Reg. § 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 only if each of the requirements in through 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 ) 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 through of this section is satisfied. However, the preceding two sentences generally do not apply to designated Roth contributions; see of this section and for special taxation rules that apply with respect to designated Roth contributions under a section 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 or ) or an eligible governmental plan under section .
(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 ) to all benefits provided under the contract. See of this section for additional rules regarding the nonforfeitability requirement of this .
(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 (relating to nondiscrimination requirements, including universal availability). See .
(4) Limitations on elective deferrals In the case of an elective deferral, the contract satisfies section (relating to limitations on elective deferrals). A contract does not satisfy section as required under this unless the contract requires that all elective deferrals for an employee not exceed the limits of section , 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 .
(5) Nontransferability The contract is not transferable. This does not apply to a contract issued before January 1, 1963. See section .
(6) Minimum required distributions The contract satisfies the requirements of section (relating to minimum required distributions). See .
(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 , 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 .
(8) Limitation on incidental benefits The contract satisfies the incidental benefit requirements of section . See .
(9) Maximum annual additions The annual additions to the contract do not exceed the applicable limitations of section (treating contributions and other additions as annual additions). See of this section and and .
(b) Application of requirements
(1) Aggregation of contracts. In accordance with section , for purposes of determining whether this section is satisfied, all section contracts purchased for an individual by an employer are treated as purchased under a single contract. Additional aggregation rules apply under section for purposes of satisfying of this section and under section for purposes of satisfying of this section.
(2) Disaggregation for excess annual additions In accordance with the last sentence of section , 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 contract (as further described in of this section) and the remaining portion of the contract is a section contract. This 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 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 of this section unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan, which, in both form and operation, satisfies the requirements of , , this section, and through . For purposes of , , this section, and through , the plan must contain all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefit distributions would be made. For purposes of , , this section, and through , a plan may contain certain optional features that are consistent with but not required under section , 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 , this section, and through .
(ii) The plan may allocate responsibility for performing administrative functions, including functions to comply with the requirements of section 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 and the conditions for obtaining a hardship withdrawal under . 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 applies to contributions to an annuity contract by a church only if the annuity is part of a retirement income account, as defined in .
(4) Exclusion limited for former employees
(i) General rule Except as provided in of this section and in , the exclusion from gross income provided by section 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 applies to contributions made for former employees with respect to compensation described in (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 , , or (relating to compensation paid to participants who are permanently and totally disabled or relating to qualified military service under section ).
(c) Special rules for designated Roth section 403(b) contributions
(1) The rules of , , , and for designated Roth contributions under a qualified cash or deferred arrangement apply to designated Roth contributions under a section plan. Thus, a designated Roth contribution under a section plan is a section 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 elective deferrals the employee is otherwise eligible to make under the plan (or is deemed to be so irrevocably designated in accordance with ); 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 ).
(2) A designated Roth contribution under a section plan must satisfy the requirements applicable to section elective deferrals. Thus, for example, designated Roth contributions under a section plan must satisfy the requirements of . Similarly, a designated Roth account under a section plan is subject to the rules of sections and (B) and .
(d) Effect of failure
(1) General rules
(i) If a contract includes any amount that fails to satisfy the requirements of section , , , this section, or through , then, except as otherwise provided in of this section (relating to failure to satisfy nonforfeitability requirements) or (relating to excess contributions under section and excess deferrals under section ), the contract is not a section contract. In addition, section and of this section provide that, for purposes of determining whether a contract satisfies section , all section contracts purchased for an individual by an employer are treated as purchased under a single contract. Thus, except as provided in of this section or as otherwise provided in this , a failure to satisfy section 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 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 (a nondiscrimination failure) nor a failure of the employer to be an eligible employer as defined in (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 which, in form, satisfies the requirements of , , this section, and through (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 contract, such as sections , , , and . Thus, for example, section (relating to nonqualified annuities) applies if any annuity contract issued by an insurance company fails to satisfy section , based on the value of the contract at the time of the failure. However, see of this section for special rules with respect to the nonforfeitability requirement of 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 contract but for the failure to satisfy the nonforfeitability requirement of of this section, then the contract is treated as a contract to which section applies. See for a rule under which a custodial account that fails to satisfy the nonforfeitability requirement of of this section is treated as a section qualified plan for certain purposes.
(ii) Treatment when contract becomes nonforfeitable
(A) In general Notwithstanding of this section, on or after the date on which the participant's interest in a contract described in of this section becomes nonforfeitable, the contract may be treated as a section contract if no election has been made under section 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 ) 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 of this section other than the nonforfeitability requirement of 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 contract as a result of contributions exceeding the limitations of section (except to the extent permitted under of this section) or to fail to satisfy the nondiscrimination rules described in . See also for a special rule in connection with termination of a section plan.
(B) Partial vesting For purposes of applying this , 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 , if a contribution is made to an annuity contract in excess of the limitations of section 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 contract (assuming it otherwise satisfies the requirements to be a section 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 . See for additional rules.
[T.D. 9340, 72 FR 41141, July 26, 2007; 72 FR 54352, Sept. 25, 2007; T.D. 10033, 90 FR 44547, Sept. 16, 2025]