participant’s compensation, 

the effective limitation on section 403(b) 

elective deferrals for a participant whose 

compensation is less than the basic dollar 

limit for section 403(b) elective deferrals is 

the participant’s compensation. Thus, D 

cannot make section 403(b) elective deferrals 

in excess of D’s actual compensation, which 

is $14,000, even though the basic dollar limit 

exceeds that amount. 

Example 11. (i) Facts illustrating 

calculation of the special section 403(b) 

catch-up. For 2006, employee E, who is age 

53, 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. 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 

under H’s section 403(b) plan 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). 

These conclusions would be unaffected if H 

were an eligible governmental employer 

under section 457(b) that has a section 457(b) 

eligible governmental plan and E were in the 

past to have made annual deferrals to that 

plan, because contributions to a section 

457(b) eligible governmental plan do not 


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constitute elective deferrals; and these 

conclusions would also be the same if H had 

a section 401(k) plan and E were in the past 

to have made elective deferrals to that plan, 

assuming that those elective deferrals did not 

exceed $10,000 ($5,000 times 15, minus the 

sum of $62,000 plus $10,000, equals $3,000), 

so as to result in the limitation at paragraph 

(c)(3)(i)(C) of this section being less than 

$3,000. 

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) as a nonelective contribution. 

(ii) Conclusion. The maximum section 

403(b) elective deferral that D may elect 

under H’s section 403(b) plan 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 catch-up 

amount of $5,000. E is not entitled to any 

additional special section 403(b) catch-up 

amount for 2007 under paragraph (c)(3) of 

this section 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. Private 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 postretirement 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. Private 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 

post-retirement 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 

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 $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. 

Example 3. (i) Facts. A public university 

maintains a section 403(b) under which it 

contributes annually 10% of compensation 

for participants, including for the first 5 

calendar years following the date on which 

the participant ceases to be an employee. The 

plan provides that if a participant who is a 

former employee dies during the first 5 

calendar years following the date on which 

the participant ceases to be an employee, a 

contribution is made that is equal to the 

lesser of—

(A) The excess of the individual’s 

includible compensation for that year over 

the contributions previously made for the 

individual for that year; or 

(B) The total contributions that would have 

been made on the individual’s behalf 

thereafter if he or she had survived to the end 

of the 5-year period. 

(ii) Individual C’s annual includible 

compensation is $72,000 (so that C’s monthly 

includible compensation is $6,000). A $600 

contribution is made for C for January of the 

first taxable year following retirement (10% 

of individual C’s monthly includible 

compensation of $6,000). Individual C dies 

during February of that year. The university 

makes a contribution for individual C for 

February equal to $11,400 (C’s monthly 

includible compensation for January and 

February, reduced by $600). 

(iii) Conclusion. The contribution does not 

exceed the amount of individual C’s 

includible compensation for the taxable year 

for purposes of section 415(c), but any 

additional contributions would exceed C’s 

includible compensation for purposes of 

section 415(c). 

(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 

must be credited with a full year of 

service for each year during which the 

individual is a full-time employee of the 

eligible employer for the entire work 

period, and a fraction of a year for each 


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41148 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

part of a work period 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 (such as 

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 by 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 the 

previous sentence, 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 G is 

employed half-time in 2004 and 2005 as a 

clerk by H, a hospital which is a section 

501(c)(3) organization. G earns $20,000 from 

H in each of those years, and retires on 

December 31, 2005. 

(ii) Conclusion. For purposes of 

determining G’s includible compensation 

during G’s last year of service under 

paragraph (d) of this section, G’s most recent 

periods of service are aggregated to determine 

G’s most recent one-year period of service. In 

this case, since D worked half-time in 2004 

and 2005, the compensation D earned in 

those two years are aggregated to produce D’s 

includible compensation for D’s last full year 

in service. Thus, in this case, the $20,000 that 

D earned in 2004 and 2005 for D’s half-time 

work are aggregated, so that D has $40,000 of 

includible compensation for D’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 H is 

employed as a part-time professor by public 

University U during the first semester of its 

two-semester 2004–2005 academic year. 

While H 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 H performs in 

the 2004–2005 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 H 

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, H 

is considered to have completed 3/18 or 1/ 

6 of a year of service during the 2004–2005 

academic year, determined as follows: 

(A) The fractional year of service if H 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 H 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. 


rmajette on PROD1PC64 with RULES2
Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 41149 

(f) Excess contributions or deferrals—

(1) Inclusion in gross income. 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. See 

§ 1.403(b)–3(d)(1)(iii) and (2)(i) for 

additional rules, including special rules 

relating to contracts that fail to be 

nonforfeitable. See also section 4973 for 

an excise tax applicable with respect to 

excess contributions to a custodial 

account and section 4979(f)(2)(B) for a 

special rule applicable if excess 

matching contributions, excess after-tax 

employee contributions, and excess 

section 403(b) elective deferrals do not 

exceed $100. 

(2) Separate account required for 

certain excess contributions; 

distribution of excess elective deferrals. 

A contract to which a contribution is 

made that exceeds the maximum annual 

contribution limit set forth in paragraph 

(b) of this section is not a section 403(b) 

contract unless the excess contribution 

is held in a separate account which 

constitutes a separate account for 

purposes of section 72. See also 

§ 1.403(b)–3(a)(4) and paragraph (f)(4) of 

this section for additional rules with 

respect to the requirements of section 

401(a)(30) and any excess deferral. 

(3) Ability to distribute excess 

contributions. 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 from a separate 

account under paragraph (f)(2) of this 

section or made under paragraph (f)(4) 

of this section. 

(4) 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. 

(5) Examples. The provisions of this 

paragraph (f) are illustrated by the 

following examples: 

Example 1. (i) Facts. Individual D’s 

employer makes a $46,000 contribution for 

2006 to an individual annuity insurance 

policy for Individual D that would otherwise 

be a section 403(b) contract. The contribution 

does not include any elective deferrals and 

the applicable limit under section 415(c) is 

$44,000 for 2006. The $2,000 section 415(c) 

excess is put into a separate account under 

the policy. Employer includes $2,000 in D’s 

gross income as wages for 2006 and, to the 

extent of the amount held in the separate 

account for the section 415(c) excess 

contribution, does not treat the account as a 

contract to which section 403(b) applies. 

(ii) Conclusion. The separate account for 

the section 415(c) excess contribution is a 

contract to which section 403(c) applies, but 

the excess contribution does not cause the 

rest of the contract to fail section 403(b). 

Example 2. (i) Facts. Same facts as 

Example 1, except that the contribution is 

made to purchase mutual funds that are held 

in a custodial account, instead of an 

individual annuity insurance policy. 

(ii) Conclusion. The conclusion is the same 

as in Example 1, except that the purchase 

constitutes a transfer described in section 83. 

Example 3. (i) Facts. Same facts as 

Example 1, except that the amount held in 

the separate account for the section 415(c) 

excess contribution is subsequently 

distributed to D. 

(ii) Conclusion. The distribution is 

included in gross income to the extent 

provided under section 72 relating to 

distributions from a section 403(c) contract. 

Example 4. (i) Facts. Individual E makes 

section 403(b) elective deferrals totaling 

$15,500 for 2006, when E 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)(4) of this section. 

Under section 402(g), the $500 excess 

deferral is included in E’s gross income for 

2006. The additional $65 is included in E’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 after-tax 

employee contributions to a section 

403(b) plan 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 employee 

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 provisions 

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)). 

In addition, for purposes of paragraph 

(a)(1) of this section, there may be 

excluded employees who are permitted 

to be excluded under paragraph 

(b)(4)(ii)(D) and (E) of this section. 

However, as provided in paragraph 

(b)(4)(i) of this section, the exclusion of 

any employee listed in paragraph 

(b)(4)(ii)(D) or (E) of this section is 

subject to the conditions applicable 

under section 410(b)(4). 

(4) Employer aggregation rules. See 

regulations under section 414(b), (c), 

(m), and (o) 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. 

Further, the employee’s right to make 

elective deferrals also includes the right 

to designate section 403(b) elective 

deferrals as designated Roth 

contributions. 

(2) Effective opportunity required. For 

purposes of paragraph (b)(1) of this 

section, an employee is not treated as 

being permitted to have section 403(b) 

elective deferrals contributed on the 

employee’s behalf unless the employee 

is provided an effective opportunity that 

satisfies the requirements of this 


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41150 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

paragraph (b)(2). 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. A section 

403(b) plan satisfies the effective 

opportunity requirement of this 

paragraph (b)(2) only if, at least once 

during each plan year, 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)) between cash or a 

contribution to the plan. Further, an 

effective opportunity includes the right 

to have section 403(b) elective deferrals 

made on his or her behalf 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 fulltime employees. An effective 

opportunity is not considered to exist if 

there are any other rights or benefits 

(other than rights or benefits listed in 

§ 1.401(k)–1(e)(6)(i)(A), (B), or (D)) 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 (that is, applies 

separately 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 eligible employer may 

condition the employee’s right to have 

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) 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. However, the exclusion 

of any employee listed in paragraph 

(b)(4)(ii)(D) or (E) of this section is 

subject to the conditions applicable 

under section 410(b)(4). Thus, if any 

employee listed in paragraph 

(b)(4)(ii)(D) of this section has the right 

to have section 403(b) elective deferrals 

made on his or her behalf, then no 

employee listed in that paragraph 

(b)(4)(ii)(D) of this section may be 

excluded under this paragraph (b)(4) 

and, if any employee listed in paragraph 

(b)(4)(ii)(E) of this section has the right 

to have section 403(b) elective deferrals 

made on his or her behalf, then no 

employee listed in that paragraph 

(b)(4)(ii)(E) of this section 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 

another section 403(b) plan, or 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 (or such lower 

number of hours per week as may be set 

forth in the plan). 

(iii) Special rules. (A) A section 403(b) 

plan is permitted to take into account 

coverage under another plan, as 

permitted in paragraphs (b)(4)(ii)(A) and 

(B) of this section, only if the rights to 

make elective deferrals with respect to 

that coverage would satisfy paragraphs 

(b)(2) and (4)(i) of this section if that 

coverage were provided under the 

section 403(b) plan. 

(B) For purposes of paragraph 

(b)(4)(ii)(E) of this section, 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) Church plans exception. 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 ERISA that may apply with respect to 

section 403(b) arrangements, 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 provides 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 


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plan termination), a section 403(b) 

contract is permitted to distribute 

retirement benefits to the participant no 

earlier than upon the earlier 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. This paragraph (b) does not 

apply to after-tax employee 

contributions or earnings thereon. 

(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 § 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) 

has the same meaning as a distribution 

on account of hardship under 

§ 1.401(k)–1(d)(3) and is subject to the 

rules and restrictions set forth 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 

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 

paragraph (d)(1) of this section; 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) for these 

requirements. 

(2) Treatment as IRAs. For purposes 

of applying the distribution rules of 

section 401(a)(9) to section 403(b) 

contracts, the minimum distribution 

rules applicable to individual retirement 

annuities described in section 408(b) 

and individual retirement accounts 

described in section 408(a) apply to 

section 403(b) contracts. 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 governmental plan or church plan, 

the required beginning date for a 5- 

percent owner is April 1 of the calendar 

year following the calendar year in 

which the employee attains 701⁄2. 

(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 also § 1.403(b)–9(a)(5 for additional 

rules relating to annuities payable from 

a retirement income account). 

(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 


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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) (without regard to this 

paragraph (e)(6)). 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) (without regard to this 

paragraph (e)(6)). 

(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 

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 §§ 1.403(b)–1 through 

1.403(b)–5, this section, and 

§§ 1.403(b)–7 through 1.403(b)–11, 

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 section 408(b)(1) 

of Title I of ERISA and 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)(ii) (in 

form or in operation). For purposes of 

this paragraph (g), to the extent the 

incidental benefit requirement of 

§ 1.401–1(b)(1)(ii) 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). In 

addition, if a contract issued by an 

insurance company qualified to issue 

annuities in a State includes provisions 

under which, in the event a participant 

becomes disabled, benefits will be 

provided by the insurance carrier as if 

employer contributions were continued 

until benefit distribution commences, 

then that benefit is treated as an 

incidental benefit (as insurance for a 

deferred annuity benefit in the event of 

disability) that must satisfy the 

incidental benefit requirement of 

§ 1.401–1(b)(1)(ii) (taking into account 

any other incidental benefits provided 

under the plan). 

(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, 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 for-profit subsidiary of 

the section 501(c)(3) organization) or in 

a capacity that is not employment with 

an eligible employer (for example, 

ceasing to be an employee performing 

services for a public school but 

continuing to work for the same State 

employer). Thus, this paragraph (h) does 

not apply if an employee transfers from 

one section 501(c)(3) organization to 

another section 501(c)(3) organization 

that is treated as the same employer or 

if an employee transfers from one public 

school to another public school of 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 


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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 rollover in accordance with 

section 401(a)(31) is not includible in 

the gross income of a participant or 

beneficiary in the year rolled over. 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 

contributed to an eligible retirement 

plan (as defined in section 402(c)(8)(B)) 

within 60 days, including the 

contribution 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. 

Thus, to the extent that a portion of a 

distribution (including a distribution 

from a designated Roth account) would 

be excluded from gross income if it were 

not rolled over, if that portion of the 

distribution is to be rolled over into an 

eligible retirement plan that is not an 

IRA, the rollover must be accomplished 

through a direct rollover of the entire 

distribution to a plan qualified under 

section 401(a) or section 403(b) plan and 

that plan must agree to separately 

account for the amount not includible in 

income (so that a 60-day rollover to a 

plan qualified under section 401(a) or 

another section 403(b) plan is not 

available for this portion of the 

distribution). 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). Thus, the special rule in 

§ 1.401(k)–1(f)(3)(ii) with respect to 

distributions from a designated Roth 

account that are expected to total less 

than $200 during a year applies to 

designated Roth accounts under a 

section 403(b) plan. 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 

§ 1.402(f)–1 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 § 31.3405(c)–1 of 

this chapter for provisions regarding the 

withholding requirements relating to 

eligible rollover distributions. 

(5) Automatic rollover for certain 

mandatory distributions under section 

401(a)(31). In accordance with section 

403(b)(10), a section 403(b) plan is 

required to comply with section 

401(a)(31) (including automatic rollover 

for certain mandatory distributions) in 

the same manner as a qualified plan. 

(c) Special rules. 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 employee contributions and 

matching contributions to comply with 

section 401(m). See sections 402(l) and 

403(b)(2) for a special rule regarding 

distributions for certain retired public 

safety officers made from a 

governmental plan for the direct 

payment of certain premiums. 

(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. See generally 

§ 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. A deemed distribution is not 

an actual distribution for purposes of 

§ 1.403(b)–6, as provided at § 1.72(p)–1, 

Q&A–12 and Q&A–13. (Further, see 

section 408(b)(1) of Title I of ERISA 

concerning the effect of noncompliance 

with Title I loan requirements for plans 

that are subject to Title I of ERISA.) 

(e) Special rules relating to 

distributions from a designated Roth 

account. If an amount is distributed 

from a designated Roth account under a 

section 403(b) plan, the amount, if any, 

that is includible in gross income and 

the amount, if any, that may be rolled 

over to another section 403(b) plan is 

determined under § 1.402A–1. Thus, the 

designated Roth account is treated as a 

separate contract for purposes of section 

72. For example, the rules of section 

72(b) must be applied separately to 

annuity payments with respect to a 

designated Roth account under a section 

403(b) plan and separately to annuity 

payments with respect to amounts 

attributable to any other contributions to 

the section 403(b) plan. 

(f) Aggregation of contracts. In 

accordance with section 403(b)(5), the 

rules of this section are applied as if all 

annuity contracts for the employee by 

the employer are treated as a single 

contract. 

(g) Certain rules relating to 

employment taxes. With respect to 

contributions under the Federal 

Insurance Contributions Act (FICA) 

under Chapter 21, see section 

3121(a)(5)(D) for a special rule relating 

to section 403(b) contracts. With respect 

to income tax withholding on 

distributions from section 403(b) 

contracts, see section 3405 generally. 

However, see section 3401 for income 


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41154 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

tax withholding applicable to annuity 

contracts or custodial accounts that are 

not section 403(b) contracts or for cases 

in which an annuity contract or 

custodial account ceases to be a section 

403(b) contract. See also § 1.72(p)–1, 

Q&A–15, and § 35.3405(c)–1, Q&A–11 of 

this chapter, for special rules relating to 

income tax withholding for loans made 

from certain employer plans, including 

section 403(b) contracts. 

§ 1.403(b)–8 Funding. 

(a) Investments. Section 403(b) and 

§ 1.403(b)–3(a) 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 paragraph (d) of 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). If a contract issued by an 

insurance company qualified to issue 

annuities in a State provides death 

benefits as part of the contract, then that 

coverage is permitted, assuming that 

those death benefits do not cause the 

contract to fail to satisfy any 

requirement applicable to section 403(b) 

contracts, for example, assuming that 

those benefits satisfy the incidental 

benefit requirement of § 1.401–1(b)(1)(i), 

as required by § 1.403(b)–6(g). 

(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 a contract described in the preceding 

sentence 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 (including a 

state university 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)–7, this section and §§ 1.403(b)–

9 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) 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 other than stock of 

a regulated investment company. 

(4) Treatment of custodial account. A 

custodial account is treated as a section 

401 qualified plan solely for purposes of 

subchapter F of subtitle A and subtitle 

F of the Internal Revenue Code with 

respect to amounts received by it (and 

income from investment thereof). This 

treatment only applies to a custodial 

account that constitutes a section 403(b) 

contract under §§ 1.403(b)–1 through 

1.403(b)–7, this section and §§ 1.403(b)–

9 through 1.403(b)–11 or that would 

constitute a section 403(b) contract 

under §§ 1.403(b)–1 through 1.403(b)–7, 

this section and §§ 1.403(b)–9 through 

1.403(b)–11 if the amounts held in the 

account were to satisfy the 

nonforfeitability requirement of 

§ 1.403(b)–3(a)(2). 

(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)–7, this 

section and §§ 1.403(b)–9 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). 


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§ 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)–8, this section, 

§ 1.403(b)–10 and § 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 (namely, there 

must be sufficient separate accounting 

in order for it 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 (and for this purpose, 

assets are treated as diverted to the 

employer if there is a loan or other 

extension of credit from assets in the 

account to the employer). 

(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 (as 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 annual 

additions 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 is 

permitted to amend its section 403(b) 

plan to eliminate future contributions 

for existing participants or to limit 

participation to existing participants 

and employees (to the extent consistent 

with § 1.403(b)–5). A section 403(b) plan 

is permitted to contain provisions that 

provide for plan termination and that 

allow 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 same 

employer under section 414(b), (c), (m), 

or (o) on the date of the termination) 

does not make contributions to any 

section 403(b) contract that is not part 

of the plan 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. To the extent a contract 

fails to satisfy the nonforfeitability 

requirement of § 1.403(b)–3(a)(2) at the 

date of plan termination, the contact is 

not, and cannot later become, a section 

403(b) contract. 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. For this 

purpose, delivery of a fully paid 

individual insurance annuity contract is 

treated as a distribution. 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, including § 1.403(b)–

7(b)(1) under which an eligible rollover 

distribution is not included in gross 

income if paid in a direct rollover to an 

eligible retirement plan or if transferred 

to an eligible retirement plan within 60 

days. 

(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) 


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41156 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

plan is permitted to 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 is permitted to provide for the 

transfer of its assets (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 is permitted to provide for the 

transfer of its assets to a qualified plan 

under section 401(a). However, neither 

a qualified plan nor an eligible 

governmental 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 

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—(i) 

General rule. 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 each of the following 

conditions are met: 

(A) The plan under which the 

contract is issued provides for the 

exchange. 

(B) The participant or beneficiary has 

an accumulated benefit immediately 

after the exchange that is 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). 

(C) The other contract is subject to 

distribution restrictions with respect to 

the participant that are not less stringent 

than those imposed on the contract 

being exchanged, and the employer 

enters into an agreement with the issuer 

of the other contract under which the 

employer and the issuer will from time 

to time in the future provide each other 

with the following information: 

(1) Information necessary for the 

resulting contract, or any other contract 

to which contributions have been made 

by the employer, to satisfy section 

403(b), including information 

concerning the participant’s 

employment and information that takes 

into account other section 403(b) 

contracts or qualified employer plans 

(such as whether a severance from 

employment has occurred for purposes 

of the distribution restrictions in 

§ 1.403(b)–6 and whether the hardship 

withdrawal rules of § 1.403(b)–6(d)(2) 

are satisfied). 

(2) Information necessary for the 

resulting contract, or any other contract 

to which contributions have been made 

by the employer, to satisfy other tax 

requirements (such as whether a plan 

loan satisfies the conditions in section 

72(p)(2) so that the loan is not a deemed 

distribution under section 72(p)(1)). 

(ii) Accumulated benefit. The 

condition in paragraph (b)(2)(i)(B) of 

this section is satisfied if the exchange 

would satisfy section 414(l)(1) if the 

exchange were a transfer of assets. 

(iii) Authority for future guidance. 

Subject to such conditions as the 

Commissioner determines to be 

appropriate, the Commissioner may 

issue rules of general applicability, in 

revenue rulings, notices, or other 

guidance published in the Internal 

Revenue Bulletin (see 

§ 601.601(d)(2)(ii)(b) of this chapter), 

permitting an exchange of one section 

403(b) contract for another section 

403(b) contract for an exchange that 

does not satisfy paragraph (b)(2)(i)(C) of 

this section. Any such rules must 

require the resulting contract to set forth 

procedures that the Commissioner 

determines are reasonably designed to 

ensure compliance with those 

requirements of section 403(b) or other 

tax provisions that depend on either 

information concerning the participant’s 

employment or information that takes 

into account other section 403(b) 

contracts or other employer plans (such 

as whether a severance from 

employment has occurred for purposes 

of the distribution restrictions in 

§ 1.403(b)–6, whether the hardship 

withdrawal rules of § 1.403(b)–6(d)(2) 

are satisfied, and whether a plan loan 

constitutes a deemed distribution under 

section 72(p)). 

(3) Requirements for plan-to-plan 

transfers. (i) 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 each 

of the following conditions are met—

(A) In the case of a transfer for a 

participant, the participant is an 

employee or former employee of the 

employer (or the business of the 

employer) for the receiving plan. 

(B) In the case of a transfer for a 

beneficiary of a deceased participant, 

the participant was an employee or 

former employee of the employer (or 

business of the employer) for the 

receiving plan. 

(C) The transferor plan provides for 

transfers. 

(D) The receiving plan provides for 

the receipt of transfers. 

(E) The participant or beneficiary 

whose assets are being transferred has 

an accumulated benefit immediately 

after the transfer that is at least equal to 

the accumulated benefit of that 

participant or beneficiary immediately 

before the transfer. 

(F) 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. 

(G) 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 (for example, a 

pro rata portion of the participant’s or 

beneficiary’s interest in any after-tax 

employee contributions). 

(ii) Accumulated benefit. The 

condition in paragraph (b)(3)(i)(D) of 

this section is satisfied if the transfer 

would satisfy section 414(l)(1). 

(4) Purchases 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 in the plan 

to a qualified defined benefit plan that 

is a 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 plan; or 


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Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 41157 

(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 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 

another event permitting a distribution 

to be made under section 403(b). In the 

case of a plan that is subject to Title I 

of ERISA, see also section 206(d)(3) of 

ERISA under which the prohibition 

against assignment or alienation of plan 

benefits under section 206(d)(1) of 

ERISA does not apply to an order that 

is determined to be a qualified domestic 

relations order. 

(d) Rollovers to a section 403(b) 

contract—(1) General rule. A section 

403(b) contract may accept a 

contribution that is an eligible rollover 

distribution (as defined in section 

402(c)(4)) made from another eligible 

retirement plan (as defined in section 

402(c)(8)(B)). Any amount contributed 

to a section 403(b) contract as an eligible 

rollover distribution is 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)), is otherwise treated in 

the same manner as an amount held 

under a section 403(b) contract for 

purposes of §§ 1.403(b)–3 through 

1.403(b)–9 and this section. 

(2) Special rules relating to after-tax 

employee contributions and designated 

Roth contributions. A section 403(b) 

plan that receives an eligible rollover 

distribution that includes after-tax 

employee contributions or designated 

Roth contributions is required to obtain 

information regarding the employee’s 

section 72 basis in the amount rolled 

over. A section 403(b) plan is permitted 

to receive an eligible rollover 

distribution that includes designated 

Roth contributions only if the plan 

permits employees to make elective 

deferrals that are designated Roth 

contributions. 

(e) Deemed IRAs. See regulations 

under section 408(q) for special rules 

relating to deemed IRAs. 

(f) Defined benefit plans—(1) Defined 

benefit plans generally. Except for a 

TEFRA church defined benefit plan as 

defined in paragraph (f)(2) of this 

section, section 403(b) does not apply to 

any contributions or accrual under a 

defined benefit plan. 

(2) 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 churchrelated 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 applicable to TEFRA 

church defined benefit plans. 

(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 Applicable dates. 

(a) General rule. Except as otherwise 

provided in this section, §§ 1.403(b)–1 

through 1.403(b)–10 apply for taxable 

years beginning after December 31, 

2008. 

(b) Collective bargaining agreements. 

In the case of a section 403(b) plan 

maintained pursuant to one or more 

collective bargaining agreements that 

have been ratified and in effect on July 

26, 2007, §§ 1.403(b)–1 through 

1.403(b)–10 do not apply before the 

earlier of—

(1) The date on which the last of the 

collective bargaining agreements 

terminates (determined without regard 

to any extension thereof after July 26, 

2007); or 

(2) July 26, 2010. 

(c) Church conventions; retirement 

income account. (1) In the case of a 

section 403(b) plan maintained by a 

church-related organization for which 

the authority to amend the plan 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 first day of the first plan year 

that begins after December 31, 2009. 

(2) In the case of a loan or other 

extension of credit to the employer that 

was entered into under a retirement 

income account before July 26, 2007 the 

plan does not fail to satisfy § 1.403(b)–

9(a)(2)(C) on account of the loan or other 

extension of credit if the plan takes 

reasonable steps to eliminate the loan or 

other extension of credit to the 

employer before the applicable date for 

§ 1.403(b)–9(a)(2) or as promptly as 

practical thereafter (including taking 

steps after July 26, 2007 and before the 

applicable date). 

(d) Special rules for plans that 

exclude certain types of employees from 

elective deferrals. (1) If, on July 26, 

2007, a plan excludes any of the 

following categories of employees, then 

the plan does not fail to satisfy 

§ 1.403(b)–5(b) as a result of that 

exclusion before the first day of the first 

taxable year that begins after December 

31, 2009: 

(i) Employees who make a one-time 

election to participate in a governmental 

plan described in section 414(d) that is 

not a section 403(b) plan. 

(ii) Professors who are providing 

services on a temporary basis to another 

educational organization (as defined 

under section 170(b)(1)(A)(ii)) 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 

educational organization. 

(iii) 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 from 

eligibility to make elective deferrals. 

(2) If, on July 26, 2007, a plan 

excludes employees who are covered by 

a collective bargaining agreement from 

eligibility to make elective deferrals, the 

plan does not fail to satisfy § 1.403(b)–

5(b) (relating to universal availability) as 


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41158 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

a result of that exclusion before the later 

of—

(i) The first day of the first taxable 

year that begins after December 31, 

2008; or 

(ii) The earlier of—

(A) The date on which the related 

collective bargaining agreement 

terminates (determined without regard 

to any extension thereof after July 26, 

2007); or 

(B) July 26, 2010. 

(3) In the case of a governmental plan 

(as defined in section 414(d)) for which 

the authority to amend the plan is held 

by a legislative body that meets in 

legislative session, the plan does not fail 

to satisfy § 1.403(b)–5(b) as a result of 

any exclusion in paragraph (d)(1)(i), 

(d)(1)(ii),(d)(1)(iii), or (d)(2) of this 

section before the earlier of —

(i) The close of the first regular 

legislative session of the legislative body 

with the authority to amend the plan 

that begins on or after January 1, 2009; 

or 

(ii) January 1, 2011. 

(e) Special rules for plans that permit 

in-service distributions. (1) Section 

1.403(b)–6(b) does not apply to a 

contract issued by an insurance 

company before January 1, 2009. 

(2) Any amendment to comply with 

the requirements of § 1.403(b)–6 

(disregarding paragraph (e)(1) of this 

section) that is adopted before January 

1, 2009, or such later date as may be 

permitted under guidance 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), 

does not violate section 204(g) of the 

Employee Retirement Income Security 

Act of 1974 to the extent the 

amendment eliminates or reduces a 

right to receive benefit distributions 

during employment. 

(f) Special rule for life insurance 

contracts. Section 1.403(b)–8(c)(2) does 

not apply to a contract issued before 

September 24, 2007. 

(g) Special rule for contracts received 

in an exchange. Section 1.403(b)–

10(b)(2) does not apply to a contract 

received in an exchange that occurred 

on or before September 24, 2007 if the 

exchange (including the contract 

received in the exchange) satisfies such 

rules as the Commissioner has 

prescribed in guidance of general 

applicability at the time of the 

exchange. 

(h) Special rule for coordination with 

regulations under section 415. Section 

1.403(b)–3(b)(4)(ii) is applicable for 

taxable years beginning on or after July 

1, 2007. 

(i) Special rule for coordination with 

regulations under section 402A. 

Sections 1.403(b)–3(c), 1.403(b)–7(e), 

and 1.403(b)–10(d)(2) are applicable 

with respect to taxable years beginning 

on or after January 1, 2007. 

§ 1.403(d)–1 [Removed] 

■ Par. 8. Section 1.403(d)–1 is removed. 

■ Par. 9. 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 only apply for purposes of 

determining when entities are treated as 

the same employer for purposes of 

section 414(b), (c), (m), and (o) 

(including the sections referred to in 

section 414(b), (c), (m), (o), and (t)), and 

are in addition to the rules otherwise 

applicable under section 414(b), (c), (m), 

and (o) for determining when entities 

are treated as the same employer. 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 church-controlled 

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 whose employees 

participate in the plan and any other 

organization that is under common 

control with that exempt organization. 

For this purpose, common control exists 

between an exempt organization and 

another organization 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. A trustee 

or director is controlled by another 

organization if the other organization 

has the general power to remove such 

trustee or director and designate a new 

trustee or director. Whether a person 

has the power to remove or designate a 

trustee or director is based on facts and 

circumstances. To illustrate the rules of 

this paragraph (b), if exempt 

organization A has the power to appoint 

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 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 section 

414(b), (c), (m), (o), and (t). 

(c) Permissive aggregation with 

entities having a common exempt 

purpose—(1) General rule. For purposes 

of this section, exempt organizations 

that maintain a plan to which section 

414(c) applies that covers one or more 

employees from each organization may 

treat themselves as under common 

control for purposes of section 414(c) 

(and, thus, as a single employer for all 

purposes for which section 414(c) 

applies) if each of the organizations 

regularly coordinates 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. 

(2) Authority to permit aggregation. (i) 

For determining when entities are 

treated as the same employer under 

section 414(b), (c), (m), and (o), the 

Commissioner may issue rules of 

general applicability, in revenue rulings, 

notices, or other guidance published in 

the Internal Revenue Bulletin (see 

§ 601.601(d)(2)(ii)(b) of this chapter), 

permitting other types of combinations 

of entities that include exempt 

organizations to elect to be treated as 

under common control for one or more 

specified purposes if: 

(A) There are substantial business 

reasons for maintaining each entity in a 

separate trust, corporation, or other 

form; and 

(B) Such treatment would be 

consistent with the anti-abuse standards 

in paragraph (f) of this section. 

(ii) For example, this authority might 

be exercised in any situation in which 


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Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 41159 

the organizations are so integrated in 

their operations as to effectively 

constitute a single coordinated 

employer for purposes of section 414(b), 

(c), (m), and (o), including common 

employee benefit plans. 

(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 several nursing 

homes each of which receives more than 

25 percent of its support from fees paid 

by residents (so that none of them is a 

qualified church-controlled organization 

under § 1.403(b)–2 and section 

3121(w)(3)(B)), the nursing homes may 

treat themselves as being under 

common control with each other, but 

not as being under common control 

with the church and the school, even 

though the nursing homes would be 

under common control with the school 

and the church under paragraph (b) of 

this section. 

(e) Application to certain church 

entities under section 3121(w)(3). 

[Reserved]. 

(f) Anti-abuse rule. In any case in 

which the Commissioner determines 

that the structure of one or more exempt 

organizations (which may include 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 any 

requirements imposed under section 

401(a), 403(b), or 457(b), or any 

applicable section (as defined in section 

414(t)), or any other provision for which 

section 414(c) applies, 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 

chose 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)), or any 

other provision for which section 414(c) 

applies. 

Example 3. (i) Facts. Organization O and P 

are each tax-exempt organizations under 

section 501(c)(3). Each organization 

maintains a qualified plan for its employees, 

but one of the plans would not satisfy section 

410(b) (or section 401(a)(4)) if the 

organizations were under common control. 

The two organizations are closely related 

and, while the organizations have several 

trustees in common, the common trustees 

constitute fewer than 80 percent of the 

trustees of either organization. Organization 

O has the power to remove any of the trustees 

of P and to select the slate of replacement 

nominees. 

(ii) Conclusion. Under these facts, pursuant 

to paragraphs (b) and (f) of this section, the 

Commissioner treats the entities as under 

common control. 

(h) Applicable date. This section 

applies for plan years beginning after 

December 31, 2008. 

■ Par. 10. For each entry listed in the 

‘‘Location’’ column, remove the 

language in the ‘‘Remove’’ column and 

add the language in the ‘‘Add’’ column 

in its place. 

Location Remove Add 

§ 1.101–1(a)(2)(ii) ............................................... paragraph (a) or (b) of § 1.403(b)–1 ................ § 1.403(b)–3. 

§ 1.101–1(a)(2)(ii) ............................................... paragraph (c)(3) of § 1.403(b)–1 ...................... § 1.403(b)–7. 

§ 1.401(a)(9)–1, A–1 .......................................... § 1.403(b)–3 ...................................................... § 1.403(b)–6(e). 

§ 1.401(a)(31)–1. introductory text ..................... § 1.403(b)–2 ...................................................... § 1.403(b)–7(b). 

§ 1.401(a)(31)–1, A–1(b)(3) ............................... § 1.403(b)–2 ...................................................... § 1.403(b)–7(b). 

§ 1.402(c)–2, introductory text ........................... § 1.403(b)–2 ...................................................... § 1.403(b)–7(b). 

§ 1.402(c)–2, A–1(b)(4) ...................................... § 1.403(b)–2 ...................................................... § 1.403(b)–7(b). 

§ 1.402(f)–1, introductory text ............................ § 1.403(b)–2 ...................................................... § 1.403(b)–7(b). 

§ 1.403(a)–1(a) ................................................... § 1.403(b)–1 ...................................................... §§ 1.403(b)–1 through 1.403(b)–10. 

§ 1.403(c)–1, all locations .................................. § 1.403(b)–1(b) ................................................. § 1.403(b)–3. 

§ 1.403(c)–1, all locations .................................. § 1.403(b)–1(b)(2) ............................................. § 1.403(b)–3(c). 

PART 31—EMPLOYMENT TAXES, 

INCOME TAXES, PENALTIES, 

PENSIONS, RAILROAD RETIREMENT, 

REPORTING AND RECORDKEEPING 

REQUIREMENTS, SOCIAL SECURITY, 

UNEMPLOYMENT COMPENSATION 

■ Par. 11. The authority citation for part 

31 continues to read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 12. For each entry listed in the 

‘‘Location’’ column, remove the 

language in the ‘‘Remove’’ column and 

add the language in the ‘‘Add’’ column 

in its place. 


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41160 Federal Register / Vol. 72, No. 143 / Thursday, July 26, 2007 / Rules and Regulations 

Location Remove Add 

§ 31.3405(c)–1, all locations .............................. § 1.403(b)–2, Q&A–1 ........................................ § 1.403(b)–7(b). 

§ 31.3405(c)–1, A–1(b) ...................................... § 1.403(b)–2, Q&A–3 ........................................ § 1.403(b)–7(b). 

§ 31.3405(c)–1, A–1(b) ...................................... § 1.403(b)–2, Q&A–1 and Q&A–2 .................... § 1.403(b)–7(b). 

§ 31.3405(c)–1, A–2 ........................................... § 1.403(b)–2, Q&A–2 ........................................ § 1.403(b)–7(b). 

PART 54—EXCISE TAXES. PENSIONS, 

REPORTING AND RECORDKEEPING 

REQUIREMENTS 

■ Par. 13. The authority citation for part 

54 continues to read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 14. For the entry listed in the 

‘‘Location’’ column, remove the 

language in the ‘‘Remove’’ column and 

add the language in the ‘‘Add’’ column 

in its place. 

Location Remove Add 

§ 54.4974–2, A–3(a)(2) ...................................... § 1.403(b)–3 ...................................................... § 1.403(b)–6(e). 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par 15. The authority citation for part 

602 continues to read in part as follows: 

Authority: 26 U.S.C. 7805. 

■ Par 16. In § 602.101, paragraph (b) is 

amended by removing the entry for 

§ 1.403(b)–2 and adding entries to the 

table for §§ 1.403(b)–7 and 1.402(b)–10 

to read as follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified and described 

Current OMB 

control 

No.* * * * * 

1.403(b)–7 ............................ 1545–1341 

* * * * * 

1.403(b)–10 .......................... 1545–2068 

* * * * * 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: July 2, 2007. 

Eric Solomon, 

Assistant Secretary of Treasury (Tax Policy). 

[FR Doc. 07–3649 Filed 7–23–07; 8:45 am] 

BILLING CODE 4830–01–P 


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