Employer Annuity Plan

Features An employer-sponsored plan that provides benefits to employees or their beneficiaries without a trust under annuity or endowment contracts which are held by the employer until such time as the employee separates from service by retirement constitute an employer’s annuity plan. Under such plans, contributions are paid toward the purchase of the contracts for the exclusive benefit of the employees or their beneficiaries, and there is a definite written arrangement between the employer and insurer that refunds of premiums, if any, will be applied within the taxable year of the employer in which received or within the next succeeding taxable year toward the purchase of annuities or endowments under the plan.

Premium Payments The following rules apply to premium payments for employees’ annuity or endowment plans: Amounts voluntarily paid by an employee for an insurance contract forming part of a deferred compensation plan for the exclusive benefit of plan participants and their beneficiaries are not deductible. They constitute the employee’s cost of investment in the plan contract. Amounts lawfully deducted and withheld from the compensation of an employee and paid for an insurance contract forming part of a deferred compensation plan for the exclusive benefit of plan participants and their beneficiaries are received by the employee as compensation at the time the deduction is made and are treated as amounts voluntarily contributed by the employee. Premium payments made under a contributory plan by an employer on behalf of an employee at the election of the employee pursuant to a cash or deferred arrangement or salary reduction agreement are received by the employee as compensation at the time the contribution is made and are treated as amounts voluntarily contributed by the employee. Employer premium payments for an insurance contract under a plan are excludible from tax if the plan participant’s rights are nontransferable and subject to a substantial risk of forfeiture or penalty.

Distributions Distributions are excludible from tax if they constitute a qualified annuity. “Qualified annuity” is defined at 61 Pa. Code § 101.1 to be an arrangement under which the payee is entitled to equal, or substantially equal periodic payments, paid at least annually, for any of the following periods: The life of the participant, or, if applicable, the joint lives of the recipient and recipient’s designated beneficiary; The life expectancy of the participant, or, if applicable, the joint life expectancies of the recipient and recipient’s designated beneficiary; or A period of at least 10 years. Withdrawals of employee contributions. Actual or constructive pre-retirement withdrawals of one’s own contributions and accumulated plan earnings are taxable only to the extent allocable to the earnings. The extent to which such withdrawals are taxable as compensation shall be determined using the cost recovery method of accounting. Pre-retirement withdrawals of employer contributions. Actual or constructive pre-retirement employee withdrawals upon severance of employment without retiring of employer premiums or earnings constitute taxable severance pay.

Terminated Plan Annuities Annuity contracts that are purchased by an employer upon the termination of a deferred compensation plan are taxed the same as employees’ annuity or endowment plans.