PLR 200032048: medical faculty annuity plan qualifies under section 403(b)

Plain-English summary

A tax exempt medical faculty practice asked whether its employee annuity purchase plan met section 403(b). The IRS ruled that the amended and restated plan qualified, so employer and employee deferral contributions used to buy the specified annuities would generally be excluded from participants' income when contributed, subject to contribution limits, and included when distributed. The ruling requires the practice's board to adopt the plan and assumes the three funding contracts meet section 403(b)(1). It did not decide whether the plan met applicable nondiscrimination rules or excuse operational violations. Governmental plan status was addressed in a separate letter.

Ruling snapshot

• Question: Does the practice's amended annuity purchase plan qualify under section 403(b)?
• Outcome: Approved, conditional on board adoption and qualifying funding contracts.
• Key authorities: IRC §§ 403(b), 401(a), 402(g), 415, and 72.

Full text (IRS public release)

Internal Revenue Service
Uniform Issue List: 403.04-00
Department of the Treasury
Washington, DC 20224

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Contact Person: ****************************
Telephone Number: ****************************
In Reference to: ************ [illegible]
Date: [illegible]

Attention: ****************************

Legend:

Employer = ****************************
Medical School = ****************************
University = ****************************
State A = *********
Plan X = ****************************
Annuity A = ****************************
Annuity B = ****************************
Annuity C = ****************************

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200032048
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Ladies and Gentlemen:

This is in response to a request for a ruling submitted
on your behalf in a letter dated May 23, 1997, as supplemented
by correspondence dated July 20, 1998, February 15, 1999, May
4, 1999, and June 8, 1999, concerning whether Plan X meets the
requirements of section 403(b) of the Internal Revenue Code
("Code"), and whether Plan X is a governmental plan as defined
in section 414(d) of the Code.

The following facts and representations have been made in
support of the request for a ruling that Plan X meets the
requirements of a Code section 403(b) annuity purchase
program:

The Employer is a medical faculty practice incorporated
as a professional service corporation under the laws of State
A and is associated with the University through the Medical
School. The Employer was chartered to advance the purposes of
the medical education program and related activities of the
Medical School of the University, which is a state university
chartered as part of the State A university system. The
Employer received determination letters dated April 18, 1979
and August 25, 1986, from the Internal Revenue Service
recognizing it as an organization exempt from federal income
tax under section 501(c) (3) of the Code.

Article I of Plan X states that the Employer’s Board of
Directors established Plan X, effective as of January 1, 1996.
Plan contributions are invested in one or more of the Funding
Vehicles available to the participants under the Plan, at the
direction of the participant. Article XI provides that the
Plan Administrator will be a committee of individuals
appointed by the Board of Directors of the Plan Sponsor which
is the Employer.

Annuity A, Annuity B and Annuity C are the Funding
Vehicles under Plan X for the investment of plan
contributions. It was submitted that these annuity contracts
together with their respective endorsements meet the
requirements of a tax-sheltered annuity contract under section
403(b) of the Code.




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Any employee employed by the Employer is eligible to
participate in Plan X for purposes of making elective deferral
contributions by executing a Salary Deferral Agreement. No
participant shall be permitted to elect deferral contributions
in excess of the dollar limitation set forth in section 402 (g)
of the Code. For each plan year the Employer also contributes
eight percent of compensation for each “active participant”
under the plan.

A letter ruling was requested on your behalf to the
effect that Plan X, as amended and restated, qualifies as an
annuity purchase plan described in section 403(b) of the Code.

An employee described in section 2.14 of Plan X is an
employee who performs services for the Employer, an
organization described in section 501(c) (3) of the Code that
meets the requirement of section 403(b) (1) (A) (i) of the Code.

Sections 3.03 and 4.02 of Plan X describe the deferral
contributions and Salary Deferral Agreement, which satisfy the
requirements of section 1.403(b)-1(b) (3) of the Income Tax
Regulations and the requirements of section 1450(a) of the
Small Business Job Protection Act of 1996. Section 4.02 of
the Plan and the Salary Deferral Agreement provide that salary
reductions of a monthly amount or percentage of earnings are
effective with respect to amounts earned subsequent to the
execution of the agreement.

Information submitted and the Funding Vehicles described
in Article VI of Plan X (i.e., Annuity A, Annuity B and
Annuity C) show that the Plan X annuity purchase arrangement
is not subject to section 403(a) of the Code, as required by
section 403(b) (1) (B) of the Code.

Article VII of Plan X satisfies the non-forfeitable
requirement of section 403(b) (1) (C) of the Code because, under
Article VII, a participant is fully and immediately vested in
amounts attributable to employer contributions and elective
deferral contributions. Article X of Plan X restricts the
transfer of benefits and satisfies the requirement of section
401(g) of the Code that the annuity contract be
nontransferable. However, Article X also provides that Plan X
will comply with any judgment, decree, or order that




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establishes the rights of another person to all or a portion
of a participant's benefits under a "qualified domestic
relations order."

Deferral contributions in section 4.02(a) of Plan X are
limited in accordance with the dollar limitation in section
402(g) (1) of the Code, as adjusted for cost-of-living
increases. Section 403(b) (1) (E) of the Code provides that, in
the case of a contract purchased under a plan which provides a
salary reduction agreement, the contract must meet the
requirements of section 401(a) (30). Section 401 (a) (30)
requires a section 403 (b) arrangement to limit elective
deferrals under the arrangement, in combination with any other
qualified plans or arrangements (of an employer maintaining
such plans or arrangements) providing for elective deferrals,
to the limitation in effect under section 402(g) (1). Under
the terms of Annuity A, Annuity B, and Annuity C, deferral
contributions made by a Participant may not exceed the annual
limit on elective deferrals described in section 402(g) of the
Code. Section 4.02(b) of Plan X provides for the timely
distribution of excess deferral contributions.

Section 2.04 of Plan X limits compensation to $150,000,
as adjusted for cost-of-living increases, according to section
401(A) (17) of the Code.

Article V of Plan X satisfies the requirements of section
415(c) of the Code. Section 5.01 of the Plan provides that
the maximum annual additions that may be contributed or
allocated to a Participant's account for any limitation year
shall not exceed the lesser of $30,000 (as adjusted for cost-
of-living increases) or 25 percent of the participant's
compensation. "Annual Additions" are defined as the total of
employer contributions and deferral contributions allocated to
a participant's account but excluding rollover contributions
made to Plan X. When contributions are made in excess of the
limits of section 415 of the Code, section 5.02 of Plan X
provides for the timely distribution to a participant of
deferral contributions in order to ensure compliance with the
limits of Code section 415.

Section 5.03 of Plan X provides for the calculation of a
participant's exclusion allowance under section 403 (b) (2) (A)




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of the Code and provides that employer contributions and
deferral contributions on behalf of a participant may not
exceed the participant's exclusion allowance for the taxable
year.

Under section 8.01 of Plan X a participant is entitled to
receive retirement benefits under the options set forth in the
relevant Funding Vehicle(s). Participant benefits payable
under Article VIII of Plan X are restricted by section
403(b) (11) of the Code because no withdrawals are permitted
prior to attaining age 59 1/2, separation from service, death,
disability or hardship. Further, only deferral contributions,
excluding any income attributable to deferral contributions,
may be distributed on account of hardship. Section 8.02(1) (a)
of the Plan defines hardship.

Plan X satisfies the distribution requirements in section
403(b) (10) of the Code because the minimum distribution
requirements and incidental death benefit requirements of Code
section 401(a) (9) and the trustee-to-trustee transfer
requirement of Code section 401(a) (31) are satisfied. Section
4.03 of Plan X permits rollover contributions and direct
transfers to Plan X of eligible rollover distributions from a
section 403(b) plan. Section 8.06 of Plan X permits a
distributee to elect a direct trustee-to-trustee transfer of
an eligible rollover distribution to a specified eligible
retirement plan as required by section 401(a) (31) of the Code.

Section 8.01 and sections 8.03 through 8.05 of Plan X
provide for the distribution of participants' benefits in
compliance with the minimum distribution requirements of
section 401(a) (9) of the Code, including the minimum |
distribution incidental benefit rules.

Section 8.03 of Plan X provides that on the death of a
participant prior to the commencement of retirement benefit
payments the full current value of the participant's
account (s) is payable to the beneficiary or beneficiaries
named by the participant, under the options set forth in the
relevant Funding Vehicles. Distributions of survivor benefits
are subject to the required minimum distribution rules in Code
section 401 (a) (9).




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Under section 8.05 of Plan X, all distributions will be
made according to the proposed regulations under Code section
401(a) (9), including proposed regulations section 1.401 (a) (9)-
2 (concerning the minimum distribution incidental death
benefit requirement). In general, distributions commence no
later than April 1 of the calendar year following the calendar
year in which the participant attains age 70 1/2 and continue
over the life expectancy of the participant or the life
expectancy of the participant and a designated beneficiary.

If distributions begin before the participant's death, any
remaining interest will be distributed at least as rapidly as
under the method of distribution in effect at the time of the
participant's death. If a participant dies before the time
benefit payments begin, any portion of his or her interest
payable to (or for the benefit of) a designated beneficiary
will be paid within five years of the participant's death or
will be paid, beginning not later than one year after the
participant's death, over the life of the designated
beneficiary or over a period not exceeding the life expectancy
of the designated beneficiary. If the designated beneficiary
is the surviving spouse, payment may be delayed until the date
the participant would have attained age 70 1/2.

Section 13.05 of Plan X provides that if there is any
inconsistency or any ambiguity between the terms of the Plan
and the terms of the contracts and/or certificates, the terms
of the Plan control.

Based on the information submitted, we conclude that Plan
X, as amended and restated, qualifies as an annuity purchase
program described in section 403(b) of the Code. Accordingly,
elective deferral contributions and employer contributions
under Plan X that are used to purchase Annuity A, Annuity B,
or Annuity C will be treated as amounts contributed by the
Employer for annuity contracts described in section 403(b) of
the Code. Furthermore, elective deferral contributions and
employer contributions under Plan X are not includible in the
participants' gross income in the year contributed to the
extent that such contributions do not exceed the applicable
limits under sections 402(g), 403(b) (2) or 415 of the Code,
but instead will be includible in the participants' gross
income in the taxable year such amounts are distributed under
section 72 of the Code.




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This ruling is based on the condition that the Board of
Directors of the Employer adopt Plan X, as amended and
restated in your correspondence of February 15, 1999, and May
4, 1999, and will have no effect unless such plan is adopted.

This ruling is based upon the assumption that the annuity
contracts used to fund Plan X, i.e., Annuity A, Annuity B and
Annuity C, meet the requirements of section 403(b) (1) of the
Code.

This ruling has not addressed whether Plan X meets the
nondiscrimination requirements of section 403(b) (12) of the
Code, where applicable, either in form or in operation. This
ruling does not extend to any operational violations of
section 403(b) by Plan X, now or in the future.

Because your ruling request presents more than one issue
and because your authorized representative requested separate
letter rulings, a separate letter ruling will be issued with
respect to the ruling request that Plan X is a governmental
plan as described in section 414(d) of the Code.

This letter ruling is directed only to the taxpayer that
requested it. Section 6110(k) (3) of the Code provides that it
may not be used or cited by others as precedent.

A copy of this letter has been sent to your authorized
representative in accordance with a power of attorney on file
in this office.

Sincerely,

John G. Riddle, Jr.

John G. Riddle, Jr., Manager
Employee Plans Technical Group 4
Tax Exempt & Government Entities Division

Enclosures:

Deleted copy of this letter
Notice of Intention to Disclose, Notice 437