E7-18809. Revised Regulations Concerning Section 403(b) Tax-Sheltered Annuity Contracts; Correction

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Correcting amendments.

SUMMARY:

This document contains corrections to final regulations (TD 9340) that were published in the Federal Register on Thursday, July 26, 2007 (72 FR 41128) providing 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:

The correction is effective September 25, 2007.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, John Tolleris at [phone]; concerning the regulations as applied to church-related entities, Robert Architect at [phone] (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of this correction are under section 403(b) of the Internal Revenue Code.

Need for Correction

As published, final regulations (TD 9340) contain errors that may prove to be misleading and are in need of clarification.

List of Subjects

26 CFR Part 1

• Income taxes
• Reporting and recordkeeping requirements

26 CFR Part 54

• Excise taxes
• Pensions
• Reporting and recording requirements

26 CFR Part 602

• Reporting and recordkeeping requirements

Correction of Publication

Accordingly, 26 CFR parts 1, 54, and 602 are corrected by making the following correcting amendments:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

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

Par. 2. Section 1.403(b)-2 is amended by revising paragraph (b)(8)(i)(A), paragraph (b)(9), second sentence, and paragraph (b)(11), fourth sentence, to read as follows:

§ 1.403(b)-2

Definitions.

* * * * *

(b) * * *

(8) * * *

(i) * * *

(A) A State, but only with respect to an employee of the State performing services for a public school;

* * * * *

(9) * * * 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.

* * * * *

(11) * * * 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 sections 125, 132(f)(4), 402(e)(2), 402(h)(1)(B), 402(k), or 457(b). * * *

* * * * *

Par. 3. Section 1.403(b)-3 is amended by revising paragraph (b)(3)(i), last sentence, paragraph (c)(2), last sentence, and paragraph (d)(1)(ii), last sentence, to read as follows:

§ 1.403-3

Exclusion for contributions to purchase section 403(b) contracts.

* * * * *

(b) * * *

(3) * * *

(i) * * * 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.

* * * * *

(c) * * *

(2) * * * Similarly, a designated Roth account under a section 403(b) plan is subject to the rules of sections 401(a)(9)(A) and (B) and § 1.403(b)-6(e).

* * * * *

(d) * * *

(1) * * *

(ii) * * * 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 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.

* * * * *

Par. 4. Section 1.403(b)-4 is amended by revising paragraph (b)(1), third sentence, paragraph (c)(3)( i)(B)(2), and paragraph (e)(7), second sentence, to read as follows:

§ 1.403(b)-4

Contribution limitations.

* * * * *

(b) * * *

(1) * * * For purposes of section 415, contributions made for a participant are aggregated to the extent applicable under sections 414(b), (c), (m), (n), and (o). * * *

* * * * *

(c) * * *

(3) * * *

(i) * * *

(B) * * *

(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

* * * * *

(e) * * *

(7) * * * 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 or her 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.

* * * * *

Par. 5. Section 1.403(b)-6 is amended by revising paragraph (e)(3) and paragraph (e)(5), last sentence, to read as follows:

§ 1.403(b)-6

Timing of distributions and benefits.

* * * * *

(e) * * *

(3) * * * 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 age 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 age 701/2.

* * * * *

(5) * * * See also § 1.403(b)-9(a)(5) for additional rules relating to annuities payable from a retirement income account).

* * * * *

Par. 6. Section 1.403(b)-11 is amended by revising paragraph (c)(2) to read as follows:

§ 1.403(b)-11

Applicable dates.

* * * * *

(c) * * *

(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)(i)(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).

* * * * *

Par. 7. Section 1.414(c)-5 is amended by revising paragraph (g) Example 3.(i), first sentence, to read as follows:

§ 1.414(c)-5

Certain tax-exempt organizations.

* * * * *

(g) * * *

Example 3. * * *

(i) * * * Organizations O and P are each tax-exempt organizations under section 501(c)(3). * * *

* * * * *

LaNita Van Dyke,

Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure and Administration).