§ 1.72-2 Applicability of section.
(a) Contracts.
(1) The contracts under which amounts paid will be subject to the provisions of section 72 include contracts which are considered to be life insurance, endowment, and annuity contracts in accordance with the customary practice of life insurance companies. For the purposes of section 72, however, it is immaterial whether such contracts are entered into with an insurance company. The term “endowment contract” also includes the “face-amount certificates” described in section 72(1).
(2) If two or more annuity obligations or elements to which section 72 applies are acquired for a single consideration, such as an obligation to pay an annuity to A for his life accompanied by an obligation to pay an annuity to B for his life, there being a single consideration paid for both obligations (whether paid by one or more persons in equal or different amounts, and whether paid in a single sum or otherwise), such annuity elements shall be considered to comprise a single contract for the purpose of the application of section 72 and the regulations thereunder. For rules relating to the allocation of investment in the contract in the case of annuity elements payable to two or more persons, see paragraph (b) of § 1.72-6.
(3)
(i) Sections 402 and 403 provide that certain distributions by employees' trusts and certain payments under employee plans are taxable under section 72. For taxable years beginning before January 1, 1964, section 72(e)(3), as in effect before such date, does not apply to such distributions or payments. For purposes of applying section 72 to such distributions and payments (other than those described in subdivision (iii) of this subparagraph), each separate program of the employer consisting of interrelated contributions and benefits shall be considered a single contract. Therefore, all distributions or payments (other than those described in subdivision (iii) of this subparagraph) which are attributable to a separate program of interrelated contributions and benefits are considered as received under a single contract. A separate program of interrelated contributions and benefits may be financed by the purchase from an insurance company of one or more group contracts or one or more individual contracts, or may be financed partly by the purchase of contracts from an insurance company and partly through an investment fund, or may be financed completely through an investment fund. A program may be considered separate for purposes of section 72 although it is only a part of a plan which qualifies under section 401. There may be several trusts under one separate program, or several separate programs may make use of a single trust. See, however, subdivision (iii) of this subparagraph for rules relating to what constitutes a “contract” for purposes of applying section 72 to distributions commencing before October 20, 1960.
(ii) The following types of benefits, and the contributions used to provide them, are examples of separate programs of interrelated contributions and benefits:
(a) Definitely determinable retirement benefits.
(b) Definitely determinable benefits payable prior to retirement in case of disability.
(c) Life insurance.
(d) Accident and health insurance.
However,
retirement benefits and
life insurance will be considered part of a single separate program of interrelated
contributions and benefits to
the extent they are provided under
retirement income, endowment, or
other contracts providing
life insurance protection. See
examples (6), (7), and (8) contained in subdivision (iv) of this subparagraph for
illustrations of
the principles of this subdivision. See, also,
§ 1.72-15 for
rules relating to
the taxation of amounts received under
an employee plan which provides both
retirement benefits and accident and health
benefits.
(iii) If any amount which is taxable under section 72 by reason of section 402 or 403 is actually distributed or made available to any person under an employees' trust or plan (other than the Civil Service Retirement Act, 5 U.S.C. ch. 14) before October 20, 1960, section 72 shall, notwithstanding any other provisions in this subparagraph, be applied to all the distributions with respect to such person (or his beneficiaries) under such trust or plan (whether received before or after October 20, 1960) as though such distributions were provided under a single contract. For purposes of applying section 72 to distributions to which this subdivision applies, therefore, the term “contract” shall be considered to include the entire interest of an employee in each trust or plan described in sections 402 and 403 to the extent that distributions thereunder are subject to the provisions of section 72. Section 72 shall be applied to distributions received under the Civil Service Retirement Act in the manner prescribed in subdivision (i) of this subparagraph (see example (4) in subdivision (iv) of this subparagraph).
(iv) The application of this subparagraph may be illustrated by the following examples:
Example 1.
On January 1, 1961, X
Corporation established a noncontributory profit-sharing
plan for its
employees providing that
the amount standing to
the account of each participant will be paid to him at
the time of his
retirement and also established a contributory pension
plan for its
employees providing for
the payment to each participant of a lifetime pension after
retirement.
The profit-sharing
plan is designed to enable
the employees to participate in
the profits of X
Corporation;
the amount of
the contributions to it are determined by reference to
the profits of X
Corporation; and
the amount of any
distribution is determined by reference to
the amount of contributions made on behalf of any participant and
the earnings thereon. On
the other hand,
the pension
plan is designed to provide a lifetime pension for a retired
employee;
the amount of
the pension is to be determined by a formula set forth in
the plan; and
the amount of contributions to
the plan is
the amount necessary to provide such pensions. In view of
the fact that each of these
plans constitutes a separate program of interrelated
contributions and
benefits,
the distributions from each shall be treated as received under a separate
contract. If these
plans had been established before October 20, 1960, then, in
the case of
an employee who receives a
distribution under
the plans before October 20, 1960,
the determination as to whether that
distribution and all
subsequent distributions to such
employee are received under a single
contract or under
more than one
contract shall be made by applying
the rules in subdivision (iii) of this subparagraph. On
the other hand, in
the case of
an employee who does not receive any
distribution under these
plans before October 20, 1960,
the determination as to whether distributions to him are received under a single
contract or under
more than one
contract shall be made in accordance with
the rules illustrated by this
example.
Example 2.
On January 1, 1961, Z
Corporation established a profit-sharing
plan for its
employees providing that any
employee may make
contributions, not in excess of 6 percent of his
compensation, to a
trust and that
the employer would make matching contributions out of profits. Under
the plan, a participant may receive a periodic
distribution of
the amount standing in his
account during any period that he is absent from work due to a personal injury or sickness. On
separation from service,
the participant is entitled to receive a
distribution of
the balance standing in his
account in accordance with one of several
options. One
option provides for
the immediate
distribution of one-half of
the account and for
the periodic
distribution of
the remaining one-half of
the account. In
addition, any participant may, after
the completion of five years of participation, withdraw any part of his
account, but in
the case of such a withdrawal,
the participant forfeits his rights to participate in
the plan for a period of
two years. Thus, a participant may receive
distributions before
separation from service; he may receive a
distribution of a lump sum upon
separation from service; he may also receive periodic
distributions upon
separation from service. However, since it is
the total amount received under all
the options that is interrelated with
the contributions to
the plan and not the amount received under any one
option, this profit-sharing
plan consists of only one separate program of interrelated
contributions and
benefits and all
distributions under
the plan (regardless of
the option under which received) are treated as received under one
contract. However, if, instead of providing that
the amount standing in
an employee's
account would be paid to him during any period that he is absent from work due to a personal injury or sickness,
the plan provided that a portion of
the amount in
the employee's
account would be used to
purchase incidental accident and health insurance, this
plan would consist of
two separate programs of interrelated
contributions and
benefits.
The accident and health insurance, and
the contributions used to
purchase it, would be considered as one separate program of interrelated
contributions and
benefits and, therefore, a separate
contract; whereas,
the remaining
contributions and
benefits would be considered another separate program of interrelated
contributions and
benefits and, consequently, another separate
contract.
Example 3.
On January 1, 1961, N
Corporation established a profit-sharing
plan for its
employees providing that
the employees may make
contributions, not in excess of 6 percent of their
compensation, to a
trust and that N
Corporation would make matching contributions out of its profits. Under
the plan,
the employee may elect each year to have his and
the employer's
contributions for such
year placed in either a savings
arrangement or a
retirement arrangement. Such an
election is irrevocable. Under
the savings
arrangement, contributions to such
arrangement for any one
year and
the earnings thereon will be distributed five
years later.
The retirement arrangement provides that all
contributions thereto and
the earnings thereon will be distributed when
the employee is separated from
the service of N
Corporation. Since
the distributions under
the retirement arrangement are attributable solely to
the contributions made to such
arrangement and are not affected in any manner by
contributions or
distributions under
the savings
arrangement or any
other plan, such
distributions are treated as received under a separate program of interrelated
contributions and
benefits. Similarly, since
distributions during any
year under
the savings
arrangement are attributable only to contributions to such
arrangement made during
the fifth preceding
year and are not affected in any manner by any
other contributions to or
distributions from such
arrangement or any
other plan,
the savings
arrangement constitutes a series of separate programs of interrelated
contributions and
benefits.
The contributions to
the savings
arrangement for any
year and
the distribution in a
subsequent year based thereon constitute a separate
contract for purposes of section 72.
Example 4.
The Civil Service Retirement Act (
5 U.S.C. Ch. 14) which provides
retirement benefits for participating
employees, consists of a compulsory program and a voluntary program. Under
the compulsory program, all participating
employees are required to make certain
contributions and, upon
retirement, are provided
retirement benefits computed on
the basis of
compensation and length of
service. Under
the voluntary program, such participating
employees are permitted to make
contributions in addition to those required under
the compulsory program and, upon
retirement, are provided additional
retirement benefits computed on
the basis of their voluntary
contributions.
Distributions received under
the Act constitute
distributions from
two separate
contracts for purposes of section 72.
Distributions received under
the compulsory program are considered as received under a separate program of interrelated
contributions and
benefits since they are computed solely under
the compulsory program and are not affected by any
contributions or
distributions under
the voluntary program or under any
other plan. For similar reasons,
distributions which are attributable to
the voluntary
contributions are considered as received under a separate program of interrelated
contributions and
benefits.
Example 5.
On January 1, 1961, M
Corporation established a contributory pension
plan for its
employees and created a trust to which it makes contributions to fund such
plan.
The plan provides that each participant will receive after age 65 a pension of 1
1/2 percent of his
compensation for each
year of service performed subsequent to
the establishment of such
plan. In order to fund part of
the benefits under
the plan,
the trustee purchased a
group annuity contract.
The remaining part of
the benefits are to be
paid out of a separate
investment fund. This pension
plan constitutes a single program of interrelated
contributions and
benefits and, therefore, all
distributions received by
an employee under
the plan are considered as received under a single
contract for purposes of section 72.
Example 6.
On January 1, 1961, Y
Corporation established a noncontributory pension
plan (including incidental
death benefits) for its
employees and created a trust to which it makes contributions to fund such
plan.
The plan provides that each participant will receive after age 65 a pension of 1
1/2 percent of his
compensation for each
year of service performed subsequent to
the establishment of such
plan. In
addition, such
plan provides for
the payment of a
death benefit if
the employee dies before age 65.
The trustee funded
the death benefits through
the purchase of a
group term insurance policy and funded
the retirement benefits through
the purchase of a
group annuity contract. Because of a subsequent change in funding from
the deferred annuity method to
the deposit administration method,
the trustee purchased a second
group annuity contract to provide
the retirement benefits under
the plan accruing after
the effective date of
the change in method of funding. Thus,
retirement benefits distributed to
an employee whose
service with Y
Corporation commenced before
the effective date of
the change in method of funding will be attributable to both
group annuity contracts. This pension
plan includes
two separate programs of interrelated
contributions and
benefits.
The death benefits, and
the contributions required to provide them, are considered as one separate program of interrelated
contributions and
benefits; whereas,
the retirement benefits, and
the contributions required to provide them, are considered as another separate program of interrelated
contributions and
benefits. Therefore, any
retirement benefits received by
an employee, whether attributable to one or both of
the group annuity contracts, shall be considered as received under a single
contract for purposes of section 72. In determining
the tax treatment of any such
retirement benefits under section 72, no
amount of
the premiums used to
purchase the group term insurance policy shall be taken into
account, since such premiums, and
the death benefits which they purchased, constitute a separate program of interrelated
contributions and
benefits.
Example 7.
Assume
the same
facts as in
example (6) except that, in lieu of funding
the benefits in
the manner described in that
example,
the trustee purchased
individual retirement income
contracts from an
insurance company. Additional
individual retirement income
contracts are purchased in order to fund any increase in
benefits resulting from increases in salary. Therefore, distributions to a particular
employee may be attributable to a single
retirement income
contract or to
more than one such
contract. All
distributions received by
an employee under
the pension
plan, whether attributable to one or
more retirement income
contracts and whether made directly from
the insurance company to
the employee or made through
the trustee, are considered as received under a single
contract for purposes of section 72. For
rules relating to
the tax treatment of
contributions and
distributions under
retirement income, endowment, or
other life insurance contracts purchased by a
trust described in section 401(a) and exempt under section 501(a), see paragraph (a) (2), (3), and (4) of
§ 1.402(a)-1.
Example 8.
Assume
the same
facts as in
example (6) except that, in lieu of funding
the benefits in
the manner described in that
example,
the trustee funded
the death benefits and part of
the retirement benefits by purchasing
individual retirement income
contracts from an
insurance company.
The remaining part of
the retirement benefits (such as any increase in
benefits resulting from increases in salary) are to be
paid out of a separate
investment fund. This pension
plan includes, with respect to each participant,
two separate
contracts for purposes of section 72.
The retirement income
contract purchased by
the trust for each participant is a separate program of interrelated
contributions and
benefits and all
distributions attributable to such
contract (whether made directly from
the insurance company to
the employee or made through
the trustee) are considered as received under a single
contract. For
rules relating to
the tax treatment of
contributions and
distributions under
retirement income, endowment, or
other life insurance contracts purchased by a
trust described in section 401(a) and exempt under section 501(a), see paragraph (a) (2), (3), and (4) of
§ 1.402(a)-1.
The remaining
distributions under
the plan are considered as received under another separate program of interrelated
contributions and
benefits.
(b) Amounts. (1)(i) In general, the amounts to which section 72 applies are any amounts received under the contracts described in paragraph (a)(1) of this section. However, if such amounts are specifically excluded from gross income under other provisions of Chapter 1 of the Code, section 72 shall not apply for the purpose of including such amounts in gross income. For example, section 72 does not apply to amounts received under a life insurance contract if such amounts are paid by reason of the death of the insured and are excludable from gross income under section 101(a). See also sections 101(d), relating to proceeds of life insurance paid at a date later than death, and 104(a)(4), relating to compensation for injuries or sickness.
(ii) Section 72 does not exclude from gross income any amounts received under an agreement to hold an amount and pay interest thereon. See paragraph (a) of § 1.72-14. However, section 72 does apply to amounts received by a surviving annuitant under a joint and survivor annuity contract since such amounts are not considered to be paid by reason of the death of an insured. For a special deduction for the estate tax attributable to the inclusion of the value of the interest of a surviving annuitant under a joint and survivor annuity contract in the estate of the deceased primary annuitant, see section 691(d) and the regulations thereunder.
(2) Amounts subject to section 72 in accordance with subparagraph (1) of this paragraph are considered “amounts received as an annuity” only in the event that all of the following tests are met:
(i) They must be received on or after the “annuity starting date” as that term is defined in paragraph (b) of § 1.72-4;
(ii) They must be payable in periodic installments at regular intervals (whether annually, semiannually, quarterly, monthly, weekly, or otherwise) over a period of more than one full year from the annuity starting date; and
(iii) Except as indicated in subparagraph (3) of this paragraph, the total of the amounts payable must be determinable at the annuity starting date either directly from the terms of the contract or indirectly by the use of either mortality tables or compound interest computations, or both, in conjunction with such terms and in accordance with sound actuarial theory.
For
the purpose of determining whether
amounts subject to section 72(d) and
§ 1.72-13 are “amounts received as an annuity”, however,
the provisions of subdivision (i) of this subparagraph shall be disregarded. In
addition,
the term “amounts received as an annuity” does not include amounts received to which
the provisions of paragraph (b) or (c) of
§ 1.72-11 apply, relating to
dividends and certain amounts received by a beneficiary in
the nature of a
refund. If an
amount is to be
paid periodically until a fund plus
interest at a fixed rate is exhausted, but further
payments may be made thereafter because of
earnings at a higher
interest rate,
the requirements of subdivision (iii) of this subparagraph are met with respect to
the payments determinable at
the outset by means of
computations involving
the fixed
interest rate, but any
payments received after
the expiration of
the period determinable by such
computations shall be taxable as
dividends received after
the annuity starting date in accordance with paragraph (b)(2) of
§ 1.72-11.
(3)
(i) Notwithstanding the requirement of subparagraph (2)(iii) of this paragraph, if amounts are to be received for a definite or determinable time (whether for a period certain or for a life or lives) under a contract which provides:
(a) That the amount of the periodic payments may vary in accordance with investment experience (as in certain profit-sharing plans), cost of living indices, or similar fluctuating criteria, or
(b) For specified payments the value of which may vary for income tax purposes, such as in the case of any annuity payable in foreign currency,
each such
payment received shall be considered as an amount received as an annuity only to
the extent that it does not exceed
the amount computed by dividing
the investment in the contract, as adjusted for any
refund feature, by
the number of periodic
payments anticipated during
the time that
the periodic
payments are to be made. If
payments are to be made
more frequently than annually,
the amount so computed shall be multiplied by
the number of periodic payments to be made during
the taxable year for
the purpose of determining
the total
amount which may be considered received as an annuity during such
year. To this extent,
the payments received shall be considered to represent a
return of premium or
other consideration
paid and shall be excludable from
gross income in
the taxable year in which received. See paragraph (d) (2) and (3) of
§ 1.72-4. To
the extent that
the payments received under
the contract during
the taxable year exceed
the total
amount thus considered to be received as an annuity during such
year, they shall be considered to be
amounts not received as an annuity and shall be included in
the gross income of
the recipient. See section 72(e) and paragraph (b)(2) of
§ 1.72-11.
(ii) For purposes of subdivision (i) of this subparagraph, the number of periodic payments anticipated during the time payments are to be made shall be determined by multiplying the number of payments to be made each year (a) by the number of years payments are to be made, or (b) if payments are to be made for a life or lives, by the multiple found by the use of the appropriate tables contained in § 1.72-9, as adjusted in accordance with the table in paragraph (a)(2) of § 1.72-5.
(iii) For an example of the computation to be made in accordance with this subparagraph and a special election which may be made in a taxable year subsequent to a taxable year in which the total payments received under a contract described in this subparagraph are less than the total of the amounts excludable from gross income in such year under subdivision (i) of this subparagraph, see paragraph (d)(3) of § 1.72-4.
[T.D. 6500,
25 FR 11402, Nov. 26, 1960, as amended by T.D. 6497,
25 FR 10019, Oct. 20, 1960; T.D. 6885,
31 FR 7798, June 2, 1966]
