[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.403(c)-1]

[Page 425-427]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.403(c)-1  Taxability of beneficiary under a nonqualified annuity.

    (a) Taxability of vested interest in premiums. If after August 1, 
1969, an employer (whether or not exempt under section 501(a)) pays 
premiums for an annuity contract for the benefit of an employee, the 
amount of such premiums shall be included as compensation in the gross 
income of the employee for the taxable year during which such premiums 
are paid, but only to the extent that the employees's rights in such 
premiums are substantially vested (as defined in Sec. 1.83-3(b)) at the 
time such premiums are paid. The preceding sentence shall not apply to 
contracts referred to in the transitional rule of paragraph (d) (1), 
(ii), or (iii) of this section, or to premiums subject to Sec. 
1.403(a)-1(a) or excludible under Sec. 1.403(b)-1(b). If any employer 
has purchased annuity contracts and transfered them to a trust (other 
than one described in section 401(a)) that is to provide annuity 
contracts or benefits for his employees, the amounts so paid shall be 
treated as contributions to a trust described in section 402(b). For the 
rules relating to the taxation of the cost of life insurance protection 
when rights in a life insurance contract are substantially nonvested, 
see Sec. 1.83-1(a)(2).
    (b) Taxability of employee when rights under annuity contract change 
from nonvested to vested--(1) In general. If, during a taxable year of 
an employee ending after August 1, 1969, the rights of such employee 
under an annuity contract purchased for him by an employer (whether or 
not exempt under section 501(a) or 521(a)) become substantially vested, 
the value of the annuity contract on the date of such change shall be 
included in the employee's gross income for such year, to the extent 
provided in paragraph (b)(2) of this section. The preceding sentence 
shall not apply, however, to an annuiity contract purchased and held as 
part of a plan which met at the time of such purchase, and continues to 
meet, the requirements of section 404(a)(2) or an annuity contract 
referred to in paragraph (d) (ii) or (iii) of this section. For purposes 
of this section, the value of an annuity contract on the date the 
employee's rights become substantially vested means the cash surrender 
value of such contract on such date.
    (2) Extent to which value of annuity contract is includible in 
employee's gross income. For purposes of paragraph (b)(1) of this 
section, the only amount includible in the gross income of the employee 
is that the portion of the value of the contract on the date of the 
change that is attributable to premiums which were paid by the employer 
after August 1, 1969, and which were not excludible from the employer's 
gross income under Sec. 1.403(b)-1(b). However, the includible portion 
does not include--
    (i) The value attributable to a premium paid on the date of such 
change, and
    (ii) The value attributable to premiums described in the 
transitional

[[Page 426]]

rule of paragraph (d)(1) (ii) or (iii) of this section.

See Sec. 1.403(b)-1(b)(2) for the treatment of an amount otherwise 
includible in gross income under section 403(c) as an employer 
contribution for purposes of the exclusion under section 403(b).
    (3) Partial vesting. If, during any taxable year of an employee, 
only part of his beneficial interest in an annuity contract becomes 
substantially vested, then only the corresponding part of the value of 
the annuity contract on the date of such change is includible in the 
employee's gross income for such taxable year. In such a case, it is 
first necessary to compute, under the rules in paragraphs (b)(1) and (2) 
of this section but without regard to any exclusion allowable under 
Sec. 1.403(b)-1(b), the amount which would be includible in the 
employee's gross income for the taxable year if his entire beneficial 
interest in the annuity contract had changed to a substantially vested 
interest during such year. The amount that is includible under this (3) 
(without regard to the section 403(b) exclusion) is equal to the amount 
determined under the preceding sentence multiplied by the percent of the 
employee's beneficial interest which became substantially vested during 
the taxable year.
    (c) Amounts paid or made available under an annuity contract. The 
amounts paid or made available to the employee under an annuity contract 
subject to this section shall be included in the gross income of the 
employee for the taxable year in which paid or made available, as 
provided in section 72 (relating to annuities). Such amounts may be 
taken into account in computations under sections 1301 through 1305 
(relating to income averaging). For rules relating to the treatment of 
employer contributions as part of the consideration paid by the 
employee, see section 72(f). See also section 101(b)(2)(D) for rules 
relating to the treatment of the limited exclusion provided thereunder 
as part of the consideration paid by the employee.
    (d) Taxability of beneficiary under a nonqualified annuity on or 
before August 1, 1969. (1) Except as provided in section 402(d) 
(relating to taxable years beginning before Janaury 1, 1977), if an 
employer purchases an annuity contract and if the amounts paid for the 
contract.
    (i) On or before August 1, 1969, or
    (ii) After such date, if pursuant to a binding written contract (as 
defined in Sec. 1.83-8(b)(2)) entered into before April 22, 1969, or
    (iii) After August 1, 1969, pursuant to a written plan in which the 
employee participated on April 22, 1969 and under which the obligation 
of the employer is essentially the same as under a binding written 
contract, are not subject to paragraph (a) of Sec. 1.403(a)-1 or 
paragraph (a) of Sec. 1.403-1, the amount of such contribution shall, 
to the extent it is not excludible under paragraph (b) of Sec. 
1.403(b)-1, be included in the income of the employee for the taxable 
year during which such contribution is made if, at at the time the 
contribution is made, the employee's rights under the annuity contract 
are nonforfeitable, except for failure to pay future premiums. If the 
annuity contract was purchased by an employer which is not exempt from 
tax under section 501(a) or section 521(a), and if the employee's rights 
under the annuity contract in such a case were forfeitable at the time 
the employer's contribution was made for the annuity contract, even 
though they become nonforfeitable later the amount of such contribution 
is not required to be included in the income of the employee at the time 
his rights under the contract become nonforfeitable. On the other hand, 
if the annuity contract is purchased by an employer which is exempt from 
tax under section 501(a) or section 521(a), all or part of the value of 
the contract may be includible in the employee's gross income at the 
time his rights under the contract become nonforfeitable (see section 
403(d) prior to the repeal thereof by the Tax Reform Act of 1969 and the 
regulations thereunder). As to what constitutes nonforfeitable rights of 
an employee, see Sec. 1.402(b)-1(d)(2). The amounts received by or made 
available to the employee under the annuity contract shall be included 
in the gross income of the employee for the taxable year in which 
received or made available, as provided in section 72 (relating to 
annuities). For taxable years beginning before Janaury 1, 1964,

[[Page 427]]

sections 72(e)(3) (relating to the treatment of certain lump sums), as 
in effect before such date, shall not apply to such amounts. For taxable 
years beginning after December 31, 1963, such amounts may be taken into 
account in computations under sections 1301 through 1305 (relating to 
income averaging). For rules relating to the treatment of employer 
contributions as part of the consideration paid by the employee, see 
section 72(f). See also section 101(b)(2)(D) for rules relating to the 
treatment of the limited exclusion provided thereunder as part of the 
consideration paid by the employee.
    (2) If an employer has purchased annuity contracts and transferred 
them to a trust, or if an employer has made contributions to a trust for 
the purpose of providing annuity contracts for his employees as provided 
in section 402(d) (see paragraph (a) of Sec. 1.402(D)-1, the amount so 
paid or contributed is not required to be included in the income of the 
employee, but any amount received by or made available to the employee 
under the annuity contract shall be includible in the gross income of 
the employee for the taxable year in which received or made available, 
as provided in section 72 (relating to annuities). For taxable years 
beginning before January 1, 1964, section 72(e)(3) (relating to the 
treatment of certain lump sums), as in effect before such date, shall 
not apply to any amount received by or made available to the employee 
under the annuity contract. For taxable years beginning after December 
31, 1963, amounts received by or made available to the employee under 
the annuity contract may be taken into account in computations under 
sections 1301 through 1305 (relating to income averaging). In such case 
the amount paid or contributed by the employer shall not constitute 
consideration paid by the employee for such annuity contract in 
determining the amount of annuity payments required to be included in 
his gross income under section 72 unless the employee has paid income 
tax for any taxable year beginning before January 1, 1949, with respect 
to such payment or contribution by the employer for such year and such 
tax is not credited or refunded to the employee. In the event such tax 
has been paid and not creditid or refunded the amount paid or 
contributed by the employer for such year shall constitute consideration 
paid by the employee for the annuity contract in determining the amount 
of the annuity required to be included in the income of the employee 
under section 72.
    (3) For taxable years beginning before January 1, 1958, the 
provisions contained in section 403(c) prior to the amendment made 
thereto by the Tax Reform Act of 1969 were included in section 403(b) of 
the Internal Revenue Code of 1954. Therefore, the regulations contained 
in this paragraph shall, for such taxable years, be considered as the 
regulations under section 403(b) as in effect for such taxable years. 
For the rules with respect to contributions paid after August 1, 1969, 
see paragraphs (a), (b), and (c) of this section.

(Secs. 83 and 7805 of the Internal Revenue Code of 1954 (83 Stat. 588; 
68A Stat. 917; 26 U.S.C. 83 and 7805))

[T.D. 7554, 43 FR 31924, July 24, 1978]