Internal Revenue Bulletin 2004-49 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
4-49
December 6, 2004
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2004–106, page 893.
Federal rates; adjusted federal rates; adjusted federal
long-termrateandthelong-termexemptrate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for December 2004.
REG–15560
8–02, page 924.
Proposed r
egulations provide updated guidance on tax-shel-
ter annuit
ies, custodial accounts of public schools and section
501(c)(3)
tax-exempt organizations and church retirement in-
come acco
unts authorized under section 403(b) of the Code.
These reg
ulations would provide the public with guidance nec-
essary to
comply with the law and affect sponsors of section
403(b) co
ntracts, administrators, participants, and beneficia-
ries. A pu
blic hearing is scheduled for February 15, 2005.
Notice 2004–79, page 898.
This notice provides guidance regarding the definition of de-
pendent under section 106 of the Code.
Rev. Proc. 2004–69, page 906.
Insurance companies; loss reserves; discounting unpaid
losses.The loss payment patterns and discount factors are
set forth for the 2004 accident year. These factors will be used
to compute discounted unpaid losses under section 846 of the
Code.
Rev. Pro
c. 2004–70, page 918.
Insuran
ce companies; discounted estimated salvage re-
coverab
le.The salvage discount factors are set forth for the
2004 ac
cident year. These factors will be used to compute
discou
nted estimated salvage recoverable under section 832
of the C
ode.
EMPLOYEE PLANS
REG–155608–02, page 924.
Proposed regulations provide updated guidance on tax-shel-
ter annuities, custodial accounts of public schools and section
501(c)(3) tax-exempt organizations and church retirement in-
come accounts authorized under section 403(b) of the Code.
These regulations would provide the public with guidance nec-
essary to comply with the law and affect sponsors of section
403(b) contracts, administrators, participants, and beneficia-
ries. A public hearing is scheduled for February 15, 2005.
EXEMPT ORGANIZATIONS
REG–155608–02, page 924.
Proposed regulations provide updated guidance on tax-shel-
ter annuities, custodial accounts of public schools and section
501(c)(3) tax-exempt organizations and church retirement in-
come accounts authorized under section 403(b) of the Code.
These regulations would provide the public with guidance nec-
essary to comply with the law and affect sponsors of section
403(b) contracts, administrators, participants, and beneficia-
ries. A public hearing is scheduled for February 15, 2005.
EMPLOY
MENT TAX
T.D. 91
59, page 895.
Tempor
ary regulations define the term “salary reduction agree-
ment” f
or purposes of section 3121(a)(5)(D) of the Code.
(Continued on the next page)
Announcements of Disbarments and Suspensions begin on page 951.
Fi
nding Lists begin on page ii.

REG–155608–02, page 924.
Proposed regulations provide updated guidance on tax-shel-
ter annuities, custodial accounts of public schools and section
501(c)(3) tax-exempt organizations and church retirement in-
come accounts authorized under section 403(b) of the Code.
These regulations would provide the public with guidance nec-
essary to comply with the law and affect sponsors of section
403(b) contracts, administrators, participants, and beneficia-
ries. A public hearing is scheduled for February 15, 2005.
ADMINISTRATIVE
Rev. Proc. 2004–64, page 898.
Optional standard mileage rates.This procedure an-
nounces 40.5 cents as the optional rate for deducting or
accounting for expenses for business use of an automobile,
14 cents as the optional rate for use of an automobile as a
charitable contribution, and 15 cents as the optional rate for
use of an automobile as a medical or moving expense for
2005. It provides rules for substantiating the deductible ex-
penses of using an automobile for business, moving, medical,
or charitable purposes. Rev. Proc. 2003–76 superseded.
Announcement 2004–97, page 957.
This document contains corrections to Rev. Rul. 2003–84,
2003–32 I.R.B. 289 and 2003–2 C.B. 289, relating to regu-
lated investment companies. Rev. Rul. 2003–84 corrected.
December 6, 20042004–49 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2004–49 I.R.B.December 6, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
Section 62.—Adjusted
Gross Income Defined
26 CFR 1.62–2: Reimbursements and other expense
allowance arrangements.
Rules are provided under which a reimbursement
or other expense allowance arrangement for the cost
of operating an automobile for business purposes will
satisfy the requirements of section 62(c) of the Code
as to business connection, substantiation, and return-
ing amounts in excess of expenses. See Rev. Proc.
2004-64, page 898.
Section 106.—Contri-
butions by Employer to
Accident and Health Plans
A notice provides guidance regarding the effect
of the Working Families Tax Relief Act of 2004
(WFTRA) on the exclusion from the gross income
of an employee under § 106 of the Code. See Notice
2004-79, page 898.
Section 162.—Trade or
Business Expenses
26 CFR 1.162–17: Reporting and substantiation of
certain business expenses of employees.
Rules are provided for substantiating the amount
of a deduction or an expense for business use of an
automobile. See Rev. Proc. 2004-64, page 898.
Section 170.—Charitable,
etc., Contributions and Gifts
26 CFR 1.170A–1: Charitable, etc., contributions
and gifts; allowance of deduction.
Rules are provided for substantiating the amount
of a deduction or an expense for charitable use of an
automobile. See Rev. Proc. 2004-64, page 898.
Section 213.—Medical,
Dental, etc., Expenses
26 CFR 1.213–1: Medical, dental, etc., expenses.
Rules are provided for substantiating the amount
of a deduction or an expense for use of an automobile
to obtain medical services. See Rev. Proc. 2004-64,
page 898.
Section 217.—Moving
Expenses
26 CFR 1.217–2: Moving expenses
Rules are provided for substantiating the amount
of a deduction or an expense for use of an automobile
as part of a move. See Rev. Proc. 2004-64, page 898.
Section 274.—Disallowance
of Certain Entertainment,
etc., Exp
enses
26 CFR 1.2
74–5: Substantiation requirements.
Rules are
provided for substantiating the amount
of ordina
ry and necessary business expenses of an
employee
for automobile expenses when a payor pro-
vides a mi
leage allowance for the expenses. Rules are
also prov
ided for employees and self-employed in-
dividua
ls to use in substantiating a trade or business
deducti
on for automobile expenses. See Rev. Proc.
2004-64
, page 898.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of December 2004. See
Rev. Rul. 2004-106, page 893.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of December 2004. See Rev.
Rul. 2004-106, page 893.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of December 2004. See
Rev. Rul. 2004-106, page 893.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of December 2004. See
Rev. Rul. 2004-106, page 893.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
2004–49 I.R.B.892December 6, 2004

Section 832.—Insurance
Company Taxable Income
26 CFR 1.832–4: Gross income.
The salvage discount factors are set forth for 2004.
These factors must be used to compute discounted
estimated salvage recoverable for purposes of section
832 of the Code. See Rev. Proc. 2004-70, page 918.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
26 CFR 1.846–1: Application of discount factors.
The loss payment patterns and discount factors are
set forth for the 2004 accident year. These factors
will be used for computing discounted unpaid losses
under section 846 of the Code. See Rev. Proc. 2004-
69, page 906.
26 CFR 1.846–1: Application of discount factors.
The salvage discount factors are set forth for the
2004 accident year. These factors will be used for
computing estimated salvage recoverable for pur-
poses of section 832 of the Code. See Rev. Proc.
2004-70, page 918.
Section 1016.—Adjust-
ments to Basis
26 CFR 1.1016–3: Exhaustion, wear and tear, ob-
solescence, amortization, and depletion for periods
since February 28, 1913.
Rules are provided for reduction of basis for busi-
ness use of an automobile under either the optional
standard mileage rate method or a mileage allowance
under a reimbursement or other expense allowance
arrangement. See Rev. Proc. 2004-64, page 898.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for December 2004.
Rev. Rul. 2004–106
This revenue ruling provides various
prescribed rates for federal income tax
purposes for December 2004 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Table 5
contains the federalrate for determining
the present value of an annuity, an interest
for life or for a term of years, or a remain-
der or a reversionary interest for purposes
of section 7520. Finally, Table 6 contains
the 2005 interest rate for sections 846 and
807.
REV. RUL. 2004–106 TABLE 1
Applicable Federal Rates (AFR) for December 2004
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR2.48%2.46%2.45%2.45%
110% AFR2.73%2.71%2.70%2.69%
120% AFR2.97%2.95%2.94%2.93%
130% AFR3.23%3.20%3.19%3.18%
Mid-term
AFR3.56%3.53%3.51%3.50%
110% AFR3.92%3.88%3.86%3.85%
120% AFR4.28%4.24%4.22%4.20%
130% AFR4.64%4.59%4.56%4.55%
150% AFR5.37%5.30%5.27%5.24%
175% AFR6.28%6.18%6.13%6.10%
Long-term
AFR4.68%4.63%4.60%4.59%
110% AFR5.15%5.09%5.06%5.04%
120% AFR5.64%5.56%5.52%5.50%
130% AFR6.11%6.02%5.98%5.95%
December 6, 20048932004–49 I.R.B.

REV. RUL. 2004–
106 TABLE 2
Adjusted AFR for December 2004
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
1.88%1.87%1.87%1.86%
Mid-term adjusted AFR2.84%2.82%2.81%2.80%
Long-term ad
justed
AFR
4.19%4.15%4.13%4.11%
REV. RUL. 2004–106 TABLE 3
Rates Under Section 382 for December 2004
Adjusted federal long-term rate for the current month4.19%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.27%
REV. RUL. 2004–106 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for December 2004
Appropriate percentage for the 70% present value low-income housing credit7.96%
Appropriate percentage for the 30% present value low-income housing credit3.41%
REV. RU
L. 2004–106 TABLE 5
Rate Under Section 7520 for December 2004
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest4.20%
REV. RUL. 2004–106 TABLE 6
Appl
icable rate of interest for 2005 for purposes of sections 846 and 807
4.44
%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
2004–49 I.R.B.894December 6, 2004

Section 3121.—Definitions
26 CFR 31.3121(a)(5)–2T: Payments under or to an
annuity contract described in section 403(b) (tempo-
rary).
T.D. 9159
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 31
Payments Made by Reason of
a Salary Reduction Agreement
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulation.
SUMMARY: This document contains
a temporary regulation that defines the
term “salary reduction agreement” for
purposes of section 3121(a)(5)(D) of the
Internal Revenue Code (Code). The tem-
porary regulation provides guidance to
employers (public educational institutions
and section 501(c)(3) organizations) pur-
chasing annuity contracts described in
section 403(b) on behalf of their employ-
ees. The text of the temporary regulation
also serves as the text of the proposed
regulation (REG–155608–02) set forth in
the notice of proposed rulemaking on this
subject in this issue of the Bulletin.
DATES:Effective Date: This regulation is
effective on November 16, 2004.
Applicability Date: For dates of appli-
cability, see §31.3121(a)(5)–2T(b).
FOR FURTHER INFORMATION
CONTACT: Neil D. Shepherd, (202)
622–6040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This temporary regulation amends the
Employment Tax Regulations (26 CFR
part 31) by providing guidance relating
to section 3121(a)(5)(D). The Federal
Insurance Contributions Act (FICA) im-
poses taxes on employees and employ-
ers equal to a percentage of the wages
received with respect to employment.
Code section 3121(a) defines wages for
FICA tax purposes as all remuneration for
employment unless otherwise excepted.
Code section 3121(a)(5)(D), added by
the Social Security Amendments of 1983
(Public Law 98–21 (97 Stat. 65)), gen-
erally excepts from wages payments
made by an employer for the purchase
of an annuity contract described in
section 403(b). In a codification of
long–standing administrative practice,
however, section 3121(a)(5)(D) expressly
excludes from the exception payments
made by reason of a salary reduction
agreement (whether evidenced by a
written instrument or otherwise).See
Rev. Rul. 65–208, 1965–2 C.B. 383,
and S. Rep. No. 98–23, at 41,
98
th
Cong., 1
st
Sess. (1983). This tem-
porary regulation defines the term “salary
reduction agreement” for purposes of sec-
tion 3121(a)(5)(D).
Explanation of Provisions
The FICA taxation of payments made
by an employer for the purchase of annu-
ity contracts described in section 403(b)
has been shaped by a congressional con-
cern for the social security revenue base
and for employees’ social security bene-
fits. In the context of contributions for the
purchase of such annuity contracts, Con-
gress has interpreted the term “wages” for
FICA tax purposes more broadly than the
term “gross income” for income tax pur-
poses.SeeS. Rep. No. 98–23, at 39, 98
th
Cong., 1
st
Sess. (1983) relating to the So-
cial Security Amendments of 1983 (Pub-
lic Law 98–21 (97 Stat. 65)).
An amount is generally includible in
wages for FICA tax purposes at the time
it is actually or constructively paid by
the employer and received by the em-
ployee. Additionally, wages generally
include an amount that an employer con-
tributes to a plan only if the employee
agrees to reduce his or her compensa-
tion. For income tax purposes, however,
section 403(b) provides an exclusion
from gross income for contributions made
by an employer, including contributions
made pursuant to a cash or deferred elec-
tion or other salary reduction agreement.
Seesection 1450(a) of the Small Busi-
nessJobProtectionActof1996(Pub-
lic Law 104–188 (110 Stat. 1755)). Con-
versely, for FICA tax purposes, wages in-
clude contributions made by an employer
to a section 403(b) contract pursuant
to a cash or deferred election or other
salary reduction agreement.SeeS. Rep.
No. 98–23, at 40–41, 98
th
Cong., 1
st
Sess.
(1983). Thus, while section 403(b) ex-
cludes from gross income contributions
made pursuant to certain cash or deferred
elections, such contributions are made by
reason of a salary reduction agreement
under section 3121(a)(5)(D) and are in-
cluded in wages for FICA tax purposes.
Consequently, this temporary regulation
explicitly provides that the term “salary
reduction agreement” includes a plan or
arrangement whereby a payment will be
made if the employee elects to reduce
his or her compensation pursuant to a
cash or deferred election as defined at
§1.401(k)–1(a)(3) of the Income Tax Reg-
ulations.
Pursuant to regulation §1.401(k)–
1(a)(3)(iv) of this chapter, a cash or de-
ferred election does not include a one-time
irrevocable election made upon an em-
ployee’s commencement of employment
with the employer. Similarly, pursuant to
section 402(g)(3), while the term “elec-
tive deferrals” generally includes any
employer contribution to purchase an an-
nuity contract under section 403(b) under
a salary reduction agreement (within the
meaning of section 3121(a)(5)(D)), an
employer contribution made pursuant
to a one-time irrevocable election is
not treated as an elective deferral.See
H.R. Rep. No. 100–795, at 145, 100
th
Cong., 2
d
Sess. (1988) and S. Rep.
No. 100–445, at 151, 100
th
Cong., 2
d
Sess. (1988) relating to the amendment
of section 402(g)(3) by the Technical
and Miscellaneous Revenue Act of 1988
(Public Law 100–647 (102 Stat. 3342)).
Notwithstanding that section 403(b) con-
tributions made pursuant to a one-time
irrevocable election are excluded from
cash or deferred elections under sec-
tion 401(k) and from elective deferrals un-
der section 402(g)(3), such contributions
are made pursuant to a salary reduction
agreement. If the employee had not made
a one-time irrevocable election, the em-
ployer’s cash payment to the employee
would be includible in the employee’s
gross income and in wages for FICA tax
purposes. Consequently, this temporary
regulation explicitly provides that the term
“salary reduction agreement” includes a
plan or arrangement whereby a payment
will be made if the employee elects to
December 6, 20048952004–49 I.R.B.

reduce his or her compensation pursuant
to a one-time irrevocable election made at
or before the time of initial eligibility to
participate in such plan or arrangement (or
pursuant to a similar arrangement involv-
ing a one-time irrevocable election).
A contribution that is made as a con-
dition of employment and that reduces
an employee’s compensation generally
constitutes an employee contribution in-
cludible in wages for FICA tax purposes.
Seesection 1015 of the Employee Re-
tirement Income Security Act of 1974
(Public Law 93–406 (88 Stat. 829))
relating to amounts designated as em-
ployee contributions under section 414(h)
of the Code;see alsoH.R. Rep.
No. 93–807, at 145, 93
d
Cong., 2
d
Sess.
(1974) wherein Congress stated that
“[u]nder present law, contributions which
are designated as employee contributions
are generally treated as employee con-
tributions for purposes of the Federal
tax law.” Code section 414(h)(1) merely
codified the existing administrative and
judicial treatment of amounts designated
as employee contributions.See, for exam-
ple,Howell v. United States, 775 F.2d 887
(7
th
Cir. 1985) holding that mandatory
contributions to a state retirement plan of
amounts designated as employee contri-
butions and withheld from the employee’s
salary are employee contributions includi-
ble in the employee’s gross income. Thus,
as with employer contributions made pur-
suant to cash or deferred elections and
one-time irrevocable elections, employer
contributions that are made as a condition
of employment and in lieu of mandatory
employee contributions and that reduce
an employee’s compensation are amounts
otherwise includible in wages for FICA
tax purposes.
Whether a contribution that reduces
an employee’s compensation is required
by statute, contract, or otherwise, an em-
ployee implicitly agrees to the contribution
as a condition of employment. The accep-
tance of employment and the subsequent
performance of services manifests the em-
ployee’s agreement to the contribution.
SeeH.R. Conf. Rep. No. 98–861, at 1415,
98
th
Cong., 2
d
Sess. (1984) relating to
the amendment of section 3121(v)(1)(B),
wherein Congress stated that “[t]he con-
ferees intend that the term salary reduction
agreement also includes any salary reduc-
tion arrangement, regardless of whether
there is approval or choice of participation
by individual employees or whether such
approval or choice is mandated by State
statute.” InPublic Employees’ Retirement
Board v. Shalala,153F.3
rd
1160, at 1166
(10
th
Cir. 1998), the court noted that “an
employee’s decision to go to work or
continuetowork...constitutesconduct
manifesting assent to a salary reduction.”
Accordingly, the court held that a desig-
nated employee contribution picked up
by an employer with a corresponding re-
duction in the employee’s gross salary
constitutes a contribution made pursuant
to a salary reduction agreement. Simi-
larly, this temporary regulation explicitly
provides that the term “salary reduction
agreement” includes a plan or arrange-
ment whereby a payment will be made if
theemployeeagreesasaconditionofem-
ployment (whethersuch condition is set
by statute, contract, or otherwise) to make
a contribution that reduces the employee’s
compensation.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant reg-
ulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) and
(d) of the Administrative Procedure Act
(5 U.S.C. chapter 5) do not apply to this
regulation. For the applicability of the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6), refer to the Special Analyses section
in the preamble to the notice of proposed
rulemaking published in this issue of the
Bulletin. Pursuant to section 7805(f) of
the Code, this temporary regulation will
be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
businesses.
Drafting Information
The principal author of this regulation
is Neil D. Shepherd, Office of Division
Counsel/Associate Chief Counsel (Tax Ex-
empt and Government Entities). However,
other personnel from the IRS and Trea-
sury Department participated in its devel-
opment.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 31 is
amended as follows:
PART 31—EMPLOYMENT TAXES
Paragraph 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.3121(a)(5)–2T is
added to read as follows:
§ 31.3121(a)(5)–2T Payments under
or to an annuity contract described in
section 403(b) (temporary).
(a)Salary reduction agreement
defined.For purposes of section
3121(a)(5)(D), the termsalary reduction
agreementmeans a plan or arrangement
(whether evidenced by a written instru-
ment or otherwise) whereby payment will
be made by an employer, on behalf of an
employee or his or her beneficiary, under
or to an annuity contract described in sec-
tion 403(b)—
(1) If the employee elects to reduce
his or her compensation pursuant to a
cash or deferred election as defined at
§1.401(k)–1(a)(3) of this chapter;
(2) If the employee elects to reduce
his or her compensation pursuant to a one-
time irrevocable election made at or before
the time of initial eligibility to participate
in such plan or arrangement (or pursuant
to a similar arrangement involving a one-
time irrevocable election); or
(3) If the employee agrees as a con-
dition of employment (whether such con-
dition is set by statute, contract, or other-
wise) to make a contribution that reduces
his or her compensation.
(b)Effective date. (1) This section is
applicable on November 16, 2004.
(2) The applicability of this section ex-
pires on or before November 16, 2007.
Nancy Jardini,
Acting Deputy Commissioner for
Services and Enforcement.
Approved November 1, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on November 15,
2004, 8:45 a.m., and published in the issue of the Federal
Register for November 16, 2004, 69 F.R. 67054)
2004–49 I.R.B.896December 6, 2004

Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2004. See Rev. Rul. 2004-106, page
893.
December 6, 20048972004–49 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Effect of the Working Families
Tax Relief Act of 2004 on
Employer-Provided Accident
or Health Plans
Notice 2004–79
I.PURPOSE
This notice provides guidance regard-
ing the effect of the Working Families Tax
Relief Act of 2004 (WFTRA), Pub. L.
No. 108–311, 118 Stat. 1166, on the ex-
clusion from the gross income of an em-
ployee under § 106 of the Internal Revenue
Code (Code) of employer-provided cover-
age under an accident or health plan.
II.BACKGROUND
Section 201 of WFTRA amended the
definition of dependent in § 152, effec-
tive for taxable years beginning after De-
cember 31, 2004. Pursuant to § 152, as
amended, an individual must be either a
“qualifying child” or a “qualifying rela-
tive” to be a dependent. Section 152(c),
as amended, provides that an individual
must meet relationship, residency, and age
requirements to be a qualifying child. In
addition, an individual is not a qualify-
ing child if the individual provided over
one-half of his or her own support for the
calendar year. Section 152(c)(3)(A) pro-
vides that an individual meets the age re-
quirement if the individual has not attained
age 19 as of the close of the calendar year
or if the individual is a student who has not
attained age 24 as of the close of the calen-
dar year. Under § 152(c)(3)(B), an individ-
ual is treated as meeting the age require-
ment if the individual is permanently and
totally disabled (as defined in § 22(e)(3))
at any time during the calendar year.
Section 152(d)(1), as amended, pro-
vides, in general, that a qualifying relative
is an individual who bears a relationship
to the taxpayer described in §152(d)(2),
whose gross income is less than the ex-
emption amount (as defined in § 151(d)),
who receives over one-half of his or her
support from the taxpayer, and who is not
a qualifying child of the taxpayer or any
other taxpayer.
Section 207 of WFTRA contains sev-
eral technical and conforming amend-
ments to Code sections that refer to the
§ 152 definition of dependent, including
an amendment to § 105(b). Section 105(b)
generally excludes from an employee’s
gross income employer-provided medical
care reimbursements paid directly or in-
directly to the employee for the medical
care of the employee and the employee’s
spouse and dependents, as defined in
§ 152. Under the WFTRA amendment to
§ 105(b), an individual’s status as a depen-
dent for purposes of § 105(b) will be deter-
mined without regard to new § 152(b)(1)
and (b)(2), which contain certain excep-
tions to the definition of dependent, and
without regard to new § 152(d)(1)(B),
which contains the gross income limita-
tion for a qualifying relative. It appears
that the intent of Congress in making these
conforming amendments was to gener-
ally maintain the current law definition of
dependent for purposes of employer-pro-
vided medical care reimbursements.
Section 106(a) provides that the gross
income of an employee does not include
employer-provided coverage under an ac-
cident or health plan. Thus, premiums
and other amounts that an employer pays
on behalf of an employee to an accident
or health plan are not included in gross
income. Treas. Reg. § 1.106–1 pro-
vides that the exclusion from gross in-
come extends to contributions which the
employer makes to an accident or health
plan on behalf of the employee and the em-
ployee’s spouse or dependents, as defined
in § 152. Because the reference to “depen-
dents” under § 106 appears only in the reg-
ulations under that section and not in the
statute itself, Congress made no conform-
ing amendments to § 106 in WFTRA.
Under current law, the exclusion under
§ 106(a) for employer-provided coverage
under an accident or health plan parallels
the exclusion under § 105(b) for employer-
provided reimbursements of medical care
expenses incurred by the employee and the
employee’s spouse and dependents, as de-
fined in § 152. However, as a result of
the changes made by WFTRA, the def-
inition of dependent in § 105(b) differs
from the definition in the regulations under
§ 106(a). Accordingly, if the regulations
under § 106(a) continued to be applied as
currently written after the effective date of
section 201 of WFTRA, the value of em-
ployer-provided coverage for an individ-
ual who is not a qualifying child and who
does not meet the gross income limitation
for a qualifying relative would have to be
included in the employee’s gross income.
Because, in general, the intent of Con-
gress was not to change the definition of
dependent for purposes of employer-pro-
vided health plans, regulations under § 106
should be revised to provide that the same
definition of dependent applies to § 106 as
appliestoamended§105(b).
III.APPLICATION
The IRS intends to revise the regula-
tions at 26 C.F.R. 1.106–1 to provide that
the term “dependent” for purposes of § 106
shall have the same meaning as in § 105(b).
The revised regulations will be effective
for taxable years beginning after Decem-
ber 31, 2004.
Taxpayers may rely on this notice pend-
ing the issuance of the revised regulations.
Accordingly, an employee may exclude
from gross income the value of employer-
provided coverage for an individual who
meets the definition of a qualifying relative
except that the individual’s gross income
equals or exceeds the exemption amount.
DRAFTING INFORMATION
The principal author of this notice is
Barbara Pie of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For
further information regarding this notice,
contact Ms. Pie at (202) 622–6080 (not a
toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, Sections 62, 162, 170, 213, 217,
274, 1016; 1.62–2, 1.162–17, 1.170A–1, 1.213–1,
1.217–2, 1.274–5, 1.1016–3.)
Rev. Proc. 2004–64
SECTION 1. PURPOSE
This revenue procedure updates Rev.
Proc. 2003–76, 2003–2 C.B. 924, by pro-
viding optional standard mileage rates for
2004–49 I.R.B.898December 6, 2004

employees, self-employed individuals, or
other taxpayers to use in computing the
deductible costs of operating an automo-
bile for business, charitable, medical, or
moving expense purposes. This revenue
procedure also provides rules under which
the amount of ordinary and necessary ex-
penses of local travel or transportation
away from home that are paid or incurred
by an employee will be deemed substan-
tiated under § 1.274–5 of the Income Tax
Regulations if a payor (the employer, its
agent, or a third party) provides a mileage
allowance under a reimbursement or other
expense allowance arrangement to pay for
the expenses. Use of a method of substan-
tiation described in this revenue procedure
is not mandatory and a taxpayer may use
actual allowable expenses if the taxpayer
maintains adequate records or other suffi-
cient evidence for proper substantiation.
SECTION 2. SUMMARY OF
STANDARD MILEAGE RATES
.01 Standard mileage rates.
(1) Business (section 5 below)40.5 cents per mile
(2) Charitable (section 7 below)14 cents per mile
(3) Medical and moving (section 7 below)15 cents per mile
.02Determination of standard mileage
rates. The business, medical, and mov-
ing standard mileage rates reflected in this
revenue procedure are based on an annual
study of the fixed and variable costs of op-
erating an automobile conducted on behalf
of the Internal Revenue Service by an inde-
pendent contractor, and the charitable stan-
dard mileage rate is provided in § 170(i) of
the Internal Revenue Code.
SEC
TION 3. BACKGROUND AND
CHA
NGES
.01 Section 162(a) allows a deduction
for all the ordinary and necessary expenses
paid or incurred during the taxable year
in carrying on any trade or business. Un-
der that provision, an employee or self-em-
ployed individual may deduct the cost of
operating an automobile to the extent that
it is used in a trade or business. However,
under § 262, no portion of the cost of op-
erating an automobile that is attributable to
personal use is deductible.
.02 Section 274(d) provides, in part,
that no deduction is allowed under § 162
with respect to any listed property (as de-
finedin§280F(d)(4)toincludepassen-
ger automobiles and any other property
used as a means of transportation) unless
the taxpayer complies with certain sub-
stantiation requirements. Section 274(d)
further provides that regulations may pre-
scribe that some or all of the substantiation
requirements do not apply to an expense
that does not exceed an amount prescribed
by the regulations.
.03 Section 1.274–5(j), in part, grants
the Commissioner of Internal Revenue
the authority to establish a method under
which a taxpayer may use mileage rates
to substantiate, for purposes of § 274(d),
the amount of the ordinary and necessary
expenses of using a vehicle for local trans-
portation and transportation to, from, and
at the destination while traveling away
from home.
.04 Section 1.274–5(g), in part, grants
the Commissioner the authority to pre-
scribe rules relating to mileage allowances
for ordinary and necessary expenses of
using a vehicle for local transportation
and transportation to, from, and at the
destination while traveling away from
home. Pursuant to this grant of authority,
the Commissioner may prescribe rules
under which the allowances, if in accor-
dance with reasonable business practice,
will be regarded as (1) equivalent to sub-
stantiation, by adequate records or other
sufficient evidence, of the amount of the
travel and transportation expenses for pur-
poses of § 1.274–5(c), and (2) satisfying
the requirements of an adequate account-
ing to the employer of the amount of the
expenses for purposes of § 1.274–5(f).
.05 Section 62(a)(2)(A) allows an em-
ployee, in determining adjusted gross in-
come, a deduction for the expenses al-
lowedbyPartVI(§161andfollowing),
subchapter B, chapter 1 of the Code, paid
or incurred by the employee in connection
with the performance of services as an em-
ployee under a reimbursement or other ex-
pense allowance arrangement with a payor.
.06 Section 62(c) provides that an ar-
rangement will not be treated as a reim-
bursement or other expense allowance ar-
rangement for purposes of § 62(a)(2)(A) if
it—
(1) does not require the employee to
substantiate the expenses covered by the
arrangement to the payor, or
(2) provides the employee with the right
to retain any amount in excess of the sub-
stantiated expenses covered under the ar-
rangement.
Section 62(c) further provides that the sub-
stantiation requirements described therein
do not apply to any expense to the extent
that, under the grant of regulatory authority
prescribed in § 274(d), the Commissioner
has provided that substantiation is not re-
quired for the expense.
.07 Under § 1.62–2(c)(1), a reim-
bursement or other expense allowance
arrangement satisfies the requirements
of § 62(c) if it meets the requirements
of business connection, substantiation,
and returning amounts in excess of ex-
penses as specified in the regulations.
Section 1.62–2(e)(2)specifically provides
that substantiation of certain business ex-
penses in accordance with rules prescribed
under the authority of § 1.274–5(g) will
be treated as substantiation of the amount
of the expenses for purposes of § 1.62–2.
Under § 1.62–2(f)(2), the Commissioner
may prescribe rules under which an ar-
rangement providing mileage allowances
will be treated as satisfying the require-
ment of returning amounts in excess of
expenses, even though the arrangement
does not require the employee to return
the portion of the allowance that relates
to miles of travel substantiated and that
exceeds the amount ofthe employee’s ex-
penses deemed substantiated pursuant to
rules prescribed under § 274(d), provided
the allowance is reasonably calculated not
to exceed the amount of the employee’s
expenses or anticipated expenses and the
employee is required to return any portion
December 6, 20048992004–49 I.R.B.

of the allowance that relates to miles of
travel not substantiated.
.08 Section 1.62–2(h)(2)(i)(B) provides
that if a payor pays a mileage allowance
under an arrangement that meets the re-
quirements of § 1.62–2(c)(1), the portion,
if any, of the allowance that relates to miles
of travel substantiated in accordance with
§ 1.62–2(e), that exceeds the amount of
the employee’s expenses deemed substan-
tiated for the travel pursuant to rules pre-
scribed under § 274(d) and § 1.274–5(g),
and that the employee is not required
to return, is subject to withholding and
payment of employment taxes.See
§§ 31.3121(a)–3, 31.3231(e)–1(a)(5),
31.3306(b)–2, and 31.3401(a)–4 of the
Employment Tax Regulations. Because
the employee is not required to return this
excess portion, the reasonable period of
time provisions of § 1.62–2(g) (relating to
the return of excess amounts) do not apply
to this excess portion.
.09 Under § 1.62–2(h)(2)(i)(B)(4), the
Commissioner may, in his or her discre-
tion, prescribe special rules regarding the
timing of withholding and payment of em-
ployment taxes on mileage allowances.
.10 Section 5.06(1) of this revenue pro-
cedure revises the limitation on simultane-
ous use of multiple automobiles to allow a
taxpayer using up to four vehicles simulta-
neously to use the standard mileage rate.
SECTION 4. DEFINITIONS
.01Standard mileage rate.Theterm
“standard mileage rate” means the applica-
ble amount provided by the Service for op-
tional use by employees or self-employed
individuals in computing the deductible
costs of operating automobiles (including
vans, pickups, or panel trucks) they own or
lease for business purposes, or by taxpay-
ers in computing the deductible costs of
operating automobiles for charitable, med-
ical, or moving expense purposes.
.02Transportation expenses.Theterm
“transportation expenses” means the ex-
penses of operating an automobile for local
travel or transportation away from home.
.03Mileage allowance.Theterm
“mileage allowance” means a payment
under a reimbursement or other expense
allowance arrangement that meets the re-
quirements specified in § 1.62–2(c)(1) and
that is:
(1) paid with respect to the ordinary and
necessary business expenses incurred, or
that the payor reasonably anticipates will
be incurred, by an employee for transporta-
tion expenses in connection with the per-
formance of services as an employee of the
employer,
(2) reasonably calculated not to exceed
the amount of the expenses or the antici-
pated expenses, and
(3) paid at the applicable standard
mileage rate, a flat rate or stated schedule,
or in accordance with any other Ser-
vice-specified rate or schedule.
.04Flat rate or stated schedule.A
mileage allowance is paid at a flat rate or
stated schedule if it is provided on a uni-
form and objective basis with respect to the
expenses described in section 4.03 of this
revenue procedure. The allowance may
be paid periodically at a fixed rate, at a
cents-per-mile rate, at a variable rate based
on a stated schedule, at a rate that com-
bines any of these rates, or on any other
basis that is consistently applied and in ac-
cordance with reasonable business prac-
tice. Thus, for example, a periodic pay-
ment at a fixed rate to cover the fixed
costs (including depreciation (or lease pay-
ments), insurance, registration and license
fees, and personal property taxes) of driv-
ing an automobile in connection with the
performance of services as an employee of
the employer, coupled with a periodic pay-
ment at a cents-per-mile rate to cover the
operating costs (including gasoline and all
taxes thereon, oil, tires, and routine main-
tenance and repairs) of using an automo-
bile for those purposes, is an allowance
paid at a flat rate or stated schedule. Like-
wise, a periodic payment at a variable rate
based on a stated schedule for different lo-
cales to cover the costs of driving an auto-
mobile in connection with the performance
of services as an employee is an allowance
paid at a flat rate or stated schedule.
SECTION 5. BUSINESS STANDARD
MILEAGE RATE
.01In general. The standard mileage
rate for transportation expenses is 40.5
cents per mile for all miles of use for busi-
ness purposes. The Service will adjust
the business standard mileage rate (to the
extent warranted) annually and prospec-
tively.
.02Use of the business standard
mileage rate. A taxpayer may use the
business standard mileage rate with re-
spect to an automobile that is either owned
or leased by the taxpayer. A taxpayer
generally may deduct an amount equal to
either the business standard mileage rate
times the number of business miles trav-
eled or the actual costs (both operating and
fixed) paid or incurred by the taxpayer that
are allocable to traveling those business
miles.
.03Business standard mileage rate in
lieu of operating and fixed costs.Ade-
duction using the standard mileage rate for
business miles is computed on a yearly ba-
sis and is in lieu of all operating and fixed
costs of the automobile allocable to busi-
ness purposes (except as provided in sec-
tion 9.06 of this revenue procedure). Items
such as depreciation (or lease payments),
maintenance and repairs, tires, gasoline
(including all taxes thereon), oil, insur-
ance, and license and registration fees are
included in operating and fixed costs for
this purpose.
.04Parking fees, tolls, interest, and
taxes. Parking fees and tolls attributable
to use of the automobile for business pur-
poses may be deducted as separate items.
Likewise, interest relating to the purchase
of the automobile as well as state and local
personal property taxes may be deducted
as separate items, but only to the extent al-
lowable under § 163 or § 164, respectively.
Section 163(h)(2)(A) expressly provides
that interest is nondeductible personal
interest if it is paid or accrued on indebt-
edness properly allocable to the trade or
business of performing services as an em-
ployee. Section 164 expressly provides
that state and local taxes that are paid or
accrued by a taxpayer in connection with
an acquisition or disposition of property
will be treated as part of the cost of the
acquiredpropertyorasareductioninthe
amount realized on the disposition of the
property. If the automobile is operated less
than 100 percent for business purposes,
an allocation is required to determine the
business and nonbusiness portion of the
taxes and interest deduction allowable.
.05Depreciation. For owned automo-
biles placed in service for business pur-
poses, and for which the business stan-
dard mileage rate has been used for any
year, depreciation will be considered to
have been allowed at the rate of 15 cents
2004–49 I.R.B.900December 6, 2004

per mile for 2001 and 2002, 16 cents per
mile for 2003 and 2004, and 17 cents per
mile for 2005, for those years in which the
business standard mileage rate was used.
If actual costs were used for one or more of
those years, the rates above will not apply
to any year in which the costs were used.
The depreciation described above will re-
duce the basis of the automobile (but not
below zero) in determining adjusted basis
as required by § 1016.
.06Limitations.
(1) The business standard mileage rate
may not be used to compute the deductible
expenses of (a) automobiles used for hire,
such as taxicabs, or (b) five or more auto-
mobiles owned or leased by a taxpayer and
used simultaneously (such as in fleet oper-
ations).
(2) The business standard mileage rate
may not be used to compute the deductible
business expenses of an automobile leased
by a taxpayer unless the taxpayer uses ei-
ther the business standard mileage rate or a
FAVR allowance (as provided in section 8
of this revenue procedure) to compute the
deductible business expenses of the auto-
mobile for the entire lease period (includ-
ing renewals). For a lease commencing
on or before December 31, 1997, the “en-
tire lease period” means the portion of the
lease period (including renewals) remain-
ing after that date.
(3) The business standard mileage rate
may not be used to compute the deductible
expenses of an automobile for which the
taxpayer has (a) claimed depreciation us-
ing a method other than straight-line for its
estimated useful life, (b) claimed a § 179
deduction, or (c) used the Accelerated Cost
Recovery System under former § 168 or
the Modified Accelerated Cost Recovery
System (MACRS) under current § 168. By
using the business standard mileage rate,
the taxpayer has elected to exclude the au-
tomobile (if owned) from MACRS pur-
suant to § 168(f)(1). If, after using the
business standard mileage rate, the tax-
payer uses actual costs, the taxpayer must
use straight-line depreciation for the au-
tomobile’s remaining estimated useful life
(subject to the applicable depreciation de-
duction limitations under § 280F).
(4) The business standard mileage rate
and this revenue procedure may not be
used to compute the amount of the de-
ductible automobile expenses of an em-
ployee of the United States Postal Service
incurred in performing services involving
the collection and delivery of mail on a ru-
ral route if the employee receives qualified
reimbursements (as defined in § 162(o))
for the expenses.See§ 162(o) for the
rules that apply to these qualified reim-
bursements.
SECTION 6. RESERVED
SECTION 7. CHARITABLE,
MEDICAL, AND MOVING
STANDARD MILEAGE RATE
.01Charitable. Section 170(i) provides
a standard mileage rate of 14 cents per mile
for purposes of computing the charitable
deduction for use of an automobile in con-
nection with rendering gratuitous services
to a charitable organization under § 170.
.02Medical and moving. The standard
mileage rate is 15 cents per mile for use of
an automobile (a) to obtain medical care
described in § 213, or (b) as part of a move
for which the expenses are deductible un-
der § 217. The Service will adjust the med-
ical and moving expense standard mileage
rates (to the extent warranted) annually
and prospectively.
.03Charitable, medical, or moving ex-
pense standard mileage rate in lieu of op-
erating expenses. A deduction computed
using the applicable standard mileage rate
for charitable, medical, or moving expense
miles is in lieu of all operating expenses
(including gasoline and oil) of the automo-
bile allocable to those purposes. Costs for
items such as depreciation (or lease pay-
ments), insurance, and license and regis-
tration fees are not deductible, and are not
included in the standard mileage rates.
.04Parking fees, tolls, interest, and
taxes.Parking fees and tolls attributable
to the use of the automobile for charitable,
medical, or moving expense purposes may
be deducted as separate items. Interest
relating to the purchase of the automobile
and state and local personal property taxes
are not deductible as charitable, medical,
or moving expenses, but they may be
deducted as separate items to the extent
allowable under § 163 or § 164, respec-
tively.
SECTION8.FIXEDANDVARIABLE
RATE ALLOWANCE
.01In general.
(1) The ordinary and necessary ex-
penses paid or incurred by an employee
in driving an automobile owned or leased
by the employee in connection with the
performance of services as an employee
of the employer will be deemed substan-
tiated (in an amount determined under
section 9 of this revenue procedure) when
a payor reimburses those expenses with
amileageallowanceusingaflatrateor
stated schedule that combines periodic
fixed and variable rate payments that meet
all the requirements of section 8 of this
revenue procedure (a FAVR allowance).
(2) The amount of a FAVR allowance
must be based on data that (a) is derived
from the base locality, (b) reflects retail
prices paid by consumers, and (c) is rea-
sonable and statistically defensible in ap-
proximating the actual expenses employ-
ees receiving the allowance would incur as
owners of the standard automobile.
.02Definitions.
(1)FAVR allowance.AFAVRal-
lowance includes periodic fixed payments
and periodic variable payments. A payor
may maintain more than one FAVR al-
lowance. A FAVR allowance that uses the
same payor, standard automobile (or an au-
tomobileofthesamemakeandmodelthat
is comparably equipped), retention period,
and business use percentage is considered
one FAVR allowance,even though other
features of the allowance may vary. A
FAVR allowance also includes any op-
tional high mileage payments; however,
optional high mileage payments are in-
cluded in the employee’s gross income,
are reported as wages or other compen-
sation on the employee’s Form W–2, and
are subject to withholding and payment
of employment taxes when paid. See sec-
tion 9.05 of this revenue procedure. An
optional high mileage payment covers
the additional depreciation for a standard
automobile attributable to business miles
driven and substantiated by the employee
for a calendar year in excess of the annual
business mileage for that year. If an em-
ployee is covered by the FAVR allowance
for less than the entire calendar year, the
annual business mileage may be prorated
on a monthly basis for purposes of the
preceding sentence.
(2)Periodic fixed payment. A periodic
fixed payment covers the projected fixed
costs (including depreciation (or lease pay-
ments), insurance, registration and license
December 6, 20049012004–49 I.R.B.

fees, and personal property taxes) of driv-
ing the standard automobile in connection
with the performance of services as an em-
ployee of the employer in a base locality,
and must be paid at least quarterly. A pe-
riodic fixed payment may be computed by
(a) dividing the total projected fixed costs
of the standard automobile for all years
of the retention period, determined at the
beginning of the retention period, by the
number of periodic fixed payments in the
retention period, and (b) multiplying the
resulting amount by the business use per-
centage.
(3)Periodic variable payment.Aperi-
odic variable payment covers the projected
operating costs (including gasoline and all
taxes thereon, oil, tires, and routine main-
tenance and repairs) of driving a standard
automobile in connection with the perfor-
mance of services as an employee of the
employer in a base locality, and must be
paid at least quarterly. The rate of a pe-
riodic variable payment for a computation
period may be computed by dividing the
total projected operating costs for the stan-
dard automobile for the computation pe-
riod, determined at the beginning of the
computation period, by the computation
period mileage. A computation period can
be any period of a year or less. Compu-
tation period mileage is the total mileage
(business and personal) a payor reason-
ably projects a standard automobile will
be driven during a computation period and
equals the retention mileage divided by the
number of computation periods in the re-
tention period. For each business mile sub-
stantiated by the employee for the com-
putation period, the periodic variable pay-
ment must be paid at a rate that does not ex-
ceed the rate for that computation period.
(4)Base locality. A base locality is
the particular geographic locality or re-
gion of the United States in which the
costs of driving an automobile in connec-
tion with the performance of services as
an employee of the employer are generally
paid or incurred by the employee. Thus,
for purposes of determining the amount
of fixed costs, the base locality is gener-
ally the geographic locality or region in
which the employee resides. For purposes
of determining the amount of operating
costs, the base locality is generally the geo-
graphic locality or region in which the em-
ployee drives the automobile in connection
with the performance of services as an em-
ployee of the employer.
(5)Standard automobile. A standard
automobile is the automobile selected by
the payor on which a specific FAVR al-
lowance is based.
(6)Standard automobile cost.Thestan-
dard automobile cost for a calendar year
may not exceed 95 percent of the sum of
(a) the retail dealer invoice cost of the stan-
dard automobile in the base locality, and
(b) state and local sales or use taxes appli-
cable on the purchase of the automobile.
Further, the standard automobile cost may
not exceed $27,600.
(7)Annual mileage. Annual mileage is
the total mileage (business and personal)
a payor reasonably projects a standard au-
tomobile will be driven during a calendar
year. Annual mileage equals the annual
business mileage divided by the business
use percentage.
(8)Annual business mileage. Annual
business mileage is the mileage a payor
reasonably projects a standard automobile
will be driven by an employee in connec-
tion with the performance of services as an
employee of the employer during the cal-
endar year, but may not be less than 6,250
miles for a calendar year. Annual business
mileage equals the annual mileage multi-
plied by the business use percentage.
(9)Business use percentage. A busi-
ness use percentage is determined by
dividing the annual business mileage by
the annual mileage. The business use
percentage may not exceed 75 percent.
In lieu of demonstrating the reasonable-
ness of the business use percentage based
on records of total mileage and business
mileage driven by theemployees annually,
a payor may use a business use percentage
that is less than or equal to the following
percentages for a FAVR allowance that
is paid for the following annual business
mileage:
Annual business mileageBusiness use percentage
6,250 or more but less than 10,00045 percent
10,000 or more but less than 15,00055 percent
15,000 or more but less than 20,00065 percent
20,000 or more75 percent
(10)Retention period. A retention pe-
riod is the period in calendar years selected
by the payor during which the payor ex-
pectsanemployeetodriveastandardauto-
mobile in connection with the performance
of services as an employee of the employer
before the automobile is replaced. The
period may not be less than two calendar
years.
(11)Retention mileage. Retention
mileage is the annual mileage multiplied
by the number of calendar years in the
retention period.
(12)Residual value. The residual value
of a standard automobile is the projected
amount for which it could be sold at the
end of the retention period after being
driven the retention mileage. The Ser-
vice will accept the following safe harbor
residual values for a standard automobile
computed as a percentage of the standard
automobile cost:
2004–49 I.R.B.902December 6, 2004

Retention periodResidual value
2-year70 percent
3-year60 percent
4-year50 percent
.03FAVR allowance in lieu of operating
and fixed costs.
(1) A reimbursement computed using
a FAVR allowance is in lieu of the em-
ployee’s deduction of all the operating and
fixed costs paid or incurred by an em-
ployee in driving the automobile in con-
nection with the performance of services
as an employee of the employer, except
as provided in section 9.06 of this rev-
enue procedure. Items such as deprecia-
tion (or lease payments), maintenance and
repairs, tires, gasoline (including all taxes
thereon), oil, insurance, license and reg-
istration fees, and personal property taxes
areincludedinoperatingandfixedcosts
for this purpose.
(2) Parking fees and tolls attributable
to an employee driving the standard au-
tomobile in connection with the perfor-
mance of services as an employee of the
employer are not included in fixed and op-
erating costs and may be deducted as sep-
arate items. Similarly, interest relating to
the purchase of the standard automobile
maybedeductedasaseparateitem,but
only to the extent that the interest is an al-
lowable deduction under § 163.
.04Depreciation.
(1) A FAVR allowance may not be paid
with respect to an automobile for which the
employee has (a) claimed depreciation us-
ing a method other than straight-line for its
estimated useful life, (b) claimed a § 179
deduction, or (c) used the Accelerated Cost
Recovery System under former § 168 or
the Modified Accelerated Cost Recovery
System under current § 168. If an em-
ployee uses actual costs for an owned au-
tomobile that has been covered by a FAVR
allowance, the employee must use straight-
line depreciation for the automobile’s re-
maining estimated useful life (subject to
the applicable depreciation deduction lim-
itations under § 280F).
(2) Except as provided in section
8.04(3) of this revenueprocedure, the total
amount of the depreciation component for
the retention period taken into account in
computing the periodic fixed payments
for that retention period may not exceed
the excess of the standard automobile cost
over the residual value of the standard
automobile. In addition, the total amount
of the depreciation component may not
exceed the sum of the annual § 280F lim-
itations on depreciation (in effect at the
beginning of the retention period) that ap-
ply to the standard automobile during the
retention period.
(3) If the depreciation component of pe-
riodic fixed payments exceeds the limi-
tations in section 8.04(2) of this revenue
procedure, that section will be treated as
satisfied in any year during which the to-
tal annual amount of the periodic fixed
payments and the periodic variable pay-
ments made to an employee driving 80
percent of the annual business mileage of
the standard automobile does not exceed
the amount obtained by multiplying 80
percent of the annual business mileage of
the standard automobile by the applicable
business standard mileage rate for that year
(under section 5.01 of the applicable rev-
enue procedure).
(4) The depreciation included in each
periodic fixed payment portion of a FAVR
allowance paid with respect to an automo-
bile will reduce the basis of the automo-
bile (but not below zero) in determining
adjusted basis as required by § 1016. See
section 8.07(2) of this revenue procedure
for the requirement that the employer re-
port the depreciation component of a peri-
odic fixed payment to the employee.
.05FAVR allowance limitations.
(1) A FAVR allowance may be paid
only to an employee who substantiates to
the payor for a calendar year at least 5,000
miles driven in connection with the perfor-
mance of services as an employee of the
employer or, if greater, 80 percent of the
annual business mileage of that FAVR al-
lowance. If the employee is covered by
the FAVR allowance for less than the en-
tire calendar year, these limits may be pro-
ratedonamonthlybasis.
(2) A FAVR allowance may not be
paid to a control employee (as defined
in § 1.61–21(f)(5) and (6), excluding
the $100,000 limitation in paragraph
(f)(5)(iii)).
(3)AnemployermaynotpayaFAVR
allowance if at any time during a calendar
year a majority of the employees covered
by the FAVR allowance are management
employees.
(4)AnemployermaynotpayaFAVR
allowance unless at all times during a
calendar year at least five employees of
the employer are covered by one or more
FAVR allowances.
(5) A FAVR allowance may be paid
only with respect to an automobile (a)
owned or leased by the employee receiv-
ing the payment, (b) the cost of which,
when new, is at least 90 percent of the
standard automobile cost taken into ac-
count for purposes of determining the
FAVR allowance for the first calendar year
the employee receives the allowance with
respect to that automobile, and (c) the
model year of which does not differ from
the current calendar year by more than the
number of years in the retention period.
(6) A FAVR allowance may not be paid
with respect to an automobile leased by
an employee for which the employee has
used actual expenses to compute the de-
ductible business expenses of the automo-
bile for any year duringtheentireleasepe-
riod. For a lease commencing on or before
December 31, 1997, the “entire lease pe-
riod” means the portion of the lease period
(including renewals) remaining after that
date.
(7) The insurance cost component of
a FAVR allowance must be based on the
rates charged in the base locality for in-
surance coverage on the standard automo-
bile during the current calendar year with-
out taking into account rate-increasing fac-
tors such as poor driving records or young
drivers.
(8) A FAVR allowance may be paid
only to an employee whose insurance cov-
erage limits on the automobile with respect
to which the FAVR allowance is paid are at
least equal to the insurance coverage lim-
December 6, 20049032004–49 I.R.B.

its used to compute the periodic fixed pay-
ment under that FAVR allowance.
.06Employee reporting.Within30
days after an employee’s automobile is
initially covered by a FAVR allowance,
or is again covered by a FAVR allowance
if coverage has lapsed, the employee by
written declaration must provide the payor
with the following information: (a) the
make, model, and year of the employee’s
automobile, (b) written proof of the insur-
ance coverage limits on the automobile,
(c) the odometer reading of the automo-
bile, (d) if owned, the purchase price of
the automobile or, if leased, the price at
which the automobile is ordinarily sold by
retailers (the gross capitalized cost of the
automobile), and (e) if owned, whether
the employee has claimed depreciation
with respect to the automobile using any
of the depreciation methods prohibited by
section 8.04(1) of this revenue procedure
or, if leased, whether the employee has
computed deductible business expenses
with respect to the automobile using actual
expenses. The information described in
(a), (b), and (c) of the preceding sentence
also must be supplied by the employee
to the payor within 30 days after the be-
ginning of each calendar year that the
employee’s automobile is covered by a
FAVR allowance.
.07Payor recordkeeping and reporting.
(1)Thepayororitsagentmustmain-
tain written records setting forth (a) the sta-
tistical data and projections on which the
FAVR allowance payments are based, and
(b) the information provided by the em-
ployees pursuant to section 8.06 of this
revenue procedure.
(2) Within 30 days of the end of each
calendar year, the employer must pro-
vide each employee covered by a FAVR
allowance during that year with a state-
ment that, for automobile owners, lists
the amount of depreciation included in
each periodic fixed payment portion of the
FAVR allowance paid during that calen-
dar year and explains that by receiving a
FAVR allowance the employee has elected
to exclude the automobile from the Mod-
ified Accelerated Cost Recovery System
pursuant to § 168(f)(1). For automobile
lessees, the statement must explain that
by receiving the FAVR allowance the em-
ployee may not compute the deductible
business expenses of the automobile using
actual expenses for the entire lease period
(including renewals). For a lease com-
mencing on or before December 31, 1997,
the “entire lease period” means the portion
of the lease period (including renewals)
remaining after that date.
.08Failure to meet section 8 require-
ments. If an employee receives a mileage
allowance that fails to meet one or more
of the requirements of section 8 of this
revenue procedure, the employee may not
be treated as covered by any FAVR al-
lowance of the payor during the period of
the failure. Nevertheless, the expenses to
which that mileage allowance relates may
be deemed substantiated using the method
described in sections 5, 9.01(1), and 9.02
of this revenue procedure to the extent the
requirements of those sections are met.
SECTION 9. APPLICATION
.01 If a payor pays a mileage allowance
in lieu of reimbursing actual transportation
expenses incurred or to be incurred by an
employee, the amount of the expenses that
is deemed substantiated to the payor is ei-
ther:
(1) for any mileage allowance other
than a FAVR allowance, the lesser of the
amount paid under the mileage allowance
or the applicable standard mileage rate
in section 5.01 of this revenue procedure
multiplied by the number of business miles
substantiated by the employee; or
(2) for a FAVR allowance, the amount
paid under the FAVR allowance less the
sum of (a) any periodic variable rate pay-
ment that relates to miles in excess of the
business miles substantiated by the em-
ployee and that the employee fails to re-
turn to the payor although required to do
so, (b) any portion of a periodic fixed pay-
ment that relates to a period during which
the employee is treated as not covered by
the FAVR allowance and that the employee
fails to return to the payor although re-
quired to do so, and (c) any optional high
mileage payments.
.02 If the amount of transportation ex-
penses is deemed substantiated under the
rulesprovidedinsection9.01ofthisrev-
enue procedure, and the employee actually
substantiates to the payor the elements of
time, place (or use), and business purpose
of the transportation expenses in accor-
dance with paragraphs (b)(2) (travel away
from home) and (b)(6) (listed property,
which includes passenger automobiles
andanyotherpropertyusedasameansof
transportation) of § 1.274–5T, and para-
graph (c) of § 1.274–5, the employee is
deemed to satisfy the adequate account-
ing requirements of § 1.274–5(f) as well
as the requirement to substantiate by
adequate records or other sufficient evi-
dence for purposes of § 1.274–5(c).See
§ 1.62–2(e)(1) for the rule that an arrange-
ment must require business expenses to be
substantiated to the payor within a reason-
able period of time.
.03 An arrangement providing mileage
allowances will be treated as satisfying the
requirement of § 1.62–2(f)(2) with respect
to returning amounts in excess of expenses
as follows:
(1) For a mileage allowance other than
a FAVR allowance, the requirement to
return excess amounts will be treated as
satisfied if the employee is required to
return within a reasonable period of time
(as defined in § 1.62–2(g)) any portion of
the allowance that relates to miles of travel
not substantiated by the employee, even
though the arrangement does not require
the employee to return the portion of the
allowance that relates to the miles of travel
substantiated and that exceeds the amount
of the employee’s expenses deemed sub-
stantiated. For example, assume a payor
provides an employee an advance mileage
allowance of $90 based on an anticipated
200 business miles at 45 cents per mile
(at a time when the applicable business
standard mileage rate is 40.5 cents per
mile), and the employee substantiates 120
business miles. The requirement to return
excess amounts will be treated as satisfied
if the employee is required to return the
portion of the allowance that relates to the
80 unsubstantiated business miles ($36)
even though the employee is not required
to return the portion of the allowance
($5.40) that exceeds the amount of the em-
ployee’s expenses deemed substantiated
under section 9.01 of this revenue pro-
cedure ($48.60) for the 120 substantiated
business miles. However, the $5.40 excess
portion of the allowance is treated as paid
under a nonaccountable plan as discussed
in section 9.05.
(2) For a FAVR allowance, the require-
ment to return excess amounts will be
treated as satisfied if the employee is re-
quired to return within a reasonable period
of time (as defined in § 1.62–2(g)), (a) the
portion (if any) of the periodic variable
2004–49 I.R.B.904December 6, 2004

payment received that relates to miles in
excess of the business miles substanti-
ated by the employee, and (b) the portion
(if any) of a periodic fixed payment that
relates to a period during which the em-
ployee was not covered by the FAVR
allowance.
.04 An employee is not required to in-
clude in gross income the portion of a
mileage allowance received from a payor
that is less than or equal to the amount
deemed substantiated under section 9.01
of this revenue procedure, provided the
employee substantiates in accordance with
section 9.02.See§ 1.274–5T(f)(2)(i). In
addition, that portion of the allowance is
treated as paid under an accountable plan,
is not reported as wages or other compen-
sation on the employee’s Form W–2, and
is exempt from withholding and payment
of employment taxes.See§§ 1.62–2(c)(2)
and (c)(4).
.05Anemployeeisrequiredtoin-
clude in gross income only the portion
of a mileage allowance received from a
payor that exceeds the amount deemed
substantiated under section 9.01 of this
revenue procedure, provided the em-
ployee substantiates in accordance with
section 9.02 of this revenue procedure.
See§ 1.274–5T(f)(2)(ii). In addition, the
excess portion of the allowance is treated
as paid under a nonaccountable plan, is re-
ported as wages or other compensation on
the employee’s Form W–2, and is subject
to withholding and payment of employ-
ment taxes.See§§ 1.62–2(c)(3)(ii), (c)(5),
and (h)(2)(i)(B).
.06 If an employee’s substantiated ex-
penses are less than the employee’s actual
expenses, the following rules apply:
(1) Except as otherwise provided in
section 9.06(2) of this revenue procedure
with respect to leased automobiles, if the
amount of the expenses deemed substan-
tiated under the rules provided in section
9.01 of this revenue procedure is less than
the amount of the employee’s business
transportation expenses, the employee
may claim an itemized deduction for
the amount by which the business trans-
portation expenses exceed the amount
that is deemed substantiated, provided
the employee substantiates all the busi-
ness transportation expenses, includes
on Form 2106,Employee Business Ex-
penses, the deemed substantiated portion
of the mileage allowance received from
the payor, and includes in gross income
the portion (if any) of the mileage al-
lowance received from the payor that
exceeds the amount deemed substantiated.
See§ 1.274–5T(f)(2)(iii). However, for
purposes of claiming this itemized deduc-
tion, substantiation of the amount of the
expenses is not required if the employee
is claiming a deduction that is equal to or
less than the applicable standard mileage
rate multiplied by the number of business
miles substantiated by the employee minus
the amount deemed substantiated under
section 9.01 of this revenue procedure.
The itemized deduction is subject to the
2-percent floor on miscellaneous itemized
deductions provided in § 67.
(2) An employee whose business trans-
portation expenses with respect to a leased
automobile are deemed substantiated un-
der section 9.01(1) of this revenue proce-
dure (relating to an allowance other than a
FAVR allowance) may not claim a deduc-
tion based on actual expenses under sec-
tion 9.06(1) unless the employee does so
consistently beginning with the first busi-
ness use of the automobile after December
31, 1997. However, an employee whose
business transportation expenses with re-
spect to a leased automobile are deemed
substantiated under section 9.01(2) of this
revenue procedure (relating to a FAVR al-
lowance) may not claim a deduction based
on actual expenses.
.07 An employee may deduct an
amount computed pursuant to section
5.01 of this revenue procedure only as an
itemized deduction. This itemized deduc-
tion is subject to the 2-percent floor on
miscellaneous itemized deductions pro-
videdin§67.
.08 A self-employed individual may
deduct an amount computed pursuant to
section 5.01 of this revenue procedure in
determining adjusted gross income under
§ 62(a)(1).
.09 If a payor’s reimbursement or
other expense allowance arrangement ev-
idences a pattern of abuse of the rules of
§ 62(c) and the regulations thereunder, all
payments under the arrangement will be
treated as made under a nonaccountable
plan. Thus, the payments are included in
the employee’s gross income, are reported
as wages or other compensation on the
employee’s Form W–2, and are subject to
withholding and payment of employment
taxes.See§§ 1.62–2(c)(3), (c)(5), and
(h)(2).
SECTION 10. WITHHOLDING AND
PAYMENT OF EMPLOYMENT TAXES
.01 The portion of a mileage allowance
(other than a FAVR allowance), if any,
that relates to the miles of business
travel substantiated and that exceeds the
amount deemed substantiated for those
miles under section 9.01(1) of this rev-
enue procedure is subject to withholding
and payment of employment taxes.See
§ 1.62–2(h)(2)(i)(B).
(1) In the case of a mileage allowance
paid as a reimbursement, the excess de-
scribedinsection10.01ofthisrevenue
procedure is subject to withholding and
payment of employment taxes in the pay-
roll period in which the payor reimburses
the expenses for the business miles sub-
stantiated.See§ 1.62–2(h)(2)(i)(B)(2).
(2) In the case of a mileage allowance
paid as an advance, the excess described in
section 10.01 of this revenue procedure is
subject to withholding and payment of em-
ployment taxes no later than the first pay-
roll period following the payroll period in
which the business miles with respect to
which the advance was paid are substanti-
ated.See§ 1.62–2(h)(2)(i)(B)(3). If some
or all of the business miles with respect
to which the advance was paid are not
substantiated within a reasonable period
of time and the employee does not return
the portion of the allowance that relates to
those miles within a reasonable period of
time, the portion of the allowance that re-
lates to those miles is subject to withhold-
ing and payment of employment taxes no
later than the first payroll period follow-
ing the end of the reasonable period.See
§ 1.62–2(h)(2)(i)(A).
(3) In the case of a mileage allowance
that is not computed on the basis of a fixed
amount per mile of travel (for example, a
mileage allowance that combines periodic
fixed and variable rate payments, but that
does not satisfy the requirements of sec-
tion 8 of this revenue procedure), the payor
must compute periodically (no less fre-
quently than quarterly) the amount, if any,
that exceeds the amountdeemed substanti-
ated under section 9.01(1) of this revenue
procedure by comparing the total mileage
allowance paid for the period to the ap-
plicable standard mileage rate in section
December 6, 20049052004–49 I.R.B.

5.01 of this revenue procedure multiplied
by the number of business miles substanti-
ated by the employee for the period. Any
excess is subject to withholding and pay-
ment of employment taxes no later than the
first payroll period following the payroll
period in which the excess is computed.
See§ 1.62–2(h)(2)(i)(B)(4).
(4) For example, assume an employer
pays its employees a mileage allowance at
a rate of 45 cents per mile (when the busi-
ness standard mileage rate is 40.5 cents per
mile). The employer does not require the
return of the portion of the allowance that
exceeds the business standard mileage rate
for the business miles substantiated (4.5
cents). In June, the employer advances an
employee $225 for 500 miles to be traveled
during the month. In July, the employee
substantiates to the employer 400 business
miles traveled in June and returns $45 to
the employer for the 100 business miles
not traveled. The amount deemed substan-
tiated for the 400 miles traveled is $162
and the employee is not required to return
$18. No later than the first payroll period
following the payroll period in which the
400 business miles traveled are substanti-
ated, the employer must withhold and pay
employment taxes on $18.
.02 The portion of a FAVR allowance,
if any, that exceeds the amount deemed
substantiated for those miles under section
9.01(2) of this revenue procedure is sub-
ject to withholding and payment of em-
ployment taxes.See§ 1.62–2(h)(2)(i)(B).
(1) Any periodic variable rate payment
that relates to miles in excess of the busi-
ness miles substantiated by the employee
and that the employee fails to return within
a reasonable period, or any portion of a pe-
riodic fixed payment that relates to a pe-
riod during which the employee is treated
as not covered by the FAVR allowance and
that the employee fails to return within a
reasonable period, is subject to withhold-
ing and payment of employment taxes no
later than the first payroll period follow-
ing the end of the reasonable period.See
§ 1.62–2(h)(2)(i)(A).
(2) Any optional high mileage payment
is subject to withholding and payment of
employment taxes when paid.
SECTION 11. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2003–76, 2003–2 C.B. 924,
is superseded for mileage allowances that
are paid both (1) to an employee on or af-
ter January 1, 2005, and (2) with respect
to transportation expenses paid or incurred
bytheemployeeonorafterJanuary1,
2005. Rev. Proc. 2003–76 is also su-
perseded for purposes of computing the
amount allowable as a deduction for trans-
portationexpensespaidorincurredonor
after January 1, 2005.
DRAFTING INFORMATION
The principal author of this revenue
procedure is John Roman Faron of the Of-
fice of Associate Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue procedure,
contact Mr. Faron at (202) 622–4930 (not
a toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also Part I, sections 846; 1.846–1.)
Rev. Proc. 2004–69
SECTION 1. PURPOSE
This revenue procedure prescribes the
loss payment patterns and discount factors
for the 2004 accident year. These factors
will be used for computing discounted un-
paid losses under § 846 of the Internal Rev-
enue Code.SeeRev. Proc. 2003–17,
2003–1 C.B. 427, for background concern-
ing the loss payment patterns and applica-
tion of the discount factors.
SECTION 2. SCOPE
This revenue procedure applies to any
taxpayer that is required to discount its un-
paid losses under § 846 for a line of busi-
ness using discount factors published by
the Secretary.
SECTION 3. TABLES OF DISCOUNT
FACTORS
.01 The following tables present sepa-
rately for each line of business the discount
factors under § 846 for accident year 2004.
All the discount factors presented in this
section were determined using the appli-
cable interest rate under § 846(c) for 2004,
which is 4.82 percent, and by assuming all
loss payments occur in the middle of the
calendar year.
.02 If the groupings of individual
lines of business on the annual state-
ment change, taxpayers must discount the
unpaid losses on the affected lines of busi-
ness in accordance with the discounting
patterns that would have applied to those
unpaid losses based on their classification
on the 2000 annual statement.SeeRev.
Proc. 2003–17, 2003–1 C.B. 427, section
2, for additional background on discount-
ing under section 846 and the use of the
Secretary’s tables.
.03 Section V of Notice 88–100,
1988–2 C.B. 439, sets forth a composite
method for computing discounted unpaid
losses for accident years that are not sep-
arately reported on the annual statement.
The tables separately provide discount
factors for taxpayers who elect to use the
composite method of section V of Notice
88–100.SeeRev. Proc. 2002–74, 2002–2
C.B. 980.
.04 Section 2.03(4) of Rev. Proc
2003–17 requested comments as to
whether a methodology should be adopted
to smooth the raw payment data and thus
produce a more stable pattern of discount
factors. This issue will be addressed in the
new determination year, which is 2007.
Accordingly, taxpayers may still submit
comments that should include a reference
toRev. Proc. 2004–69on this issue to the
following address:
CC:PA:LPD (Rev. Proc. 2004–69),
room 5207, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Comments may be
hand delivered between the hours of
8a.m. and4p.m.toCC:PA:LPD(Rev.
Proc. 2004–69), Courier’s Desk, In-
ternal Revenue Service, 1111 Consti-
tution Avenue, NW, Washington, DC
20224. Alternatively, e-mail comments to
Notice.Comments@irscounsel.treas.gov.
All comments will be available for public
inspection and copying.
.05 Tables.
2004–49 I.R.B.906December 6, 2004

Tables of Factors to be Used to Discount
Unpaid Losses Incurred in
Accident Year 2004
(Interest rate: 4.82 percent)
Accident and Health
(Other Than Disability Income or Credit Disability Insurance)
Taxpayers that do not use the composite method of Notice 88–100 should use 97.6738 percent to discount unpaid losses incurred
in this line of business in the 2004 accident year and that are outstanding at theend of the 2004 and later taxable years.
Taxpayers that use the composite method of Notice 88–100 should use 97.6738 percent to discount all unpaid losses in this line of
business that are outstanding at the end of the 2004 taxable year.
Auto Physical Damage
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200489.646889.646810.353210.091497.4716
200599.684510.03770.31550.301195.4281
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2006 and later years0.15780.15780.154197.6738
Taxpayers
that use the composite method of Notice 88–100 should use 97.6738 percent to discount unpaid losses incurred in this
line of bu
siness in 2004 and prior years and that are outstanding at the end of the 2006 taxable year.
Commercial Auto/Truck Liability/Medical
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200428.824428.824471.175664.952491.2566
200554.987126.162645.012941.297491.7455
200672.803917.816827.196125.046792.0968
200785.057212.253314.942813.708991.7422
200891.62766.57048.37247.642791.2848
200994.95143.32395.04864.608191.2757
201097.045
3
2.09382.95472.686590.922
8
201198.15741.11211.84261.677491.0343
201298.73700.57961.26301.164992.2284
201399.10700.37000.89300.842294.3090
December 6, 20049072004–49 I.R.B.

Commercial Auto/Truck Liability/Medical
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20140.37000.52300.504096.3596
2015 and later years0.37000.15300.149597.6738
Taxpayers tha
t use the composite method of Notice 88–100 should use 96.6098 percent to discount unpaid losses incurred in this
line of busine
ss in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Composite
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200440.998540.998559.001552.826089.5334
200565.843924.845434.156129.935187.6422
200677.502311.658322.497719.442086.4176
200784.62217.119815.377913.089785.1202
200890.24555.62349.75457.963381.6370
200992.27802.03257.72206.266281.1476
201094.39742.11955.60264.398378.5056
201195.25260.85524.74743.734878.6702
201296.27921.02663.72082.863776.9662
201396.43230.15313.56772.845079.7443
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20140.15313.41452.825382.7452
20150.15313.26142.804885.998
8
20160.15313.10832.783289.5410
20170.15312.95512.760593.4151
2018 and later years0.15312.80202.736897.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 88.2038 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Fidelity/Surety
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200438.332838.332861.667257.502793.2469
200558.848520.515641.151539.270195.4281
Tax
payers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
inc
urred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2006 and later years20.575820.575820.097197.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 97.6738 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2006 taxable year.
2004–49 I.R.B.908December 6, 2004

Financial Guaranty/Mortgage Guaranty
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20044.07234.072395.927789.766693.5773
200540.763936.691659.236156.527895.4281
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2006 and later
years
29.618029.618028.929197.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 97.6738 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2006 taxable year.
International (Composite)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200440.998540.998559.001552.826089.5334
200565.843924.845434.156129.935187.6422
200677.502311.658322.497719.442086.4176
200784.62217.119815.377913.089785.1202
200890.24555.62349.75457.963381.6370
200992.27802.03257.72206.266281.1476
201094.39742.11955.60264.398378.5056
201195.25260.85524.74743.734878.6702
201296.27921.02663.72082.863776.9662
201396.43230.15313.56772.845079.7443
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20140.15313.41452.825382.7452
20150.15313.26142.804885.9988
20160.15313.10832.783289.5410
20170.153
1
2.955
1
2.760
5
93.41
51
2018 and later0.15312.80202.736897.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 88.2038 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
December 6, 20049092004–49 I.R.B.

Medical Malpractice — Claims-Made
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20047.34477.344792.655381.768288.2499
200529.019121.674470.980963.518889.4872
200653.310824.291746.689241.710289.3358
200769.151715.840930.848327.502589.1538
200882.098112.946417.901915.573386.9925
200986.39954.301413.600511.920187.6445
201089.71113.311610.28899.104288.4854
201192.46882.75777.53126.719689.2237
201294.51632.04755.48374.947290.2171
201395.76351.24714.23653.908892.2647
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20141.24712.98942.820494.3465
20151.24711.74221.679596.3974
2016 and later years1.24710.49510.483697.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 95.1999 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Medica
l Malpractice — Occurrence
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20040.83160.831699.168481.938082.6251
20057.45736.625792.542779.103985.4783
200623.557516.100276.442566.433186.9060
200741.006217.448758.993851.770987.7565
200855.583214.577044.416839.342188.57
48
200968.941313.358131.058727.562288.7421
201078.20959.268221.790519.401789.0375
201182.87274.663217.127315.562690.8644
201286.31783.445113.682212.785593.4468
201391.08344.76568.91668.522795.5829
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2014 and later years4.76564.15104.054497.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 97.6738 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
2004–49 I.R.B.910December 6, 2004

Miscellaneous Casualty
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200479.779079.779020.221019.415196.0143
200594.941715.16275.05834.827195.4281
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2006 and later
years
2.52922.52922.470397.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 97.6738 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2006 taxable year.
Multiple Peril Lines
(Homeowners/Farmowners, Commercial Multiple Peril, and Special Liability
(Ocean Marine, Aircraft (All Perils), Boiler and Machinery))
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200459.744559.744540.255536.910291.6900
200581.034721.290218.965316.892189.0684
200687.33256.297812.667511.258588.8771
200791.06593.73348.93417.978889.3078
200895.17814.11224.82194.153386.1338
200995.76050.58244.23953.757288.6237
201097.05391.29332.94612.614188.7309
201197.64410.59032.35592.135890.6591
201298.70371.05961.29631.153989.0187
201398.6217-0.08211.37831.293693.8496
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20140.52260.85580.820995.9252
2015 and later years0.52260.33320.325497.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 96.3566 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
December 6, 20049112004–49 I.R.B.

Other (Including Credit)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200469.172969.172930.827129.527395.7837
200591.216822.04398.78328.381795.4281
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2006 and later
years
4.39164.39164.289597.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 97.6738 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2006 taxable year.
Other Liability — Claims-Made
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200414.961814.961885.038273.585086.5317
200536.211321.249463.788755.376386.8120
200654.287618.076345.712439.538686.4942
200764.21639.928835.783731.279187.4117
200873.27329.056926.726823.514287.9799
200980.57487.301619.425217.172188.4011
201087.62007.045212.380010.786887.1308
201189.91552.295510.08458.956588.8150
201293.39463.47916.60545.826388.2049
201394.61701.22235.38304.855690.2026
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20141.22234.16073.838292.2497
20151.22232.93832.771894.3309
20161.22231.71601.653996.3817
2017 a
nd later years
1.222
3
0.493
6
0.482
2
97.67
38
Taxpayers that use the composite method of Notice 88–100 shoulduse 93.4601 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
2004–49 I.R.B.912December 6, 2004

Other Liability — Occurrence
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200419.113319.113380.886767.775883.7909
200536.443417.330163.556653.299783.8618
200652.164815.721547.835239.772983.1457
200763.238311.073436.761730.352882.5662
200872.07808.839727.922022.765581.5325
200975.90213.824124.097919.947682.7774
201082.93057.028417.069513.713380.3380
201185.14412.213614.855912.108081.5027
201289.30064.156510.69948.436178.8462
201389.98980.689210.01028.137181.2878
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20140.68929.32107.823783.9359
20150.68928.63187.495186.8318
20160.68927.94267.150890.0309
20170.68927.25336.789893.6092
2018 and
later years
0.68926.56416.411497.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 87.9688 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Private Passenger Auto Liability/Medical
Tax Yea
r
Estim
ated
Cumul
ative
Losses
Paid
(%)
Estim
ated
Losses
Paid
Each Ye
ar
(%)
Unpai
d
Losses
at
Year En
d
(%)
Disco
unted
Unpai
d
Losses
at
Year En
d
(%)
Discou
nt
Factor
s
(%)
200443.192643.192656.807452.896193.1148
200572.200829.008227.799225.746792.6165
200684.56
32
12.362515.436814.330892.83
53
200791.93167.36848.06847.477692.6783
200895.87293.94134.12713.802992.1449
200997.78041.90752.21962.033391.6058
201098.79571.01531.20431.091890.6592
201199.24910.45350.75090.680290.5885
201
2
99.
5195
0.27
03
0.48
05
0.43
62
90.
7769
201399.63530.11590.36470.338692.8555
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
December 6, 20049132004–49 I.R.B.

Private Passenger Auto Liability/Medical
20140.11590.24880.236394.9794
20150.11590.13300.129197.0963
2016 and later years0.11590.01710.016797.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 95.6966 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Products Liability — Claims-Made
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20046.58046.580493.419677.968883.4608
200526.718320.137973.281761.109483.3897
200643.183416.465256.816647.197683.0701
200743.92090.737556.079148.717486.8727
200854.380610.459745.619440.356888.4641
200978.363023.982421.637017.748582.0282
201082.86434.501317.135713.995481.6740
201168.2184-14.645931.781629.664793.3392
201279.158210.939920.841819.894295.4533
201389.696310.538110.303710.064097.6738
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2014 and later years97.6738
Taxpay
ers that use the composite method of Notice 88–100 should use 94.7093 percent to discount unpaid losses incurred in this
line of
business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Products Liability — Occurrence
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
20049.41989.419890.58
02
74.19
27
81.90
83
200520.584511.164779.415566.338183.5330
200636.780716.196263.219352.953783.7619
200755.597418.816744.402636.241281.6196
200866.623811.026333.376226.699179.9943
200977.263610.639922.736417.092775.1778
201
0
79.18
88
1.92
51
20.
8112
15.
9456
76.
6201
201183.68164.492816.318412.114474.2373
201285.55071.869114.449310.784674.6377
201385.72910.178414.270911.121877.9334
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2004–49 I.R.B.914December 6, 2004

Products Liability — Occurrence
20140.178414.092511.475281.4279
20150.178413.914111.845785.1344
20160.178413.735712.234089.0671
20170.178413.557312.641093.2415
2018 and later years0.178413.378913.067797.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 85.1384 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Reinsurance A (Nonproportional Assumed Property)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200425.057125.057174.942968.520991.4308
200552.040226.983147.959844.197992.1560
200682.470930.430717.529115.172786.5574
200785.63873.167814.361312.660888.1593
200892.72287.08407.27726.018382.7002
200991.8604-0.86248.13967.191388.3493
201096.50164.64123.49842.786279.6410
201196.1872-0.31433.81283.242385.0381
201297.62061.43332.37941.931181.1586
201397.84190.22142.15811.797683.2949
Taxpay
ers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurr
ed in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20140.22141.93671.657685.5871
20150.22141.71541.510988.0776
20160.221
4
1.494
0
1.357
1
90.83
26
20170.22141.27271.195893.9635
2018 and later years0.22141.05131.026997.6738
Taxp
ayers that use the composite method of Notice 88–100 should use 87.1588 percent to discount unpaid losses incurred in this
line
of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Reinsurance B (Nonproportional Assumed Liability)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200
4
8.92
23
8.92
23
91.
0777
73.
9275
81.
1697
200527.361818.439572.638258.612180.6905
200644.575817.214055.424243.813379.0507
200753.87819.302346.121936.401278.9239
200860.88967.011539.110430.977279.2046
200969.73278.843030.267323.416777.3661
2
010
7
6
.
6292
6.
8965
2
3.3708
1
7.4846
7
4.8137
December 6, 20049152004–49 I.R.B.

Reinsurance B (Nonproportional Assumed Liability)
201179.40302.773820.597015.487575.1928
201283.89364.490616.106411.636472.2470
201380.1707-3.722919.829316.008880.7332
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20141.180518.648715.571883.5005
20151.180517.468215.113786.5212
20161.180516.287714.633589.8442
20171.180515.107214.130293.5333
2018 and later years1.180513.926613.602797.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 85.5743 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
Reinsurance C (Nonproportional Assumed Financial Lines)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200417.119517.119582.880573.083288.1791
200546.659029.539553.341046.362886.9179
200667.713521.054532.286527.041683.7552
200778.137910.424421.862117.672380.8355
200889.734611.596710.26546.651264.7929
200992.12682.39217.87324.522757.4441
201089.7323-2.394510.26777.192270.0468
201190.04600.31379.95407.217772.5104
201294.88674.84075.11332.609651.0353
201386.70
41
-8.182713.295911.112983.58
11
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20141.427711.868310.186985.8328
20151.427710.44069.216288.2727
20161.42779.01298.198790.9665
20171.42777.58527.132294.0277
20
18 and later years
1.
4277
6.1
575
6.0
143
97
.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 87.3575 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
2004–49 I.R.B.916December 6, 2004

Special Property
(Fire, Allied Lines, Inland Marine, Earthquake, Glass, Burglary and Theft)
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200462.932062.932037.068035.442595.6148
200588.495025.563111.505010.979095.4281
Taxpayers that do not use the composite method of Notice 88–100 should use the following factor to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
2006 and later
years
5.75255.75255.618797.6738
Taxpayers that use the composite method of Notice 88–100 shoulduse 97.6738 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2006 taxable year.
Workers’ Compensation
Tax Year
Estimated
Cumulative
Losses
Paid
(%)
Estimated
Losses Paid
Each Year
(%)
Unpaid
Losses at
Year End
(%)
Discounted
Unpaid
Losses at
Year End
(%)
Discount
Factors
(%)
200428.248928.248971.751162.911987.6808
200557.873929.624942.126135.613884.5408
200671.299913.426028.700123.584682.1759
200777.75846.458522.241618.109081.4196
200881.93014.171718.069914.710881.4107
200983.77391.843716.226113.532283.3977
201086.53502.761113.465011.357684.3489
201188.43671.901711.56339.958086.1175
201289.59261.155910.40749.254588.9229
201391.64412.05158.35597.600390.9570
Taxpayers that do not use the composite method of Notice 88–100 should use the following factors to discount unpaid losses
incurred in this line of business in the 2004 accident year and that are outstanding at the end of the tax year shown.
20142.05156.30455.866393.0502
20152.05154.25304.048895.1976
20162.05152.20162.143697.3675
2017 a
nd later years
2.051
5
0.150
1
0.146
6
97.67
38
Taxpayers that use the composite method of Notice 88–100 shoulduse 94.3547 percent to discount unpaid losses incurred in this
line of business in 2004 and prior years and that are outstanding at the end of the 2014 taxable year.
DRAFTING INFORMATION
The p
rincipal author of this revenue
proc
edure is Katherine A. Hossofsky of
theOfficeoftheAssociateChiefCounsel
(Financial Institutions & Products). For
further information regarding this revenue
procedure, contact Ms. Hossofsky at (202)
622–8435 (not a toll-free call).
December 6, 20049172004–49 I.R.B.

26 CFR 601.201: Rulings and determination letters.
(Also Part I, sections 832, 846; 1.832–4, 1.8461.)
Rev. Proc. 2004–70
SECTION 1. PURPOSE
This revenue p
rocedure prescribes the
salvage disco
unt factors for the 2004 acci-
dent year. Th
ese factors must be used to
compute disc
ounted estimated salvage re-
coverable un
der § 832 of the Internal Rev-
enue Code.
SECTION 2. BACKGROUND
Section 832(b)(5)(A) requires that all
estimated salvage recoverable (including
that which cannot be treated as an asset
for state accounting purposes) be taken
into account in computing the deduction
for losses incurred. Under § 832(b)(5)(A),
paid losses are to be reduced by salvage
and reinsurance recovered during the tax-
able year. This amount is adjusted to re-
flect changes in discounted unpaid losses
on nonlife insurance contracts and in un-
paid losses on life insurance contracts.
An adjustment is then made to reflect any
changes in discounted estimated salvage
recoverable and in reinsurance recover-
able.
Pursuant to § 832(b), the amount of es-
timated salvage is determined on a dis-
counted basis in accordance with proce-
dures established by the Secretary.
SECTION 3. SCOPE
This revenue procedure applies to any
taxpayer that is required to discount esti-
mated salvage recoverable under § 832.
SECTION 4. APPLICATION
.01 The following tables present sepa-
rately for each line of business the discount
factors under § 832 for the 2004 accident
year. All the discount factors presented
in this section were determined using the
applicable interest rate under § 846(c) for
2004, which is 4.82 percent, and by as-
suming all estimated salvage is recovered
in the middle of each calendar year.See
Rev. Proc. 2003–18, 2003–1 C.B. 439, for
background regarding the tables.
.02 These tables must be used by tax-
payers irrespective of whether they elected
to discount unpaid losses using their own
historical experience under § 846.
.03 Section V of Notice 88–100,
1988–2 C.B. 439, provides a composite
discount factor to be used in determining
the discounted unpaid losses for accident
years that are not separately reported on
the NAIC Annual Statement. The tables
separately provide discount factors for
taxpayers who elect to use the composite
method. Rev. Proc. 2002–74, 2002–2
C.B. 980, clarifies that for certain insur-
ance companies subject to tax under § 831
the composite method for discounting un-
paid losses set forth in Notice 88–100,
section V, 1988–2 C.B. 419, is permitted
but not required. This revenue procedure
further provides alternative methods for
computing discounted unpaid losses that
are permitted for insurance companies not
using the composite method, and sets forth
a procedure for insurance companies to
obtain automatic consent of the Commis-
sioner to change to one of the methods
described in Rev. Proc. 2002–74.
.04 Tables.
Tables of Factors to be Used to
Discount Salvage Recoverable
With Respect to Losses Incurred in
Accident Year 2004
(Interest rate: 4.82 percent)
Accident and Health (Other Than
Disability Income or Credit Disability
Insurance)
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
97.6738 percent to discount salvage re-
coverable with respect to losses incurred
in this line of business in the 2004 acci-
dent year as of the end of the 2004 and
later taxable years.
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount all salvage
recoverable in this line of business as of
the end of the 2004 taxable year.
Auto Physical Damage
Tax Year
Discount
Factors
(%)
200496.5590
200595.4281
Taxpayers tha
t do not use the compos-
ite method of
Notice 88–100 should use
the followin
g factor to discount salvage
recoverable
as of the end of the tax year
shownwithre
spect to losses incurred in
this line of
business in the 2004 accident
year.
2006 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2006
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Commerc
ial Auto/Truck
Liabili
ty/Medical
Tax Year
Discount
Factors
(%)
200490.6645
200590.3669
200690.1327
200790.6408
200891.17
85
200990.5988
201091.8814
201192.9935
201293.2915
201395.4594
2004–49 I.R.B.918December 6, 2004

Commercial Auto/Truck
Liability/Medical
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2014 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Composite
Tax Year
Discount
Factors
(%)
200490.5683
200589.2161
200688.6645
200788.0367
200886.8142
200986.8926
201086.6271
201186.58
09
201286.7177
201388.6805
Taxp
ayers that do not use the compos-
ite m
ethod of Notice 88–100 should use
the
following factors to discount salvage
rec
overable as of the end of the tax year
sho
wn with respect to losses incurred in
thi
s line of business in the 2004 accident
yea
r.
201490.6998
201592.7729
2
016
9
4.8883
201796.9880
2018 and later
years
97.6738
Composite
Taxpayers that use the composite
method of Notice 88–100 should use
91.9391 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Fidelity/Surety
Tax Year
Discount
Factors
(%)
200493.1746
200595.4281
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2006 and
later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2006
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Financial Guaranty/Mortgage
Guaranty
Tax Ye
ar
Disc
ount
Facto
rs
(%)
200494.6749
200595.4281
Financial Guaranty/Mortgage
Guaranty
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2006 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2006
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
International (Composite)
Tax Year
Discount
Factors
(%)
200490.5683
200589.2161
200688.6645
200788.0367
200886.8142
200986.8926
201086.6271
201186.58
09
201286.7177
201388.6805
Taxp
ayers that do not use the compos-
ite m
ethod of Notice 88–100 should use
the
following factors to discount salvage
rec
overable as of the end of the tax year
sho
wn with respect to losses incurred in
thi
s line of business in the 2004 accident
yea
r.
201490.6998
201592.7729
2
016
9
4.8883
201796.9880
2018 and later
years
97.6738
December 6, 20049192004–49 I.R.B.

International (Composite)
Taxpayers that use the composite
method of Notice 88–100 should use
91.9391 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Medical Malpractice —
Claims-Made
Tax Year
Discount
Factors
(%)
200485.5093
200580.4030
200685.5474
200782.9525
200884.0312
200977.9665
201088.7516
201191.9419
201295.7422
201397.673
8
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2014 and later
years
97.6738
Tax
payers that use the composite
met
hod of Notice 88–100 should use
97.
6738 percent to discount salvage
rec
overable as of the end of the 2014
tax
able year with respect to losses in-
cur
red in this line of business in 2004
an
d prior years.
Medical Malpractice — Occurrence
Tax Year
Discount
Factors
(%)
200481.0996
200582.3752
200686.3279
200787.9623
200874.2782
200985.2215
201090.8308
201194.1660
201296.0748
201397.6738
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2014 and
later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Miscellaneous Casualty
Tax Y
ear
Disc
ount
Fact
ors
(%)
200496.0374
200595.4281
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
Miscellaneous Casualty
2006 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2006
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Multiple Peril Lines (Homeown-
ers/Farmowners, Commercial
Multiple Peril, and Special Liability
(Ocean Marine, Aircraft (All Perils),
Boiler and Machinery))
Tax Year
Discount
Factors
(%)
200491.6039
200589.7492
200690.5601
200790.2475
200889.8022
200991.1562
201091.2128
201191.4205
201293.1099
201395.2655
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
201
4
97.
4556
2015 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.4560 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
2004–49 I.R.B.920December 6, 2004

Other (Including Credit)
Tax Year
Discount
Factors
(%)
200496.2479
200595.4281
Taxpayers tha
t do not use the compos-
ite method of
Notice 88–100 should use
the followin
g factor to discount salvage
recoverable
as of the end of the tax year
shown with re
spect to losses incurred in
this line of
business in the 2004 accident
year.
2006 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2006
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Other Li
ability — Claims-Made
Tax Year
Discount
Factors
(%)
200490.0420
200580.0175
200665.1028
200787.1628
200883.28
75
200982.4626
201089.1681
201192.9417
201289.5057
201391.5434
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
Other Liability — Claims-Made
201493.6283
201595.7330
2016 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
94.7277 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Other Liability — Occurrence
Tax Year
Discount
Factors
(%)
200484.4755
200585.9883
200687.1531
200783.6055
200887.3020
200989.9297
201090.3252
201192.5157
201293.9128
201395.98
21
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2014 and later
years
97.6738
Ta
xpayers that use the composite
me
thod of Notice 88–100 should use
97
.6738 percent to discount salvage
re
coverable as of the end of the 2014
ta
xable year with respect to losses in-
c
urred in this line of business in 2004
a
nd prior years.
Private Passenger Auto
Liability/Medical
Tax Year
Discount
Factors
(%)
200493.7245
200593.5180
200693.2272
200792.3657
200892.1360
200991.0524
201090.9939
201191.0582
201292.3235
201394.4076
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
201496.459
8
2015 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
96.6736 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
December 6, 20049212004–49 I.R.B.

Products Liability — Claims-Made
Tax Year
Discount
Factors
(%)
200485.9966
200586.0537
200687.7977
20077.9001
200879.1822
200985.8894
201090.6864
201195.0912
201225.2668
201395.5221
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2014 and
later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Products Liability — Occurrence
Tax Y
ear
Disc
ount
Fact
ors
(%)
200480.0842
200582.8436
200
6
83.
5123
200786.2999
200883.5735
200987.2379
201090.4562
201191.2267
2
012
8
5.5469
201387.4740
Products Liability — Occurrence
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
201489.4572
201591.4954
201693.5825
201795.6945
2018 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
92.6255 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Reinsurance A (Nonproportional
Assumed Property)
Tax Year
Discount
Factors
(%)
200485.3031
200582.2450
200686.5640
200790.49
06
200891.1611
200992.9938
201094.8571
201196.1798
201296.7980
201
3
97.
6738
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2014 and later
years
97.6738
Reinsurance A (Nonproportional
Assumed Property)
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Reinsurance B (Nonproportional
Assumed Liability)
Tax Year
Discount
Factors
(%)
200484.7610
200582.3424
200685.7505
200783.4780
200876.1754
200979.9172
201079.2255
201181.5908
201276.2736
201384.170
2
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
201486.3467
201588.6896
201691.2606
201794.1745
201
8 and later
ye
ars
97.
6738
Taxpayers that use the composite
method of Notice 88–100 should use
87.7819 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
2004–49 I.R.B.922December 6, 2004

Reinsurance C (Nonproportional
Assumed Financial Lines)
Tax Year
Discount
Factors
(%)
200484.4808
200585.2596
200688.9070
200786.2016
200889.5553
200982.3408
201085.6757
201192.8358
201294.2578
201396.3087
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factor to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
2014 an
d later
years
97.673
8
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Special Property (Fire, Allied Lines,
Inland Marine, Earthquake, Glass,
Burglary and Theft)
Tax Year
Discount
Factors
(%)
200493.6220
200595.4281
Taxpayers th
at do not use the compos-
ite method of
Notice 88–100 should use
the followin
g factor to discount salvage
recoverabl
e as of the end of the tax year
shownwithr
espect to losses incurred in
this line of
business in the 2004 accident
year.
2006 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
97.6738 percent to discount salvage
recoverable as of the end of the 2006
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
Workers’ Compensation
Tax Year
Discount
Factors
(%)
200485.3979
200586.7440
200687.2113
200787.1308
200886.4289
200987.2964
201087.0843
201187.2655
201288.1306
201390.1258
Taxpayers that do not use the compos-
ite method of Notice 88–100 should use
the following factors to discount salvage
recoverable as of the end of the tax year
shown with respect to losses incurred in
this line of business in the 2004 accident
year.
201492.1703
201594.2492
201696.3002
2017 and later
years
97.6738
Taxpayers that use the composite
method of Notice 88–100 should use
93.3819 percent to discount salvage
recoverable as of the end of the 2014
taxable year with respect to losses in-
curred in this line of business in 2004
and prior years.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Katherine A. Hossofsky of
the Office of the Associate Chief Counsel
(Financial Institutions & Products). For
further information regarding this revenue
procedure, contact Ms. Hossofsky at (202)
622–8435 (not a toll-free call).
December 6, 20049232004–49 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking, Notice of
Proposed Rulemaking
by Cross-Reference to
Temporary Regulations, and
Notice of Public Hearing
Revised Regulations
Concerning Section 403(b)
Tax-Sheltered Annuity
Contracts
REG–155608–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing, notice of proposed rulemaking by
cross-reference to temporary regulations,
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations under section 403(b) of
the Internal Revenue Code and under re-
lated provisions of sections 402(b), 402(g),
414(c), and 3121(a)(5)(D). The proposed
regulations would provide updated guid-
ance on section 403(b) contracts of public
schools and tax-exempt organizations de-
scribed in section 501(c)(3). These regula-
tions would provide the public with guid-
ance necessary to comply with the law
and will affect sponsors of section 403(b)
contracts, administrators, participants and
beneficiaries. In this issue of the Bulletin,
the Treasury Department and IRS are issu-
ing temporary regulations (T.D. 9159) pro-
viding employment tax guidance to em-
ployers and employeeson salary reduction
agreements. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Written or electronic comments
must be received by February 14, 2005.
Outlines of topics to be discussed at the
public hearing scheduled for February 15,
2005, to be held in the IRS Auditorium
(7
th
Floor) must be received by January 25,
2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–155608–02),
room 5203, Internal Revenue Ser-
vice, POB 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand delivered Monday
through Friday between the hours of
8 a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG–155608–02), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS-REG–155608–02). The public hear-
ing will be held in the IRS Auditorium
(7
th
Floor), Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, R. Lisa Mojiri-Azad or John
Tolleris, (202) 622–6060; concerning
the proposed regulations as applied to
church-related entities, Robert Architect
(202) 283–9634; concerning submission
of comments, the hearing, and/or to be
placed on the building access list to attend
the hearing, Sonya Cruse, (202) 622–7180
(not toll–free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of rulemaking has been pre-
viously reviewed and approved by the Of-
fice of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1341.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
Regulations (T.D. 6783, 1965–1 C.B.
180) under section 403(b) of the Internal
Revenue Code (Code) were published in
theFederal Register(29 FR 18356) on
December 24, 1964. These regulations
provided guidance for complying with
section 403(b) which had been enacted
in 1958 in section 23(a) of the Techni-
cal Amendments Act of 1958, Public
Law 85–866 (1958), relating to tax-shel-
tered annuity arrangements established for
employees by public schools and tax-ex-
empt organizations described in section
501(c)(3). Since 1964, additional reg-
ulations have been issued under section
403(b) to reflect rules relating to eligible
rollover distributions and minimum distri-
butions under section 401(a)(9).
These proposed regulations would
amend the current regulations to conform
them to the numerous amendments made
to section 403(b) by subsequent legis-
lation, including section 1022(e) of the
Employee Retirement Income Security
Act of 1974 (ERISA) (88 Stat. 829), Pub-
lic Law 93–406; section 251 of the Tax
Equity and Fiscal Responsibility Act of
1982 (TEFRA) (96 Stat. 324, 529), Pub-
lic Law 97–248; section 1120 of the Tax
Reform Act of 1986 (TRA ’86) (100 Stat.
2085, 2463), Public Law 99–514; section
1450(a) of the Small Business Job Protec-
tion Act of 1996 (SBJPA) (110 Stat. 1755,
1814), Public Law 104–188; and sec-
tions 632, 646, and 647 of the Economic
Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA) (115 Stat. 38, 113,
126, 127), Public Law 107–16.
Explanation of Provisions
Overview
The purposes of these proposed regu-
lations are to update the current regula-
tions under section 403(b) to delete provi-
sions that no longer have legal effect due
to changes in law, to include in the regu-
lations a number of items of interpretive
2004–49 I.R.B.924December 6, 2004

guidance that have been issued under sec-
tion 403(b) since the 1964 regulations,
1
and generally to reflect the numerous le-
gal changes that have been made in sec-
tion 403(b). A major effect of the legal
changes in section 403(b) has been to di-
minish the extent to which the rules gov-
erning section 403(b) plans differ from the
rules governing other arrangements that
include salary reduction contributions,i.e.,
section 401(k) plans and section 457(b)
plans for State and local governmental en-
tities. Thus, these regulations will reflect
the increasing similarity among these ar-
rangements.
Since the existing regulations were
issued in 1964, a number of revenue rul-
ings and other guidance under section
403(b) have become outdated as a result
of changes in law. In addition, as a result
of the inclusion in these proposed regu-
lations of much of the guidance that the
IRS has issued regarding section 403(b),
it is anticipated that these regulations,
when finalized, will supersede a number
of revenue rulings and notices that have
been issued under section 403(b). Thus,
the IRS anticipates taking action to ob-
solete many revenue rulings, notices, and
other guidance under section 403(b) when
these regulations are issued in final form.
2
However, the positions taken in certain
rulings and other outstanding guidance
are expected to be retained. For example,
it is intended that a revenue ruling will
be issued that substantially replicates and
consolidates the existing rules
3
for deter-
mining when employees are performing
services for a public school.
4
The existing regulations include special
rules for determining the amount of the
contributions made for an employee under
a defined benefit plan, based on the em-
ployee’s pension under the plan. These
rules are generally no longer applicable
for section 403(b) because the limitations
on contributions to a section 403(b) con-
tract are no longer coordinated with accru-
als under a defined benefit plan. (See also
the discussion of defined benefit plans be-
low under the headingMiscellaneous Pro-
visions.) However, the rules for determin-
ing the amount of contributions made for
an employee under a defined benefit plan
in the existing regulations under section
403(b) are also used for purposes of sec-
tion 402(b) (relating to nonqualified plans
funded through trusts) and, accordingly,
these rules are proposed to be deleted from
the regulations under section 403(b). New
proposed regulations under section 402(b)
would authorize the Commissioner to is-
sue guidance for determining the amount
of the contributions made for an employee
under a defined benefit plan under section
402(b). See also the request for comments
on this guidance under the headingCom-
ments and Public Hearing.
The proposed regulations also include
controlled group rules under section
414(c) for entities that are tax-exempt
under section 501(a).
Exclusion for Contributions to Section
403(b) Contracts
Section 403(b) provides an exclusion
from gross income for certain contribu-
tions made by certain types of employers
for their employees to specific types of
funding arrangements. There are three
categories of funding arrangements to
which section 403(b) applies: (1) annuity
contracts (as defined in section 401(g))
issued by an insurance company; (2) cus-
todial accounts that are invested solely in
mutual funds; and (3) retirement income
accounts which are only permitted for
church employees. The exclusion applies
only if certain general requirements are
satisfied. For purposes of most of these
requirements, section 403(b)(5) provides
that all section 403(b)contracts purchased
for an individual by an employer are
treated as purchased under a single con-
tract. Other aggregation rules apply for
certain specific purposes, including the
aggregation rules under section 402(g) for
purposes of satisfying the limitations on
elective deferrals (which apply both on an
individual basis and to all contributions
made by an employer) and the controlled
group rules of section 414(b) and (c) for
purposes of the general nondiscrimination
rules and the contribution limitations of
section 415 (which generally apply on an
employer-by-employer basis).
Section 403(b) Requirements
Section 403(b)(1)(C) requires that the
contract be nonforfeitable except for the
failure to pay future premiums. The pro-
posed regulations define nonforfeitability
based on the regulations under section
411(a) and clarify that if an annuity con-
tract issued by an insurance company
is purchased that would satisfy section
403(b) except for the failure to satisfy
this nonforfeitability requirement, then the
contract is treated as a contract to which
section 403(c) applies. Section 403(c) pro-
vides that the value of a nonqualified con-
tract is included in gross income under the
rules of section 83, which generally does
not occur before the employee’s rights in
the contract become substantially vested.
Under the proposed regulations, on the
date on which the employee’s interest in
that contract becomes nonforfeitable, the
contract may be treated as a section 403(b)
contract if the contract has at all prior
times satisfied the requirements of section
403(b) other than the nonforfeitability re-
quirement. Solely for this purpose, if a
participant’s interest in a contract is only
partially nonforfeitable in a year, then
the portion that is nonforfeitable and the
1
Since 1964, the existing regulations have been revised for certain specific changes in law, for example, regulations under section 403(b) have been issuedinquestionandanswerformto
reflect changes relating to eligible rollover distributions (T.D. 8619, 1995–2 C.B. 41, September 15, 1995) and minimum distributions under section 401(a)(9) (T.D. 8987, 2002–1 C.B. 852,
April 16, 2002).
2
It is expected that the following guidance is outdated, or will be superseded, when these regulations are issued in final form: Rev. Rul. 64–333. 1964–2 C.B. 114; Rev. Rul. 65–200, 1965–2
C.B. 141; Rev. Rul. 66–254, 1966–2 C.B. 125; Rev. Rul. 66–312, 1966–2 C.B. 127; Rev. Rul. 67–78, 1967–1 C.B. 94; Rev. Rul. 67–69, 1967–1 C.B. 93; Rev. Rul. 67–361, 1967–2 C.B.
153; Rev. Rul. 67–387, 1967–2 C.B. 153; Rev. Rul. 67–388, 1967–2 C.B. 153; Rev. Rul. 68–179, 1968–1 C.B. 179; Rev. Rul. 68–482, 1968–2 C.B. 186; Rev. Rul. 68–487, 1968–2 C.B.
187; Rev. Rul. 68–488, 1968–2 C.B. 188; Rev. Rul. 69–629, 1969–2 C.B. 101; Rev. Rul. 70–243, 1970–1 C.B. 107; Rev. Rul. 87–114, 1987–2 C.B. 116; Notice 89–23, 1989–1 C.B. 654;
Rev. Rul. 90–24, 1990–1 C.B. 97; Notice 90–73, 1990–2 C.B. 353; Notice 92–36, 1992–2 C.B. 364; and Announcement 95–48, 1995–23 I.R.B. 13. It is expected that the following guidance
will not be superseded when these regulations are issued in final form: Rev. Rul. 66–254, 1966–2 C.B. 125; Rev. Rul. 68–33, 1968–1 C.B. 175; Rev. Rul 68–58, 1968–1 C.B. 176; Rev.
Rul. 68–116, 1968–1 C.B. 177; Rev. Rul. 68–648, 1968–2 C.B. 49; Rev. Rul. 68–488, 1968–2 C.B. 188; and Rev. Rul. 69–146, 1969–1 C.B. 132. Comments are requested on whether any
guidance items under section 403(b) should be added to or deleted from either of the preceding lists. See the request for comments below under the headingComments and Public Hearing.
3
Rev. Rul. 73–607, 1973–2 C.B. 145 and Rev. Rul. 80–139, 1980–1 C.B. 88.
4
As discussed below (under the headingControlled Group Rules For Tax-Exempt Entities), other guidance that may be reissued includes the controlled group safe harbor rules in paragraph
(V)(B)(2)(b) of Notice 89–23.
December 6, 20049252004–49 I.R.B.

portion that fails to be nonforfeitable are
bifurcated.
Section 403(b)(12) requires a section
403(b) contract to make elective deferrals
available to all employees (the univer-
sal availability rule) and requires other
contributions to satisfy the general nondis-
crimination requirements applicable to
qualified plans. These rules are discussed
further below under the headingSection
403(b) Nondiscrimination and Universal
Availability Rules.
Section 403(b)(1)(E) requires a section
403(b) contract to satisfy the requirements
of section 401(a)(30) relating to limita-
tions on elective deferrals under section
402(g)(1). The proposed regulations pro-
vide that a contract only satisfies this re-
quirement if the contract requires all elec-
tive deferrals for an employee to satisfy
section 402(g)(1), including elective defer-
rals 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 ar-
rangements of the employer that are sub-
ject to the limits of section 402(g). This
rule is the same as the rule for section
401(k) arrangements.
A section 403(b) contract is also re-
quired to provide that it will satisfy the
minimum required distribution require-
ments of section 401(a)(9), the incidental
benefit requirements of section 401(a),
and the rollover distribution rules of sec-
tion 402(c).
The proposed regulations address the
requirement that annual additions to the
contract not exceed the applicable limita-
tions of section 415(c) (treating contribu-
tions as annual additions). In accordance
with the last sentence of section 415(a)(2),
if an excess annual addition is made to
a contract that otherwise satisfies the re-
quirements of section 403(b), then the por-
tion of the contract that includes the ex-
cess will fail to be a section 403(b) contract
(and instead will be a contract to which
section 403(c) applies) and the remaining
portion of the contract that includes the
contribution that is not in excess of the
section 415 limitations is a section 403(b)
contract. This rule under which only the
excess annual addition is subject to section
403(c) does not apply unless, for the year
of the excess and each year thereafter, the
issuer of the contract maintains separate
accounts for the portion that includes the
excess and for the section 403(b) portion,
i.e., the portion that includes the amount
not in excess of the section 415 limitations.
The proposed regulations require that
these conditions for the exclusion be satis-
fied both in form and operation in the sec-
tion 403(b) contract. Because several of
these requirements are based on plan doc-
uments — in particular the requirements
that elective deferrals satisfy a universal
availability rule and that other contribu-
tions satisfy the nondiscrimination rules
applicable to qualified plans — the pro-
posed regulations require that the contract
be maintained pursuant to a plan. For
this purpose, it is intended that the plan
would include all of the material provi-
sions regarding eligibility, benefits, appli-
cable limitations, the contracts available
under the plan, and the time and form un-
der which benefit distributions would be
made. This rule does not require that there
be a single plan document. For exam-
ple, this requirement would be satisfied by
complying with the plan document rules
applicable to qualified plans.
Interaction between Title I of ERISA and
Section 403(b) of the Code
The Treasury Department and the IRS
have consulted with the Department of
Labor concerning the interaction between
Title I of the Employee Retirement Income
Security Act of 1974 (ERISA) and section
403(b) of the Code. The Department of
Labor has advised the Treasury Depart-
ment and the IRS that Title I of ERISA
generally applies to “any plan, fund, or
program...established or maintained by an
employer or by an employee organization,
or by both, to the extent that...such plan,
fund, or program...provides retirement
income to employees, or...results in a de-
ferral of income by employees for periods
extending to the termination of covered
employment or beyond.” ERISA, section
3(2)(A). However, governmental plans
and church plans are generally excluded
from coverage under Title I of ERISA. See
ERISA, section 4(b)(1) and (2). There-
fore, section 403(b) contracts purchased
or provided under a program that is ei-
ther a “governmental plan” under section
3(32) of ERISA or a “church plan” under
section 3(33) of ERISA are not generally
covered under Title I. However, section
403(b) of the Code is also available with
respect to contracts purchased or provided
by employers for employees of a section
501(c)(3) organization, and many pro-
grams for the purchase of section 403(b)
contracts offered bysuch employers are
covered under Title I of ERISA as part of
an “employee pension benefit plan” within
the meaning of section 3(2)(A) of ERISA.
The Department of Labor has promul-
gated a regulation, 29 CFR 2510.3–2(f),
describing circumstances under which an
employer’s program for the purchase of
section 403(b) contracts for its employees,
which is not otherwise excluded from cov-
erage under Title I, will not be considered
to constitute the establishment or main-
tenance of an “employee pension benefit
plan” under Title I of ERISA.
These proposed regulations are gener-
ally limited to the requirements imposed
under section 403(b). In this regard, the
proposed regulations require that a section
403(b) program be maintained pursuant
to a plan, which for this purpose is de-
fined as a written defined contribution plan
which, in both form and operation, satis-
fies the regulatory requirements of section
403(b) and contains all the material terms
and conditions for benefits under the plan.
The Department of Labor has advised the
Treasury Department and the IRS that, al-
though it does not appear that the proposed
regulations would mandate the establish-
ment or maintenance of an employee pen-
sion benefit plan in order to satisfy its re-
quirements, it leaves open the possibility
that an employer may undertake responsi-
bilities that would constitute establishing
and maintaining an ERISA-covered plan.
The Department of Labor has further ad-
vised the Treasury Department and the IRS
that whether the manner in which any par-
ticular employer decides to satisfy partic-
ular responsibilities under these proposed
regulations will cause the employer to be
considered to have established or to main-
tain a plan that is covered under Title I
of ERISA must be analyzed on a case-by-
case basis, applying the criteria set forth
in 29 CFR 2510.3–2(f), including the em-
ployer’s involvement as contemplated by
the plan documents and in operation.
To the extent that these proposed reg-
ulations may raise questions for employ-
ers concerning the scope and application of
the regulation at 29 CFR 2510.3–2(f), the
Treasury Department and the IRS are re-
2004–49 I.R.B.926December 6, 2004

questing comments. See below under the
headingComments and Public Hearing
All employee pension benefit plans
covered under Title I of ERISA, including
plans that involve the purchase of section
403(b) contracts, must satisfy a number
of requirements, including requirements
relating to reporting and disclosure, eli-
gibility, vesting, benefit accrual, advance
notice of contribution reductions, qual-
ified joint and survivor annuities, mini-
mum funding, fiduciary standards, fidelity
bonds, and claims procedures. Authority
to interpret many of the requirements in
Parts2and3ofTitleIofERISA(specif-
ically those relating to eligibility, vesting,
benefit accrual, minimum funding, and
qualified joint and survivor annuities) has
been transferred to the Treasury Depart-
ment and the IRS. See Reorganization
Plan No. 4 of 1978, 43 FR 47713, October
17, 1978. As a result, those section 403(b)
contracts of a section 501(c)(3) organiza-
tion that are part of an employee pension
benefit plan are subject to requirements
parallel to those imposed under sections
401(a)(11) through 401(a)(15), 410, 411,
412, and 417 of the Internal Revenue
Code and the regulations promulgated
thereunder, since regulations and other
guidance issued under those Code sections
are applicable for purposes of the parallel
requirements in ERISA. Further, although
specific references are made to Title I in
these proposed regulations, this does not
imply that other Title I issues are not ap-
plicable.
Comparison with Section 401(k) Elective
Deferrals
Section 1450(a) of SBJPA provides that
the rules applicable to cash or deferred
elections under section 401(k) are to ap-
ply under section 403(b) for purposes of
determining the frequency with which an
employee may enter into a salary reduc-
tion agreement, the salary to which such
an agreement may apply, and the ability to
revoke such an agreement. Based in part
on this provision, and taking into account
the guidance that has been issued since
SBJPA,
5
the proposed regulations would
clarify the extent to which section 403(b)
elective deferrals are like elective defer-
rals under proposed and final rules under
section 401(k). Specifically, the rules are
fundamentally similar with respect to the
frequency with which a deferral election
can be made, changed, or revoked, includ-
ing automatic enrollment (plan provisions
under which elective deferrals are auto-
matically made for employees unless they
elect otherwise), the ability for a deferral
election that has been made in one year
to be carried forward to subsequent peri-
ods until modified, the rule under which ir-
revocable elections are not treated as elec-
tive deferrals, and the requirement that em-
ployees have an annual effective opportu-
nity to make, revoke, or modify a defer-
ral election. The rules are also fundamen-
tally similar with respect to the compensa-
tion with respect to which the election can
be made,e.g., allowing a deferral election
to be made for compensation up to the day
before the compensation is currently avail-
able. Likewise, the proposed regulations
explicitly provide that, for purposes of sec-
tions 402(g) and 403(b), an elective defer-
ral with respect to a section 403(b) contract
is limited to contributions made pursuant
to a cash or deferred election, as defined in
regulations under section 401(k).
These proposed regulations also in-
clude a rule comparable to the anti-condi-
tioning rule at section 401(k)(4). Finally,
the proposed regulations include rules
similar to those for section 401(k) plans
regarding plan limitations to comply with
section 401(a)(30) and to pay out section
403(b) elective deferrals in excess of the
related section 402(g) limitation.
As a result, under the proposed regula-
tions, the three major differences between
the rules applicable to section 403(b) elec-
tive deferrals and the rules applicable to
elective deferrals under section 401(k) are:
•Section 403(b) is limited to certain spe-
cific employers and employees (i.e.,
employees of a State public school,
employees of a section 501(c)(3) or-
ganization, and certain ministers),
whereas section 401(k) is available
to all employers, except a State or
local government or any political sub-
division, agency, or instrumentality
thereof.
•Unlike section 401(k), contributions
under section 403(b) can only be made
to certain funding arrangements,i.e.,
an insurance annuity contract, custo-
dial account that is limited to mutual
fund shares, or church retirement in-
come account, and not to a trust or
custodial account that fails to satisfy
the custodial account rules at section
403(b)(7) or the retirement income
account rules at section 403(b)(9) for
churches.
•A universal availability rule applies
to section 403(b) elective deferrals,
whereas an average deferral percent-
agerule(theADPtest)andaminimum
coverage rule (section 410(b)) apply
with respect to elective deferrals under
section 401(k).
6
Failure to Satisfy Section 403(b)
The regulations clarify that if the re-
quirements of section 403(b) fail to be sat-
isfied with respect to an employer contri-
bution, then the contribution is subject ei-
ther to the rules undersection 403(c) (re-
lating to nonqualified annuities) if the con-
tribution is for an annuity contract issued
by an insurance company, or is subject to
the rules under section 61, 83, or 402(b) if
the contribution is to a custodial account or
retirement income account that fails to sat-
isfy the requirements of section 403(b).
Issues have been raised about the appli-
cation of section 403(b) to tax-exempt en-
tities that have State or local government
features. These proposed regulations do
not attempt to address when an entity is a
State (treating a local government or other
subdivision as a State) and when it is a
section 501(c)(3) organization that is not
aState.
7
Thus, for example, these regula-
tions do not provide guidance on the con-
5
See, for example, Rev. Rul. 2000–35, 2000–2 C.B.138, relating to automatic enrollment in section 403(b) plans.
6
Other differences between the rules applicable toelective deferrals under section 403(b) and elective deferrals under section 401(k) include the following: the consequences of failing to
satisfy the rules of section 403(b) (described below under the headingFailure to satisfy section 403(b)); the definition of compensation (including the five-year rule) at section 403(b)(3); the
special section 403(b) catch-up elective deferral at section 402(g)(7); the section 415 aggregation rules; and the general inapplicability of stock ownership for State entities (and some nonprofit
entities), including the related inapplicability of employee stock ownership plans and the use of stock ownership to determine common control. An additional difference is discussed below,
under the headingSeverance From Employment.
7
Similarly, the proposed regulations do not address the conditions under which a plan is a governmental plan under section 414(d).
December 6, 20049272004–49 I.R.B.

ditions under which a tax-exempt charter
school is, or is not, a State entity.
Basedonthewordingofsection
401(k)(4)(B)(i) and(ii), an entity that
is both a section 501(c)(3) organization
and an instrumentality of a State cannot
have a section 401(k) plan. Under sec-
tions 457(b)(6) and 457(g), an entity that
is both an instrumentality of a State and
a section 501(c)(3) organization can have
an eligible plan under section 457(b) only
if it is funded. However, under section
403(b)(1)(A)(i) and (ii), an entity that is
both an instrumentality of a State and
a section 501(c)(3) organization could
cover any of its employees, regardless of
whether they are performing services for a
public school.
Maximum Contribution Limitations
The exclusion provided under section
403(b) applies only to the extent that all
amounts contributed by the employer for
the purchase of an annuity contract for the
participant do notexceed the applicable
limit under section 415 and, with respect
to section 403(b) elective deferrals, only if
the contract is purchased under a plan that
includes the limits under section 402(g),
including aggregation under all plans of
the employer. The proposed regulations
require a section 403(b) contract to include
this limit on section 403(b) elective defer-
rals, as imposed by section 402(g).
Catch-up Contributions
A section 403(b) contract may provide
for additional catch-up contributions for a
participant who is age 50 by the end of the
year, provided that those age 50 catch-up
contributions do not exceed the catch-up
limit under section 414(v) for the taxable
year (which is $3,000 for 2004). In addi-
tion, an employee of a qualified organiza-
tion who has at least 15 years of service
(disregarding any period during which an
individual is not an employee of the eligi-
ble employer) is entitled to a special sec-
tion 403(b) catch-up limit. Under the spe-
cial section 403(b)catch-up limit, the sec-
tion 402(g) limit is increased by the low-
est of the following three amounts: (i)
$3,000; (ii) the excess of $15,000 over the
total special section 403(b) catch-up elec-
tive deferrals made for the qualified em-
ployee by the qualified organization for
prior taxable years; or (iii) the excess of
(A) $5,000 multiplied by the number of
years of service of the employee with the
qualified organization, over (B) the total
elective deferrals made for the qualified
employee by the qualified organization for
prior taxable years. For this purpose, a
qualified organization is an eligible em-
ployer that is a school, hospital, health and
welfare service agency (including a home
health service agency), or a church-related
organization. In the case of a church-
related organization, all entities that are
in such a church-related organization are
treated as a single qualified organization,
so that years of service and any section
403(b) catch-up elective deferrals previ-
ously made for a qualified employee for
anysuchchurcharetakenintoaccount
for purposes of determining the amount of
section 403(b) catch-up elective deferrals
to which an employee is entitled under any
section 403(b) plan maintained by another
entity in the same church-related organiza-
tion. A health and welfare service agency
is defined as either an organization whose
primary activity is to provide medical care
as defined in section 213(d)(1) (such as a
hospice), or a section 501(c)(3) organiza-
tion whose primary activity is the preven-
tion of cruelty to individuals or animals,
or which provides substantial personal ser-
vices to the needy as part of its primary ac-
tivity (such as a section 501(c)(3) organi-
zation that provides meals to needy indi-
viduals).
The proposed regulations provide that
any catch-up contribution for an employee
who is eligible for both an age 50 catch-up
and the special section 403(b) catch-up
is treated first as a special section 403(b)
catch-up to the extent a special section
403(b) catch-up is permitted, and then
as an amount contributed as an age 50
catch-up (to the extent the age 50 catch-up
amount exceeds the maximum special sec-
tion 403(b) catch-up).
Any contribution made for a participant
to a section 403(b) contract for a taxable
year that exceeds either the section 415
maximum annual contribution limit or the
section 402(g) elective deferral limit con-
stitutes an excess contribution that is in-
cluded in gross income for that taxable
year (or, if later, the taxable year in which
the contract becomes nonforfeitable). The
proposed regulations provide that a section
403(b) contract or the section 403(b) plan
may provide that any excess deferral as a
result of a failure to comply with the sec-
tion 402(g) elective deferral limit for the
taxable year with respect to any section
403(b) elective deferral made for a partici-
pant by the employer will be distributed to
the participant, with allocable net income,
no later than April 15 or otherwise in ac-
cordance with section 402(g).
Determination of Years of Service under
Section 403(b)
For purposes of determining a partici-
pant’s includible compensation and years
of service — used both for the special
section 403(b) catch-up contributions and
foremployercontributionsforformerem-
ployees — an employee’s number of years
of service include each full year during
which the individual is a full-time em-
ployee of the eligible employer plus a frac-
tion of a year for each part of a year during
which the individual is a full-time or part-
time employee of the eligible employer.
A year of service is based on the em-
ployer’s annual work period, not the em-
ployee’s taxable year. Thus, in determin-
ing whether a university professor is em-
ployed full-time, the annual work period
is the school’s academic year. In deter-
mining whether an individual is employed
full-time, the amount of work actually per-
formed is compared with the amount of
work that is normally required of individu-
als performing similar services from which
substantially all of their annual compensa-
tion is derived. An individual is treated as
performing a fraction of a year of service
for each annual work period during which
he or she is a full-time employee for part
of the annual work period or for each an-
nual work period during which he or she is
a part-time employee either for the entire
annual work period or for a part of the an-
nual work period.
In measuring the amount of work of an
individual performing particular services,
the work performed is determined based
on the individual’s hours of service (as de-
fined under section 410(a)(3)(C)), except
that a plan may use a different measure
of work if appropriate under the facts and
circumstances. For example, a plan may
provide for a university professor’s work
to be measured by the number of courses
taught during an annual work period if that
individual’s work assignment is generally
2004–49 I.R.B.928December 6, 2004

based on a specified number of courses to
be taught.
In determining years of service, any pe-
riod during which an individual is not an
employee of the eligible employer is dis-
regarded, except that, for a section 403(b)
contract of an eligible employer that is
a church-related organization, any period
during which an individual is an employee
of that eligible employer and any other el-
igible employer that is within the same
church-related organization with that eli-
gible employer is taken into account on an
aggregated basis. In the case of a part-time
employee or a full-time employee who is
employed for only part of the year, the em-
ployee’s most recent periods of service are
aggregated to determine his or her most re-
cent one-year period of service, as follows:
the employee’s service during the annual
work period for which the last year of
service’s includible compensation is being
determined is taken into account first; then
the employee’s service during the next pre-
ceding annual work period based on whole
months is taken into account; and so forth,
until the employee’s service equals, in the
aggregate, one year of service.
Special Rule for Former Employees
Under section 403(b)(3), a former
employee is deemed to have monthly
includible compensation for the period
through the end of the taxable year of the
employee in which he or she ceases to
be an employee and through the end of
each of the next five taxable years of the
employee. The amount of the monthly
includible compensation is equal to 1/12
of the former employee’s includible com-
pensation during the former employee’s
most recent year of service. Accordingly,
a plan may provide that nonelective em-
ployer contributions are continued for up
to five years for a former employee, up to
thelesserofthedollaramountinsection
415(c)(1)(A) or the former employee’s an-
nual includible compensation based on the
former employee’s compensation during
his or her most recent year of service.
Other Contributions for Former
Employees
The proposed regulations do not ad-
dress the extent, if any, to which the exclu-
sion from gross income provided by sec-
tion 403(b) applies to contributions made
for former employees (e.g.,whetheracon-
tribution may be made for a former em-
ployee if the contribution is with respect
to compensation that would otherwise be
paid for a payroll period that begins after
severance from employment) other than as
provided under the five-year rule at sec-
tion 403(b)(3), described above under the
headingSpecial Rule for Former Employ-
ees. The Treasury Department and the IRS
expect to issue separate guidance on this
issue, potentially addressing this question
with respect to not only section 403(b), but
also sections 401(k), 457(b) (for eligible
governmental plans), and 415(c).
Section 403(b) Nondiscrimination and
Universal Availability Rules
Nondiscrimination
Section 403(b)(12)(A)(i) requires that
employer contributions and employee af-
ter-tax contributions made under a section
403(b) contract satisfy a specified series
of requirements (the nondiscrimination
requirements) in the same manner as a
qualified plan under section 401(a). These
proposed regulations do not adopt the
good faith reasonable standard of No-
tice 89–23 for purposes of satisfying the
nondiscrimination requirements of section
403(b)(12)(A)(i). These nondiscrimina-
tion requirements include rules relating to
nondiscrimination in contributions, ben-
efits, and coverage (sections 401(a)(4)
and 410(b)), a limitation on the amount
of compensation that can be taken into
account (section 401(a)(17)), and the av-
erage contribution percentage rules of
section 401(m) (relating to matching and
after-tax contributions). The nondiscrim-
ination requirements are generally tested
using compensation as defined in section
414(s) and are applied on an aggregated
basis taking into account all plans of the
employer. See the discussion below under
the headingControlled Group Rules For
Tax-Exempt Entities.
The nondiscrimination requirements do
not apply to section 403(b) elective defer-
rals. In addition, the only nondiscrimina-
tion requirement that applies to a govern-
mental plan, within the meaning of section
414(d), is the limitation on compensation
(section 401(a)(17)).
Universal Availability
Under section 403(b)(12)(A)(ii), a uni-
versal availability requirement applies un-
der which all employees of the eligible
employer must be permitted to elect to
have section 403(b) elective deferrals con-
tributed on their behalf if any employee of
the eligible employer may elect to have the
organization make section 403(b) elective
deferrals. Under the proposed regulations,
the universal availability requirement is
not satisfied unless the contributions are
made pursuant to a plan and the plan per-
mits elective deferrals that satisfy the uni-
versal availability requirement. The pro-
posed regulations generally provide that
the universal availability requirement ap-
plies separately to each common law en-
tity,i.e., to each section 501(c)(3) organi-
zation, or, in the case of a section 403(b)
plan that covers the employees of more
than one State entity, to each entity that
is not part of a common payroll. The
proposed regulations allow an employer
that historically has treated one or more of
its various geographically distinct units as
separate for employee benefit purposes to
treat each unit as a separate organization
if the unit is operated independently on a
day-to-day basis.
The proposed regulations include the
statutory categories that are exceptions to
the universal availability rule, and provide
that, if any employee listed in any exclud-
able category has the right to have section
403(b) elective deferrals made on his or
her behalf, then no employees in that cat-
egory may be excluded. The categories
generally are: employees who are eligi-
ble to participate in an eligible governmen-
tal plan under section 457(b) which per-
mits contributions or deferrals at the elec-
tion of the employee or a plan of the em-
ployer offering a qualified cash or deferred
election under section 401(k); employees
who are non-resident aliens; employees
who are students performing services de-
scribed in section 3121(b)(10); and em-
ployees who normally work fewer than
20 hours per week. Additionally, Notice
89–23 included transition rules for certain
other exclusions that are not in the statute:
employees who make a one-time election
to participate in a governmental plan in-
stead of a section 403(b) plan; employees
covered by a collective bargaining agree-
ment; visiting professors for up to one year
December 6, 20049292004–49 I.R.B.

under certain circumstances; and employ-
ees affiliated with a religious order who
have taken a vow of poverty. The proposed
regulations do not adopt these transition
rules. See the reference to these exclusions
below under the headingComments and
Public Hearing.
The nondiscrimination and the univer-
sal availability requirements do not apply
to a section 403(b) contract purchased by a
church, which is specially defined for this
purpose, and generally does not include a
university, hospital, or nursing home.
The nondiscrimination and universal
availability requirements are in addition
to other applicable legal requirements.
Specifically, these requirements do not re-
flect the requirements of Title I of ERISA
that may apply with respect to a section
403(b) plan, such as the ERISA vesting
requirements. Another example is that,
while employees who normally work
fewerthan20hoursperweekmaybe
excluded under the universal availability
rule, employers who maintain plans that
are subject to Title I of ERISA should
be aware that Title I of ERISA includes
limitations on the conditions under which
employees can be excluded from a plan
on account of not working full time and
that these limitationswould generally not
permit an exclusion for employees who
normally work fewer than 20 hours per
week. See section 202(a)(1) of ERISA
and regulations under section 410(a) of
the Code (which interpret section 202 of
ERISA).
Timing of Distributions and Benefits
The proposed regulations reflect the
statutory rules regarding when distribu-
tions can be made from a section 403(b)
contract. Thus, amounts held in a cus-
todial contract attributable to employer
contributions (that are not section 403(b)
elective deferrals) may not be paid to a
participant before the participant has a
severance from employment, becomes
disabled (within the meaning of section
72(m)(7)), or attains age 59
1
/2. This rule
also applies to amounts transferred out
of a custodial account (i.e.,toanannuity
contract or retirement income account),
including earnings thereon. In addition,
distributions of amounts attributable to
section 403(b) elective deferrals may
not be paid to a participant earlier than
when the participant has a severance from
employment, has a hardship, becomes
disabled (within the meaning of section
72(m)(7)), or attains age 59
1
/2.Hardshipis
generally defined under regulations issued
under section 401(k).
The proposed regulations would reflect
the requirements of section 402(f) relat-
ing to the written explanation requirements
for distributions that qualify as eligible
rollover distributions, including conform-
ing the timing rule to the rule for qualified
plans.
Where the distribution restrictions do
not apply, a section 403(b) contract is per-
mitted to distribute retirement benefits to
the participant after severance from em-
ployment or upon the prior occurrence of
an event, such as after a fixed number of
years, the attainment of a stated age, or dis-
ability. The proposed regulations include
a number of exceptions to the timing re-
strictions,e.g., the rule for elective defer-
rals does not apply to distributions of sec-
tion 403(b) elective deferrals (not includ-
ing earnings thereon) that were contributed
before January 1, 1989.
Severance From Employment
The proposed regulations define sever-
ance from employment in a manner that is
generally the same as the proposed regu-
lations under section 401(k),
8
but provide
that a severance from employment oc-
curs on any date on which the employee
ceases to be employed by an eligible em-
ployer that maintains the section 403(b)
plan. Thus, a severance from employment
would occur when an employee ceases to
be employed by an eligible employer even
though the employee may continue to be
employed by an entity that is part of the
same controlled group but that is not an
eligible employer, or on any date on which
the employee works in a capacity that is
not employment with an eligible employer.
Examples of the situations that constitute
a severance from employment include:
an employee transferring from a sec-
tion 501(c)(3) organization to a for-profit
subsidiary of the section 501(c)(3) or-
ganization; an employee ceasing to work
for a public school, but continuing to be
employed by the same State; and an in-
dividual employed as a minister for an
entity that is neither a State nor a section
501(c)(3) organization ceasing to perform
services as a minister, but continuing to be
employed by the same entity.
Section 401(a)(9)
The proposed regulations include rules
similar to those in the existing regulations
relating to the minimum distribution re-
quirements of section 401(a)(9), but with
some minor changes (for example, omit-
ting the special rules for 5-percent own-
ers). Thus, section 403(b) contracts must
satisfy the incidental benefit rules. Exist-
ing revenue rulings provide guidance with
respect to the application of the incidental
benefit requirements to permissible nonre-
tirement benefits such as life, accident, or
health benefits.
9
Loans
The proposed regulations include rules
reflecting that loans can be made to partic-
ipants from a section 403(b) contract.
QDROs
The proposed regulations include lim-
ited rules relating to qualified domestic
relations orders (QDROs) under section
414(p). Section 414(p)(9) provides that
the QDRO rules only apply to plans that
are subject to the anti-alienation provisions
of section 401(a)(13), except that section
414(p)(9) also provides that, except to the
extent set forth in regulations — there
are currently no regulations under section
414(p) — the section 414(p) QDRO rules
apply to a section 403(b) contract. These
proposed section 403(b) regulations clar-
ify that the section 414(p) QDRO rules
apply to section 403(b) contracts for pur-
poses of applying section 403(b).
Taxation of Distributions and Benefits
From a Section 403(b) Contract
The proposed regulations include a
number of rules regarding the taxation
of distributions and benefits from sec-
8
See proposed §1.401(k)–1(d)(2), REG–108639–99, 2003–2 C.B. 431 [68 FR 42476] (July 17, 2003).
9
See, for example, Rev. Rul. 61–121, 1961–2 C.B. 65; Rev. Rul. 68–304, 1968–1 C.B. 179; Rev. Rul. 72–240, 1972–1 C.B. 108; Rev. Rul. 72–241, 1972–1 C.B. 108; Rev. Rul. 73–239,
1973–1 C.B. 201; and Rev. Rul. 74–115, 1974–1 C.B. 100. (see §601.601(d)(2)(ii)(b) of this chapter).
2004–49 I.R.B.930December 6, 2004

tion 403(b) contracts, including the statu-
tory provision that only amounts actually
distributed from a section 403(b) contract
are generally includible in the gross in-
come of the recipient for the year in which
distributed under section 72, relating to
annuities. The regulations also reflect the
rule that any payment that constitutes an
eligible rollover distribution is not taxed
in the year distributed to the extent the
payment is directly rolled over or trans-
ferred to an eligible retirement plan. The
payor must withhold 20 percent Fed-
eral income tax, however, if an eligible
rollover distribution is not rolled over in a
direct rollover. Another provision requires
the payor to give proper written notice
to the section 403(b) participant or ben-
eficiary concerning the eligible rollover
distribution provision. Notice 2002–3,
2002–1 C.B. 289, provides a sample of
the safe-harbor notice that the payor may
furnish to satisfy this requirement.
Funding of Section 403(b) Arrangements
Annuity Contracts
As described above, section 403(b)
only applies to contributions made to
certain funding arrangements, namely:
amounts held in an annuity contract, in
a custodial account that is treated as an
annuity contract under section 403(b)(7),
or in a church retirement income account
that is treated as an annuity contract under
section 403(b)(9). The proposed regula-
tions require that contributions to a section
403(b) plan be transferred to the insurance
company issuing the annuity contract (or
the entity holding assets of any custodial or
retirement income account that is treated
as an annuity contract) within a period
that is not longer thanis reasonable for
the proper administration of the plan, such
as transferring elective deferrals within
15 business days following the month in
which these amounts would otherwise
have been paid to the participant.
The proposed regulations provide that,
except where a custodial or retirement in-
come account is treated as an annuity con-
tract, an annuity contract means a con-
tract that is issued by an insurance com-
pany qualified to issue annuities in a State
and that includes payment in the form of
an annuity, but does not include a contract
that is a life insurancecontract, as defined
in section 7702, an endowment contract,
a heath or accident insurance contract, or
a property, casualty, or liability insurance
contract. The regulations include a spe-
cial transition rule relating to life insurance
contracts issued before the effective date.
Rev. Rul. 67–361, 1967–2 C.B. 153,
and Rev. Rul. 67–387, 1967–2 C.B.
153, provided for certain State plans to
be treated as qualifying as annuities un-
der section 403(b). Rev. Rul. 82–102,
1982–1 C.B. 62, revoked this interpreta-
tion (in connection with the 1974 enact-
ment of section 403(b)(7) which allowed
custodial accounts), butprovides section
7805(b) relief for arrangements estab-
lished in reliance on these rulings,i.e.,
for arrangements established on or before
May 17, 1982. The proposed regulations
contemplate that the section 7805(b) relief
provided by these rulings would be contin-
ued. This relief would be limited to State
section 403(b) plans established on or be-
fore May 17, 1982 satisfying either of the
following requirements: (i) benefits under
the contract are provided from a separately
funded retirement reserve that is subject to
supervision of the State insurance depart-
ment or (ii) benefits under the contract are
provided from a fund that is separate from
the fund used to provide statutory benefits
payable under a State retirement system
and that is part of a State teachers retire-
ment system to purchase benefits that are
unrelated to the basic benefits provided
under the retirement system, and the death
benefit provided under the contract cannot
at any time exceed the larger of the reserve
or the contribution made for the employee.
Custodial Accounts
The proposed regulations define a cus-
todial account as a plan, or a separate
account under a plan, in which an amount
attributable to section 403(b) contribu-
tions (or amounts rolled over to a section
403(b) contract) is held by a bank or a
person who satisfies the conditions in
section 401(f)(2), if amounts held in the
account are invested in stock of a regu-
lated investment company (as defined in
section 851(a) relating to mutual funds),
the special restrictions on distributions
with respect to a custodial account are
satisfied, the assets held in the account
cannot be used for, or diverted to, pur-
poses other than for the exclusive benefit
of plan participants or their beneficiaries,
and the account is not part of a retirement
income account, as described below. This
requirement limiting investments to mu-
tual funds is not satisfied if the account
includes any assets other than stock of a
regulated investment company.
Special Rules for Church Plans
Retirement Income Accounts
The proposed regulations include
a number of special rules for church
plans. Under section 403(b)(9), a retire-
ment income account for employees of a
church-related organization is treated as
an annuity contract forpurposesofsection
403(b) and these regulations. Under the
proposed regulations, the rules for a re-
tirement income account are based largely
on the legislative history to TEFRA. The
proposed regulations define a retirement
income account as a defined contribution
program established or maintained by a
church-related organization under which
(i) there is separate accounting for the re-
tirement income account’s interest in the
underlying assets (i.e.,itmustbepossible
at all times to determine the retirement
income account’s interest in the under-
lying assets and distinguish that interest
from any interest that is not part of the re-
tirement income account), (ii) investment
performance is based on gains and losses
on those assets, and (iii) the assets held in
the account cannot be used for, or diverted
to, purposes other than for the exclusive
benefit of plan participants or their benefi-
ciaries. For this purpose, assets are treated
as diverted to the employer if the employer
borrows assets from the account. A retire-
ment income account must be maintained
pursuant to a program which is a plan and
the plan document must state (or otherwise
evidence in a similarly clear manner) the
intent to constitute a retirement income
account.
If any asset of a retirement income ac-
count is owned or used by a participant or
beneficiary, then that ownership or use is
treated as a distribution to that participant
or beneficiary. The proposed regulations
provide that a retirement income account
that is treated as an annuity contract is not
a custodial account (even if it is invested in
stock of a regulated investment company).
December 6, 20049312004–49 I.R.B.

A life annuity can generally only be
provided from an individual account by the
purchase of an insurance annuity contract.
However, in light of the special rules ap-
plicable to church retirement income ac-
counts, the proposed regulations permit a
life annuity to be paid from such an ac-
count if certain conditions are satisfied.
The conditions are that the amount of the
distribution form have an actuarial present
value, at the annuity starting date, that is
equal to the participant’s or beneficiary’s
accumulated benefit, based on reasonable
actuarial assumptions, including assump-
tions regarding interest and mortality, and
that the plan sponsor guarantee benefits in
theeventthatapaymentisduethatex-
ceeds the participant’s or beneficiary’s ac-
cumulated benefit.
Commingling Assets
Under these proposed regulations, both
custodial accounts andretirement income
accounts would be subject to an exclu-
sive benefit requirement similar to the ex-
clusive benefit requirement applicable to
qualified plans. Section 403(b)(7)(B) pro-
vides for a custodial account to be treated
as a tax exempt organization.
When these regulations are issued as
final regulations, to the extent permitted
by the Commissioner in future guidance,
assets held under a custodial account or a
retirement income account may be pooled
with trust assets held under qualified plans.
Controlled Group Rules For Tax-Exempt
Entities
The proposed regulations include con-
trolled group rules under section 414(c)
for entities that are tax-exempt under
section 501(a). Under these rules, the
employer for a plan maintained by a sec-
tion 501(c)(3) organization (or any other
tax-exempt organization under section
501(a)) includes not only the organiza-
tion whose employees participate in the
plan, but also any other exempt organi-
zation that is under common control with
such organization, based on 80 percent
of the directors or trustees being either
representatives of or directly or indirectly
controlled by an exempt organization. The
proposed regulations include an anti-abuse
rule and would also allow tax exempt or-
ganizations to choose to be aggregated if
they maintain a single plan covering one
or more employees from each organization
and the organizations regularly coordinate
their day to day exempt activities. For a
section 501(c)(3) organization that makes
contributions to a section 403(b) contract,
these rules would be generally relevant
for purposes of the nondiscrimination re-
quirements, as well as the section 415
contribution limitations, the special sec-
tion 403(b) catch-up contributions, and the
section 401(a)(9) minimum distribution
rules.
These controlled group rules for tax-ex-
empt entities generally do not apply to cer-
tain church entities. Comments are re-
quested below under the headingComment
and Public Hearingon whether these rules
should be extended to such church entities.
The proposed regulations do not in-
clude controlled group rules for public
schools. As noted above (under the head-
ingOverview), it is anticipated that, when
these regulations are issued as final regu-
lations, guidance may be issued providing
controlled group safe harbors for public
schools taking into account the existing
safe harbors in Notice 89–23.
Miscellaneous Provisions
The proposed regulations include a
number of rules that address the circum-
stances under which a section 403(b) plan
may be terminated or assets may be ex-
changed or transferred.
Plan Termination
The proposed regulations, if adopted as
final regulations, would not only permit an
employer to amend its section 403(b) plan
to eliminate future contributions for exist-
ing participants, but would allow plan pro-
visions that permit plan termination with a
resulting distribution of accumulated ben-
efits. In general, the distribution of accu-
mulated benefits would be permitted only
if the employer (taking into account all en-
tities that are treated as the employer un-
der section 414 on the date of the termi-
nation) does not make contributions to an-
other section 403(b) contract that is not
part of the plan (based generally on con-
tributions made to a section 403(b) con-
tract during the 12 months before and af-
ter the date of plan termination). In order
for a section 403(b) plan to be considered
terminated, all accumulated benefits under
the plan must be distributed to all partici-
pants and beneficiaries as soon as admin-
istratively practicable after termination of
the plan. A distribution includes delivery
of a fully paid individual insurance annu-
ity contract. Eligible rollover distributions
would not be subject to current income in-
clusion if rolled over to an eligible retire-
ment plan.
The proposed regulations prohibit an
employer that ceases to be an eligible em-
ployer from making any further contribu-
tions to the section 403(b) contract for sub-
sequent periods. In this event, the contract
can be held under a frozen plan or the plan
could be terminated in accordance with the
rules regarding plan termination.
Exchanges and Transfers
Under certain conditions, the pro-
posed regulations permit the following
exchanges or transfers:
•A section 403(b) contract is permitted
to be exchanged for another section
403(b) contract held under the same
section 403(b) plan if the following
conditions are satisfied: (1) the plan
provides for the exchange, (2) the
participant or beneficiary has an ac-
cumulated benefit immediately after
the exchange at least equal to the ac-
cumulated benefit of that participant
or beneficiary immediately before the
exchange (taking into account the ac-
cumulated benefit of that participant or
beneficiary under both section 403(b)
contracts immediately before the ex-
change), and (3) the contract received
in the exchange provides that, to the
extent a contract that is exchanged is
subject to any section 403(b) distribu-
tion restrictions, the contract received
in the exchange imposes restrictions
on distributions to the participant or
beneficiary that are not less stringent
than those imposed on the contract
being exchanged.
•A section 403(b) contract is permitted
to be transferred to another section
403(b) plan (i.e., the section 403(b)
contracts held thereunder, including
any assets held in a custodial account
or retirement income account that are
treated as section 403(b) contracts)
2004–49 I.R.B.932December 6, 2004

if the following conditions are satis-
fied: (1) the participant or beneficiary
whose assets are being transferred is an
employee of the employer providing
the receiving plan, (2) the transferor
plan provides for transfers, (3) the
receiving plan provides for the re-
ceipt of transfers, (4) the participant
or beneficiary whose assets are being
transferred has an accumulated benefit
immediately after the transfer at least
equal to the accumulated benefit with
respect to that participant or benefi-
ciary immediately before the transfer,
and (5) the receiving plan provides
that, to the extent any amount trans-
ferred is subject to any section 403(b)
distribution restrictions, the receiving
plan imposes restrictions on distribu-
tions to the participant or beneficiary
whose assets are being transferred
that are not less stringent than those
imposed on the transferor plan. In
addition, if a plan-to-plan transfer
does not constitute a complete transfer
of the participant’s or beneficiary’s
interest in the section 403(b) plan,
then the transferee plan must treat the
amount transferred as a continuation
of apro rataportion of the partici-
pant’s or beneficiary’s interest in the
transferor section 403(b) plan (e.g.,a
pro rataportion of the participant’s or
beneficiary’s interest in any after-tax
employee contributions).
•A section 403(b) plan may provide for
the transfer of its assets to a qualified
plan under section 401(a) to purchase
permissive service credit under a de-
fined benefit governmental plan or to
make a repayment to a defined benefit
governmental plan.
However, neither a qualified plan nor an
eligible plan under section 457 may trans-
fer assets to a section 403(b) plan, and a
section 403(b) plan may not accept such a
transfer. In addition, a section 403(b) con-
tract may not be exchanged for an annuity
contract that is not a section 403(b) con-
tract. Neither a plan-to-plan transfer nor a
contract exchange permitted under the pro-
posed regulations is treated as a distribu-
tion for purposes of the section 403(b) dis-
tribution restrictions (so that such a trans-
fer or exchange may be made before sev-
erance from employment or another distri-
bution event).
Additional plan-to-plan transfer rules
may apply in the event that a plan-to-plan
transfer is made to or from a section 403(b)
arrangement that is subject to Title I of
ERISA. See section 208 of ERISA and reg-
ulations under section 414(l) of the Inter-
nal Revenue Code (which are the regula-
tions interpreting section 208 of ERISA).
Defined Benefit Plans
These proposed regulations generally
require a section 403(b) plan to be a de-
fined contribution plan. This requirement
would not apply to certain church plans.
Specifically, section 251(e)(5) of TEFRA
permits a church arrangement in effect on
September 3, 1982 (the date TEFRA was
enacted) to not be treated as failing to sat-
isfy the exclusion allowance limitations of
section 403(b)(2) merely because it is a
defined benefit plan and these regulations
would allow such a plan to be continued.
Any other defined benefit plan in existence
on the effective date of these regulations
that has taken the position, based on a rea-
sonable interpretation of the statute, that it
satisfies section 403(b) would not be sub-
ject to the requirement in these regulations
that the plan be a defined contribution plan
for pre-effective date accruals, and such a
plan might seek to take the position that
it satisfies the section 401 qualified plan
rules for subsequent accruals (assuming it
satisfies those rules with respect to those
accruals).
Section 3121(a)(5)(D)
These proposed regulations also in-
clude proposed amendments to regulations
under section 3121(a)(5)(D), defining
salary reduction agreement for purposes
of the Federal Insurance Contributions Act
(FICA). The text of the proposed amend-
ments is the same as that of temporary
regulations being issued under section
3121(a)(5)(D) in this same issue of the
Bulletin. The proposed regulations under
section 3121(a)(5)(D) would be applicable
on November 16, 2004.
Proposed Effective date
These regulations (other than the pro-
posed amendments to regulations under
section 3121(a)(5)(D)) are proposed to be
generally applicable for taxable years be-
ginning after December 31, 2005. How-
ever, there are certain transition rules. Un-
der one transition rule, for a section 403(b)
contract maintained pursuant to a collec-
tive bargaining agreement that is ratified
and in effect when the final regulations are
issued, the regulations would not apply un-
til the collective bargaining agreement ter-
minates (determined without regard to any
extension thereof after the date of publica-
tion of final regulations). Under another
transition rule, for a section 403(b) con-
tract maintained by a church-related organ-
ization for which the authority to amend
the contract is held by a church convention
(within the meaning of section 414(e)), the
regulations would not apply before the ear-
lier of (i) January 1, 2007, or (ii) 60 days
following the earliest church convention
that occurs after the date of publication of
final regulations. These proposed regula-
tions cannot be relied upon until adopted
in final form.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
It is hereby certified that the collection
of information in these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based upon the determina-
tion that respondents will need to spend
minimal time (an average of
1
/2hour per
year) giving the statutorily required no-
tice to departing employees. Therefore,
a Regulatory Flexibility Analysis is not
required under the Regulatory Flexibility
Act (5 U.S.C. chapter 6).
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
December 6, 20049332004–49 I.R.B.

(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. Comments are requested
on all aspects of the proposed regulations.
In addition, comments are specifically re-
quested on the clarity of the proposed reg-
ulations and how they can be revised to
be more easily understood. All comments
will be available for public inspection and
copying.
Comments are also requested on the fol-
lowing:
•As indicated above, the IRS expects to
obsolete a number of revenue rulings,
notices, and other guidance when these
regulations are issued in final form, in-
cluding guidance that is now outdated
as a result of changes in the law, and
guidance that will become outdated by
final regulations. Other previously is-
sued guidance is expected to continue
in effect. Comments are requested as
to whether any previously issued guid-
ance should be added or deleted from
either list, with respect to the scope
of this obsolescence, and also with re-
spect to whether there are any aspects
that should be preserved in the guid-
ance that is expected to be obsolete.
•The Treasury Department and the IRS
are requesting comments describing
the issues and suggesting methods
of clarifying the interaction between
the employer activities required un-
der these proposed regulations for an
arrangement to satisfy section 403(b)
and the employer conduct that will
give rise to the establishment and
maintenance of an employee pension
benefit plan covered under Title I of
ERISA. The Treasury Department and
the IRS will forward a copy of the
comments on this issue to the Depart-
ment of Labor.
•These proposed regulations authorize
the Commissioner to issue rules to
determine the amount of contributions
for a participant in a defined benefit
plan under section 402(b) (relating to
the tax treatment of contributions to
nonqualified plans). Comments are
requested on the methodology and
assumptions that should be used for
this purpose, including specifically
whether the methodology and assump-
tions should be the same as those
currently in the regulations under sec-
tion 403(b), whether revisions should
be made to reflect the possibility that
a nonqualified plan might include an
early retirement subsidy, and whether
the assumptions currently applicable
under the section 403(b) regulations
should be updated (for example, to
match the assumptions in Rev. Proc.
2004–37, 2004–26 I.R.B. 1099, relat-
ing to determining the extent to which
certain pension payments made to a
nonresident alien are not U.S. source
income).
•With respect to includible compen-
sation, comments are requested on
whether the Treasury Department and
IRS have the authority to permit 403(b)
plans to use compensation, as defined
in section 415(c)(3) without regard
tosection415(c)(3)(E),inlieuofthe
definition of includible compensation
under section 403(b)(3) and, if so,
whether this should be done.
•With respect to the universal availabil-
ity rule, comments are requested on
whether the requirement should apply
separately to employees covered by a
collective bargaining unit. Comments
are also requested on whether plans
that exclude any of the following addi-
tional types of employees (as has been
permitted under Notice 89–23) should
be permitted to continue to exclude
these types of employees for at least
some period of time: employees who
make a one-time election to partici-
pate in a governmental plan described
in section 414(d) instead of a section
403(b) plan; professors who are pro-
viding services on a temporary basis
to another public school for up to one
year and for whom section 403(b) con-
tributions are being made at a rate no
greater than the rate each such pro-
fessor would receive under the sec-
tion 403(b) plan of the original public
school; employees who are affiliated
with a religious order and who have
taken a vow of poverty where the re-
ligious order provides for the support
of such employees in their retirement;
and employees who are covered by a
collective bargaining agreement.
•The controlled group rules in these
proposed regulations for tax-exempt
entities generally do not apply to cer-
tain church entities. Comments are re-
quested on whether these rules should
be extended to such church entities.
A public hearing has been scheduled
for February 15, 2005, at 10 a.m. in the
IRS Auditorium (7
th
Floor), Internal Rev-
enue Service Building, 1111 Constitution
Avenue, NW, Washington DC. All visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the immediate entrance area at the Consti-
tution Avenue entrance more than 30 min-
utes before the hearing starts. For infor-
mation about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFORMA-
TION CONTACT” section of this pream-
ble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit elec-
tronic or written comments and an out-
line of the topics to be discussed and the
time to be devoted to each topic (a signed
original and eight (8) copies) by January
25, 2005. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receivingoutlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal authors of these reg-
ulations are R. Lisa Mojiri-Azad and
John Tolleris, Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities), IRS.
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 31 are
proposed to be amended as follows:
PART 1—INCOME TAXES
2004–49 I.R.B.934December 6, 2004

Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for §1.403(b)–3 and adding entries in nu-
merical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
§1.403(b)–6 also issued under 26
U.S.C. 403(b)(10). * * *
§1.414(c)–5 also issued under 26
U.S.C. 414(b), (c), and (o). * * *
Par. 2. Section 1.402(b)–1 is amended
by revising paragraphs (a)(2) and (b)(2)(ii)
to read as follows:
§1.402(b)–1 Treatment of beneficiary of a
trust not exempt under section 501(a).
(a) * * *
(2)Determination of amount of em-
ployer contributions. If, for an employee,
the actual amount of employer contribu-
tions referred to in paragraph (a)(1) of
this section for any taxable year of the
employee is not determinable or for any
other reason is not known, such amount
shall be the amount applicable under rules
prescribed by the Commissioner in rev-
enue rulings, notices, or other guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b) of this chapter).
(b) * * *
(2) * * *
(ii) If a separateaccount in a trust for
the benefit of two or more employees is not
maintained for eachemployee, the value
of the employee’s interest in such trust is
determined in accordance with rules pre-
scribed by the Commissioner under the au-
thority in paragraph (a)(2) of this section.
*****
Par. 3. Section 1.402(g)(3)–1 is added
to read as follows:
§1.402(g)(3)–1 Employer contributions to
purchase a section 403(b) contract under
a salary reduction agreement.
(a)General rule. With respect to an an-
nuity contract under section 403(b), except
as provided in paragraph (b) of this section,
an elective deferral means an employer
contribution to purchase an annuity con-
tract under section 403(b) under a salary
reduction agreement within the meaning of
§31.3121(a)(5)–2(a) of this chapter.
(b)Special rule. Notwithstanding para-
graph (a) of this section, for purposes of
section 402(g)(3)(C), an elective deferral
only includes a contribution that is made
pursuant to a cash or deferred election (as
defined at §1.401(k)–1(a)(3)). Thus, for
purposes of section 402(g)(3)(C), an elec-
tive deferral does not include a contribu-
tion that is made pursuant to an employee’s
one-time irrevocable election made on or
before the employee’s first becoming eli-
gible to participate under the employer’s
plan or a contribution made as a condi-
tion of employment that reduces the em-
ployee’s compensation.
(c)Effective date. This section is appli-
cable for taxable years beginning after De-
cember 31, 2005.
Par. 4. Section 1.403(b)–0 is added to
read as follows:
§1.403(b)–0 Taxability under an
annuity purchased by a section 501(c)(3)
organization or a public school.
§1.403(b)–1 General overview of taxabil-
ity under an annuity contract purchased by
a section 501(c)(3) organization or a pub-
lic school.
§1.403(b)–2 Definitions.
§1.403(b)–3 Exclusion for contributions to
purchase section 403(b) contracts.
§1.403(b)–4 Contribution limitations.
§1.403(b)–5 Nondiscrimination rules.
§1.403(b)–6 Timing of distributions and
benefits.
§1. 403(b)–7 Taxation of distributions and
benefits.
§1.403(b)–8 Funding.
§1.403(b)–9 Special rules for church
plans.
§1.403(b)–10 Miscellaneous provisions.
§1.403(b)–11 Effective date.
Par.5.Sections 1.403(b)–1,
1.403(b)–2 and 1.403(b)–3 are revised
to read as follows:
§1.403(b)–1 General overview of
taxability under an annuity contract
purchased by a section 501(c)(3)
organization or a public school.
Section 403(b) and §§1.403(b)–2
through 1.403(b)–10 provide rules for
the Federal income tax treatment of an
annuity purchased for an employee by an
employer that is either a tax-exempt entity
under section 501(c)(3) (relating to certain
religious, charitable, scientific, or other
types of organizations) or a public school,
or for a minister described in section
414(e)(5)(A). See section 403(a) (relating
to qualified annuities) for rules regarding
the taxation of an annuity purchased under
a qualified annuity plan that meets the
requirements of section 404(a)(2), and see
section 403(c) (relating to nonqualified
annuities) for rules regarding the taxation
of other types of annuities.
§1.403(b)–2 Definitions.
(a) This section sets forth the defini-
tions that are applicable for purposes of
§§1.403(b)–1 through 1.403(b)–11.
(1)Accumulated benefitmeans the to-
tal benefit to which a participant or ben-
eficiary is entitled under a section 403(b)
contract, including all contributions made
to the contract and all earnings thereon.
(2)Annuity contractmeans a contract
that is issued by an insurance company
qualified to issue annuities in a State and
that includes payment in the form of an
annuity. See §1.401(f)–1(d)(2) and (e)
for the definition of an annuity, and see
§1.403(b)–8(c)(3) for a special rule for cer-
tain State plans. See also §§1.403(b)–8(d)
and 1.403(b)–9(a) for additional rules re-
garding the treatment of custodial accounts
and retirement income accounts as annuity
contracts.
(3)Beneficiarymeans a person who is
entitled to benefits in respect of a partic-
ipant following the participant’s death or
an alternate payee pursuant to a qualified
domestic relations order, as described in
§1.403(b)–10(c).
(4)Catch-upamount orcatch-uplim-
itation for a participant for a taxable
year means a section 403(b) elective de-
ferral permitted under section 414(v)
(as described in §1.403(b)–4(c)(2)),
or section 402(g)(7) (as described in
§1.403(b)–4(c)(3)).
(5)Churchmeans a church as defined
in section 3121(w)(3)(A) and a qualified
church-controlled organization as defined
in section 3121(w)(3)(B).
(6)Church-related organizationmeans
a church or convention or association
of churches as described in section
414(e)(3)(A).
(7)Elective deferralmeans an elec-
tive deferral under §1.402(g)(3)–1 (with
respect to an employer contribution to
a section 403(b) contract) and any other
amount that constitutes an elective defer-
ral under section 402(g)(3).
(8) (i)Eligible employermeans—
December 6, 20049352004–49 I.R.B.

(A) A State, but only with respect to an
employee of the State performing services
for a public school;
(B) A section 501(c)(3) organization
with respect to any employee of the sec-
tion 501(c)(3) organization;
(C) Any employer of a minister de-
scribed in section 414(e)(5)(A), but only
with respect to the minister; or
(D) A minister described in section
414(e)(5)(A), but only with respect to a
retirement income account established for
the minister.
(ii) An entity is not an eligible employer
under paragraph (a)(8)(i)(A) of this sec-
tion if it treats itself as not being a State
for any other purpose of the Internal Rev-
enue Code, and a subsidiary or other affil-
iate of an eligible employer is not an eligi-
ble employer under paragraph (a)(8)(i) of
this section if the subsidiary or other affil-
iate is not an entity described in paragraph
(a)(8)(i) of this section.
(9)Employeemeans a common-law
employee performing services for the
employer, and does not include a former
employee or an independent contrac-
tor. Subject to any rules in §§1.403(b)–1
through 1.403(b)–11that are specifically
applicable to ministers, an employee also
includes a minister described in section
414(e)(5)(A) when performing services in
the exercise of his or her ministry.
(10)Employee performing services for
a public schoolmeans an employee per-
forming services as an employee for a pub-
lic school of a State. This definition is not
applicable unless the employee’s compen-
sation for performing services for a pub-
lic school is paid by the State. Further, a
person occupying an elective or appointive
public office is not an employee perform-
ing services for a public school unless such
office is one to which an individual is
elected or appointed only if the individual
has received training, or is experienced, in
the field of education. The termpublic of-
ficeincludes any elective or appointive of-
fice of a State.
(11)Includible compensationmeans
the employee’s compensation received
from an eligible employer that is in-
cludible in the participant’s gross income
for Federal income tax purposes (com-
puted without regard to section 911) for
the most recent period that is a year of
service. Includible compensation for a
minister who is self-employed means the
minister’s earned income as defined in
section 401(c)(2) (computed without re-
gard to section 911) for the most recent
period that is a year of service. Includible
compensation does not include any com-
pensation received during a period when
the employer is not an eligible employer.
Includible compensation also includes
any elective deferral and any amount
contributed or deferred by the eligible
employer at the election of the employee
that is not includible in the gross income
of the employee by reason of section 125,
132(f)(4), or 457. The amount of includi-
ble compensation is determined without
regard to any community property laws.
See §1.403(b)–4(d) for a special rule re-
garding former employees.
(12)Participantmeans an employee
for whom a section 403(b) contract is cur-
rently being purchased, or an employee
or former employee for whom a sec-
tion 403(b) contract has previously been
purchased and who has not received a dis-
tribution of his or her entire benefit under
the contract.
(13)Planmeans a plan as described in
§1.403(b)–3(b)(3).
(14)Public schoolmeans a State-spon-
sored educational organization described
in section 170(b)(1)(A)(ii) (relating to edu-
cational organizations that normally main-
tain a regular faculty and curriculum and
normally have a regularly enrolled body of
pupils or students in attendance at the place
where educational activities are regularly
carried on).
(15)Retirement income accountmeans
a defined contribution program estab-
lished or maintained by a church-related
organization to provide benefits under
section 403(b) for its employees or their
beneficiaries as described in §1.403(b)–9.
(16)Section 403(b) contract; sec-
tion 403(b) plan—(i)Section 403(b)
contractmeans a contract described in
§1.403(b)–3. If for any taxable year an
employer contributes to more than one
section 403(b) contract for a participant or
beneficiary, then, under section 403(b)(5),
all such contracts are treated as one con-
tract for purposes of section 403(b) and
§§1.403(b)–2 through 1.403(b)–10. See
also §1.403(b)–3(b)(1).
(ii)Section 403(b) planmeans the plan
of the employer under which the section
403(b) contracts for its employees are
maintained.
(17)Section 403(b) elective defer-
ralmeans an elective deferral that is
an employer contribution to a section
403(b) contract for an employee. See
§1.403(b)–5(b) for additional rules with
respect to a section 403(b) elective defer-
ral.
(18)Section 501(c)(3) organization
means an organization that is described
in section 501(c)(3) (relating to certain
religious, charitable, scientific, or other
types of organizations) and exempt from
tax under section 501(a).
(19)Severance from employment
means that the employee ceases to be
employed by the employer maintaining
the plan. See regulations under section
401(k) for additional guidance concerning
severance from employment. See also
§1.403(b)–6(h) for a special rule under
which severance from employment is de-
termined by reference to employment with
the eligible employer.
(20)Statemeans a State, a political
subdivision of a State, or any agency or
instrumentality of a State. For this pur-
pose, the District of Columbia is treated
as a State, as provided under section
7701(a)(10). In addition, for purposes of
determining whether an individual is an
employee performing services for a pub-
lic school, an Indian tribal government
is treated as a State, as provided under
section 7871(a)(6)(B). See also section
1450(b) of the Small Business Job Protec-
tion Act of 1996 (110 Stat. 1755, 1814)
for special rules treating certain contracts
purchased in a plan year beginning before
January 1, 1995, that include contributions
by an Indian tribal government as section
403(b) contracts, whether or not those
contributions are for employees perform-
ing services for a public school.
(21)Years of servicemeans each full
year during which an individual is a full-
time employee of an eligible employer,
plus fractional credit for each part of a
year during which the individual is either
a full-time employee of an eligible em-
ployer for a part of the year or a part-time
employee of an eligible employer. See
§1.403(b)–4(e) for rules for determining
years of service.
(b) [Reserved].
2004–49 I.R.B.936December 6, 2004

§1.403(b)–3 Exclusion for contributions
to purchase section 403(b) contracts.
(a)Exclusion for section 403(b) con-
tracts. Amounts contributed by an eligi-
ble employer for the purchase of an annu-
ity contract for an employee are excluded
from the gross income of the employee
under section 403(b) only if each of the
requirements in paragraphs (a)(1) through
(9) of this section is satisfied. In addi-
tion, amounts contributed by an eligible
employer for the purchase of an annuity
contract for an employee pursuant to a cash
or deferred election are not includible in
an employee’s gross income at the time the
cash would have been includible in the em-
ployee’s gross income(but for the cash or
deferred election) if each of the require-
ments in paragraphs (a)(1) through (9) of
this section is satisfied.
(1)Not a contract issued under qual-
ified plan or eligible governmental plan.
The contract is not purchased under a
qualified plan (under section 401(a) or
404(a)(2)) or an eligible governmental
plan under section 457(b).
(2)Nonforfeitability. The rights of the
employee under the contract (disregard-
ing rights to future premiums) are non-
forfeitable. An employee’s rights under
a contract fail to be nonforfeitable unless
the participant for whom the contract is
purchased has at all times a fully vested
and nonforfeitable right (as defined under
§1.411(a)–4) to all benefits provided under
the contract. See paragraph (c) of this sec-
tion for additional rules regarding the non-
forfeitability requirement of this paragraph
(a)(2).
(3)Nondiscrimination and universal
availability. In the case of a contract pur-
chased by an eligible employer other than
a church, the contract is purchased under
a plan that satisfies section 403(b)(12)
(relating to nondiscrimination and uni-
versal availability requirements). See
§1.403(b)–5.
(4)Limitations on elective deferrals.In
the case of an elective deferral, the contract
satisfies section 401(a)(30) (relating to
limitations on elective deferrals). A con-
tract does not satisfy section 401(a)(30) as
required under this paragraph (a)(4) unless
the contract requires all elective deferrals
for an employee to not exceed the limits of
section 402(g)(1), including elective de-
ferrals 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.
(5)Nontransferability. The contract is
not transferable. This paragraph (a)(5)
does not apply to a contract issued before
January 1, 1963. See section 401(g).
(6)Minimum required distributions.
The contract satisfies the requirements of
section401(a)(9)(relatingtominimumre-
quired distributions).See §1.403(b)–6(e).
(7)Rollover distributions.Thecon-
tract provides that, if the distributee of
an eligible rollover distribution elects to
have the distribution paid directly to an el-
igible retirement plan, as defined in sec-
tion 402(c)(8)(B), and specifies the eligi-
ble retirement plan to which the distribu-
tion is to be paid, then the distribution will
be paid to that eligible retirement plan in a
direct rollover. See §1.403(b)–7(b)(2).
(8)Limitation on incidental benefits.
The contract satisfies the incidental ben-
efit requirements of section 401(a). See
§1.403(b)–6(g).
(9)Maximum annual additions.The
annual additions to the contract do not
exceed the applicable limitations of sec-
tion 415(c) (treating contributions and
other additions as annual additions).
See paragraph (b) of this section and
§1.403(b)–4(b).
(b)Application of requirements—(1)
Aggregation of contracts. In accordance
with section 403(b)(5), for purposes of de-
termining whether this section is satisfied,
all section 403(b) contracts purchased for
an individual by an employer are treated
as purchased under a single contract. Ad-
ditional aggregation rules apply under
section 402(g) for purposes of satisfying
paragraph (a)(4) of this section and un-
der section 415 for purposes of satisfying
paragraph (a)(9) of this section.
(2)Disaggregation for excess annual
additions. In accordance with the last sen-
tence of section 415(a)(2), if an excess an-
nual 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 403(b) contract (and in-
stead is a contract to which section 403(c)
applies, as further described in paragraph
(c)(1) of this section) and the remaining
portion of the contract is a section 403(b)
contract. This paragraph (b)(2) does not
apply unless, for the year of the excess and
each year thereafter, the issuer of the con-
tract maintains separate accounts for each
such portion. Thus, the entire contract fails
to be a section 403(b) contract if an excess
annual addition is made and a separate ac-
count is not maintained with respect to the
excess.
(3)Plan in form and operation. A con-
tract does not satisfy paragraph (a) 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 require-
ments of this section and §§1.403(b)–4
through 1.403(b)–10. For purposes of
this section and §§1.403(b)–4 through
1.403(b)–10, the plan must contain all the
material terms and conditions for eligi-
bility, benefits, applicable limitations, the
contracts available under the plan, and the
time and form under which benefit dis-
tributions would be made. For purposes
of this section and §§1.403(b)–4 through
1.403(b)–10, a plan may contain certain
optional features not required under sec-
tion 403(b), such as hardship withdrawal
distributions, loans, plan-to-plan or annu-
ity contract-to-annuitycontract 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 rel-
evant requirements under section 403(b),
this section, and §§1.403(b)–4 through
1.403(b)–10. This paragraph (b)(3) ap-
plies to contributions to an annuity con-
tract by a church only if the annuity is part
of a retirement income account, as defined
in §1.403(b)–9.
(4)Exclusion limited to former employ-
ees—(i)General rule. Except as provided
in paragraph (b)(4)(ii) of this section and in
§1.403(b)–4(d), the exclusion from gross
income provided by section 403(b) does
not apply to contributions made for former
employees. For this purpose, a contribu-
tion is not made for a former employee if
the contribution is with respect to compen-
sation that would otherwise be paid for a
payroll period that begins before severance
from employment.
(ii)Exceptions. [Reserved].
(c)Effect of failure—(1)General rule.
See section 403(c) (relating to nonqual-
ified annuities) for the treatment of a
nonqualified annuity contract issued by an
insurance company that is not a section
December 6, 20049372004–49 I.R.B.

403(b) contract. See section 61, 83, or
402(b) for the treatment of a custodial
account or retirement income account that
fails to be treated as a section 403(b) con-
tract.
(2)Failure to satisfy nonforfeitability
requirement. If an annuity contract issued
by an insurance company would qualify as
a section 403(b) contract but for the fail-
ure to satisfy the nonforfeitability require-
ment of paragraph (a)(2) of this section,
then the contract is treated as a contract to
which section 403(c) applies. However, on
or after the date on which the participant’s
interest in that contract becomes nonfor-
feitable, the contract may be treated as a
section 403(b) contract if no election has
been made under section 83(b) with re-
spect to the contract, the participant’s in-
terest in the contract has been subject to a
substantial risk of forfeiture before becom-
ing nonforfeitable, and the contract has at
all times satisfied the requirements of para-
graph (a) of this section other than the
nonforfeitability requirement of paragraph
(a)(2) of this section. Thus, for example,
for the current year and each prior year,
no contribution can have been made to the
contract that wouldcause the contract to
fail to be a section 403(b) contract as a re-
sult of contributions exceeding the limita-
tions of section 415 (except to the extent
permitted under paragraph (b)(2) of this
section) or to fail to satisfy the nondiscrim-
ination rules described in §1.403(b)–5.
(3)Treatment of partial vesting and
separate accounts. For purposes of ap-
plying this paragraph (c), if a participant’s
interest in a contract becomes nonfor-
feitable to any extent in a year but the
participant’s entire interest in the contract
is not nonforfeitable, then the portion that
is nonforfeitable and the portion that fails
to be nonforfeitable are each treated as
separate contracts. In addition, for pur-
poses of applying this paragraph (c), if a
contribution is made to an annuity con-
tract in excess of the limitations of section
415(c) and the excess is maintained in a
separate account, then the portion of the
contract that includes the excess contribu-
tions account and the remainder are each
treated as separate contracts. Thus, if an
annuity contract that includes an excess
contributions account changes from for-
feitable to nonforfeitable during a year,
then the portion that is not attributable to
the excess contributions account consti-
tutes a section 403(b) contract (assuming
it otherwise satisfies the requirements to
be a section 403(b) contract) and is not
included in gross income, and the portion
that is attributable to the excess contribu-
tions account is included in gross income
in accordance with section 403(c).
Par. 5a. Sections 1.403(b)–4 through
1.403(b)–11 are added to read as follows:
§1.403(b)–4 Contribution limitations.
(a)Treatment of contributions in excess
of limitations. The exclusion provided
under §1.403(b)–3(a) applies to a partic-
ipant only if the amounts contributed by
the employer for the purchase of an an-
nuity contract for the participant do not
exceed the applicablelimit under sections
415 and 402(g), as described in this sec-
tion. Under §1.403(b)–3(a)(4), a section
403(b) contract is required to include the
limits on elective deferrals imposed by
section 402(g), as described in paragraph
(c) of this section. See paragraph (f) of
this section for special rules concerning
correction of excess contributions and
deferrals. The limits imposed by section
415, §1.403(b)–3(a)(9), section 402(g),
§1.403(b)–3(a)(4),andthissectiondonot
apply with respect to rollover contribu-
tions made to a section 403(b) contract, as
described in §1.403(b)–10(d), but after-tax
contributions are taken into account under
section 415, §1.403(b)–3(a)(9), and this
section.
(b)Maximum annual contribution—(1)
General rule. In accordance with section
415(a)(2) and §1.403(b)–3(b)(2), the con-
tributions for any participant under a sec-
tion 403(b) contract (i.e., employer non-
elective contributions (including matching
contributions), section 403(b) elective de-
ferrals, and after-tax contributions) are
not permitted to exceed the limitations
imposedbysection415. Forthispur-
pose, contributions made for a participant
are aggregated to the extent applicable
under sections 414(b), (c), (m), (n), and
(o). For purposes of section 415(a)(2)
and §1.403(b)–1 through §1.403(b)–11, a
contribution means any annual addition,
as defined in section 415(c).
(2)Special rules. See section 415(k)(4)
for a special rule under which contri-
butions to section 403(b) contracts are
generally aggregated with contributions
under other arrangements in applying
section 415. For purposes of applying
section 415(c)(1)(B) with respect to a sec-
tion 403(b) contract, except as provided
in section 415(c)(3)(C), a participant’s
includible compensation (as defined in
§1.403(b)–2) is substituted for the par-
ticipant’s compensation, as described in
section 415(c)(3)(E). Any age 50 catch-up
contributions under paragraph (c)(2) of
this section are disregarded in applying
section 415.
(c)Section 403(b) elective defer-
rals—(1)Basic limit under section
402(g)(1). In accordance with section
402(g)(1)(A), the section 403(b) elective
deferrals for any individual are included in
the individual’s gross income to the extent
the amount of such deferrals, plus all other
elective deferrals for the individual, for
the taxable year exceeds the applicable
dollar amount under section 402(g)(1)(B).
The applicable annual dollar amount un-
der section 402(g)(1)(B) is: $11,000 for
2002; $12,000 for 2003; $13,000 for 2004;
$14,000 for 2005; and $15,000 for 2006
and thereafter. After 2006, the $15,000
amount is adjusted for cost-of-living in
the manner described insection 402(g)(4).
See §1.403(b)–5(b) for a universal avail-
ability rule that applies if any employee is
permitted to have any section 403(b) elec-
tive deferrals made on his or her behalf.
(2)Age 50 catch-up—(i)In general.
In accordance with section 414(v) and the
regulations thereunder, a section 403(b)
contract may provide for additional
catch-up contributions for a participant
who is age 50 by the end of the year,
provided that such age 50 catch-up contri-
butions do not exceed the catch-up limit
under section 414(v)(2) for the taxable
year. The maximum amount of additional
age 50 catch-up contributions for a taxable
year under section 414(v) is as follows:
$1,000 for 2002; $2,000 for 2003; $3,000
for 2004; $4,000 for 2005; and $5,000
for 2006 and thereafter. After 2006, the
$5,000 amount is adjusted for cost-of-liv-
inginthemannerdescribedinsection
414(v)(2)(C). For additional requirements,
see regulations under section 414(v).
(ii)Coordination with special section
403(b) catch-up. In accordance with sec-
tions 414(v)(6)(A)(ii) and 402(g)(7)(A),
the age 50 catch-up described in this para-
graph (c)(2) may apply for any taxable
year in which a participant also qualifies
2004–49 I.R.B.938December 6, 2004

for the special section 403(b) catch-up
under paragraph (c)(3) of this section.
(3)Special section 403(b) catch-up for
certain organizations—(i)Amount of the
special section 403(b) catch-up.Inthe
case of a qualified employee of a qualified
organization for whom the basic section
403(b) elective deferrals for any year are
not less than the applicable dollar amount
under section 402(g)(1)(B), the section
403(b) elective deferral limitation of sec-
tion 402(g)(1) for the taxable year of the
qualified employee is increased by the
least of—
(A) $3,000;
(B) The excess of—
(1) $15,000; over
(2) The total special section 403(b)
catch-up elective deferrals made for the
qualified employee by the qualified organ-
ization for prior years; or
(C) The excess of—
(1) $5,000 multiplied by the number of
years of service of the employee with the
qualified organization; over
(2) The total elective deferrals (as de-
fined at §1.403(b)–2) made for the qual-
ified employee by the qualified organiza-
tion for prior years.
(ii)Qualified organization.(A)For
purposes of this paragraph (c)(3),qualified
organizationmeans an eligible employer
that is either—
(1) An educational organization de-
scribed in section 170(b)(1)(A)(ii);
(2) A hospital;
(3) A health and welfare service agency
(including a home health service agency);
or
(4) A church-related organization. All
entities that are in a church-related organ-
ization are treated as a single qualified
organization (so that years of service
and any special section 403(b) catch-up
elective deferrals previously made for a
qualified employee for a church within
a church-related organization are taken
into account for purposes of applying this
paragraph (c)(3) to the employee with re-
spect to any other entity within the same
church-related organization).
(B) For purposes of this paragraph
(c)(3)(ii), ahealth and welfare service
agencymeans either an organization
whose primary activity is to provide
services that constitute medical care as
defined in section 213(d)(1) (such as a hos-
pice) or a section 501(c)(3) organization
whose primary activity is the prevention of
cruelty to individuals or animals, or which
provides substantial personal services to
the needy as part of its primary activity
(such as a section 501(c)(3) organization
that provides meals to needy individuals).
(iii)Qualified employee. For pur-
posesofthisparagraph(c)(3),qualified
employeemeans an employee who has
completed at least 15 years of service (as
defined under paragraph (e) of this sec-
tion) taking into account only employment
with the qualified organization.
(iv)Coordination with age 50 catch-up.
In accordance with sections 402(g)(1)(C)
and 402(g)(7), any catch-up amount con-
tributed by an employee who is eligible
for both an age 50 catch-up and a special
section 403(b) catch-up is treated first as
an amount contributed as a special section
403(b) catch-up to the extent a special
section 403(b) catch-up is permitted, and
then as an amount contributed as an age
50 catch-up (to the extent the catch-up
amount exceeds the maximum special
section 403(b) catch-up after taking into
account sections 402(g) and 415(c), this
paragraph (c)(3), and any limitations on
the special section 403(b) catch-up that
are imposed by the terms of the plan).
(4)Examples. The provisions of this
paragraph (c) are illustrated by the follow-
ing examples:
Example 1.(i)Facts illustrating application of
the basic dollar limit. Participant B, who is 45, is eli-
gible to participate in a State university section 403(b)
plan in 2006. B is not a qualified employee, as de-
fined in paragraph (c)(3)(iii) of this section. The plan
permits section 403(b) elective deferrals, but no other
employer contributions are made under the plan. The
plan provides limitations on section 403(b) elective
deferrals up to the maximum permitted under para-
graphs (c)(1) and (3) of this section and the additional
age 50 catch-up amount described in paragraph (c)(2)
of this section. For 2006, B will receive includible
compensation of $42,000 from the eligible employer.
B desires to elect to have the maximum section 403(b)
elective deferral possible contributed in 2006. For
2006, the basic dollar limit for section 403(b) elec-
tive deferrals under paragraph (c)(1) of this section is
$15,000 and the additional dollar amount permitted
under the age 50 catch-up is $5,000.
(ii)Conclusion. B is not eligible for the age 50
catch-up in 2006 because B is 45 in 2006, or the spe-
cial section 403(b) catch-up under paragraph (c)(3)
of this section because B is not a qualified employee.
Accordingly, the maximum section 403(b) elective
deferral that B may elect for 2006 is $15,000.
Example 2.(i)Facts illustrating application of
the includible compensation limitation. The facts are
thesameasinExample 1, except B’s includible com-
pensation is $14,000.
(ii)Conclusion. Under section 415(c), contribu-
tions may not exceed 100 percent of includible com-
pensation. Accordingly, the maximum section 403(b)
elective deferral that B may elect for 2006 is $14,000.
Example 3.(i)Facts illustrating application of
the age 50 catch-up. Participant C, who is 55, is eli-
gible to participate in a State university section 403(b)
plan in 2006. The plan permits section 403(b) elec-
tive deferrals, but no other employer contributions are
made under the plan. The plan provides limitations
on section 403(b) elective deferrals up to the maxi-
mum permitted under paragraphs (c)(1) and (3) of this
section and the additional age 50 catch-up amount de-
scribed in paragraph (c)(2) of this section. For 2006,
C will receive includible compensation of $48,000
from the eligible employer. C desires to elect to have
the maximum section 403(b) elective deferral pos-
sible contributed in 2006. For 2006, the basic dol-
lar limit for section 403(b) elective deferrals under
paragraph (c)(1) of this section is $15,000 and the
additional dollar amount permitted under the age 50
catch-up is $5,000. C does not have 15 years of ser-
vice and thus is not a qualified employee, as defined
in paragraph (c)(3)(iii) of this section.
(ii)Conclusion. C is eligible for the age 50
catch-up in 2006 because C is 55 in 2006. C is
not eligible for the special section 403(b) catch-up
under paragraph (c)(3) of this section because C is
not a qualified employee (as defined in paragraph
(c)(3)(iii) of this section). Accordingly, the max-
imum section 403(b) elective deferral that C may
elect for 2006 is $20,000 ($15,000 plus $5,000).
Example 4.(i)Facts illustrating application of
both the age 50 and the special section 403(b) catch-
up. The facts are the same as inExample 3, except
that C is a qualified employee for purposes of the
special section 403(b) catch-up provisions in para-
graph (c)(3) of this section. For 2006, the maximum
additional section 403(b) elective deferral for which
C qualifies under the special section 403(b) catch-up
under paragraph (c)(3) of this section is $3,000.
(ii)Conclusion. The maximum section 403(b)
elective deferrals that C may elect for 2006 is
$23,000. This is the sum of the basic limit on sec-
tion 403(b) elective deferrals under paragraph (c)(1)
of this section equal to $15,000, plus the $3,000
additional special section 403(b) catch-up amount
for which C qualifies under paragraph (c)(3) of this
section, plus the additional age 50 catch-up amount
of $5,000.
Example 5.(i)Facts illustrating calculation of
years of service with a predecessor organization for
purposes of the special section 403(b) catch-up.The
facts are the same as inExample 4, except that C has
previously made special section 403(b) catch-up de-
ferrals to a section 403(b) plan maintained by a hos-
pital which was acquired by C’s current eligible em-
ployer which is a hospital.
(ii)Conclusion. The special section 403(b)
catch-up amount for which C qualifies under para-
graph (c)(3) of this section must be calculated taking
into account C’s prior years of service and special
section 403(b) catch-up deferrals with the prede-
cessor hospital if and only if C did not have any
severance from service inconnection with the acqui-
sition.
Example 6.(i)Facts illustrating application of
the age 50 catch-up and the section 415(c) dollar lim-
itation. The facts are the same as inExample 4, except
December 6, 20049392004–49 I.R.B.

that the employer makes a nonelective contribution
for each employee equal to 20 percent of C’s com-
pensation (which is $48,000). Thus, the employer
makes a nonelective contribution for C for 2006 equal
to $9,600. The plan provides that a participant is not
permitted to make section 403(b) elective deferrals to
the extent the section 403(b) elective deferrals would
result in contributions in excess of the maximum per-
mitted under section 415 and provides that contribu-
tions are reduced in the following order: the special
section 403(b) catch-up elective deferrals under para-
graph (c)(3) of this section are reduced first; the age
50 catch-up elective deferrals under paragraph (c)(2)
of this section are reduced second; and then the ba-
sic section 403(b) elective deferrals under paragraph
(c)(1) of this section are reduced. For 2006, it is as-
sumed that the applicable dollar limit under section
415(c)(1)(A) is $44,000.
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $23,000.
This is the sum of the basic limit on section 403(b)
elective deferrals under paragraph (c)(1) of this sec-
tion equal to $15,000, plus the $3,000 additional spe-
cial section 403(b) catch-up amount for which C qual-
ifies under paragraph (c)(3) of this section, plus the
additional age 50 catch-up amount of $5,000. The
limit in paragraph (b) of this section would not be
exceeded because the sum of the $9,600 nonelective
contribution and the $23,000 section 403(b) elective
deferrals does not exceed the lesser of $49,000 (which
is the sum of $44,000 plus the $5,000 additional age
50 catch-up amount) or $53,000 (which is the sum of
C’s includible compensation for 2006 ($48,000) plus
the $5,000 additional age 50 catch-up amount).
Example 7.(i)Facts further illustrating applica-
tion of the age 50 catch-up and the section 415(c) dol-
lar limitation. The facts are the same as inExample
6, except that C’s includible compensation for 2006 is
$56,000 and the plan provides for a nonelective con-
tribution equal to 50 percent of includible compen-
sation, so that the employer nonelective contribution
for C for 2006 is $28,000 (50 percent of $56,000).
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $21,000.
A section 403(b) elective deferral in excess of this
amount would exceed the sum of the limit in section
415(c)(1)(A) plus the additional age 50 catch-up
amount, because the sum of the employer’s nonelec-
tive contribution of $28,000 plus a section 403(b)
elective deferral in excess of $21,000 would exceed
$49,000 (the sum of the $44,000 limit in section
415(c)(1)(A) plus the $5,000 additional age 50
catch-up amount).
Example 8.(i)Facts further illustrating applica-
tion of the age 50 catch-up and the section 415(c) dol-
lar limitation. The facts are the same as inExample
7, except that the plan provides for a nonelective con-
tribution for C equal to $44,000 (which is the limit in
section 415(c)(1)(A)).
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $5,000.
A section 403(b) elective deferral in excess of this
amount would exceed the sum of the limit in sec-
tion 415(c)(1)(A) plus the additional age 50 catch-up
amount ($5,000), because the sum of the employer’s
nonelective contribution of $44,000 plus a section
403(b) elective deferral in excess of $5,000 would
exceed $49,000 (the sum of the $44,000 limit in sec-
tion 415(c)(1)(A) plus the $5,000 additional age 50
catch-up amount).
Example 9.(i)Facts illustrating application of
the age 50 catch-up and the section 415(c) includible
compensation limitation. The facts are the same as in
Example 7, except that C’s includible compensation
for 2006 is $28,000, so that the employer nonelective
contribution for C for 2006 is $14,000 (50 percent of
$28,000).
(ii)Conclusion. The maximum section 403(b)
elective deferral that C may elect for 2006 is $19,000.
A section 403(b) elective deferral in excess of this
amount would exceed the sum of the limit in section
415(c)(1)(B) plus the additional age 50 catch-up
amount, because C’s includible compensation is
$28,000 and the sum of the employer’s nonelective
contribution of $14,000 plus a section 403(b) elective
deferral in excess of $19,000 would exceed $33,000
(which is the sum of 100 percent of C’s includible
compensation plus the $5,000 additional age 50
catch-up amount).
Example 10.(i)Facts illustrating that section
403(b) elective deferrals cannot exceed compensa-
tion otherwise payable. Employee D is age 60, has in-
cludible compensation of $14,000, and wishes to con-
tribute section 403(b) elective deferrals of $20,000
for the year. No nonelective contributions are made
for Employee D.
(ii)Conclusion. The maximum limit on section
403(b) elective deferrals for a participant with com-
pensation less than the maximum dollar limit in sec-
tion 415(c) is 100 percent of includible compensation,
plus the $5,000 additional age 50 catch-up amount.
However, because a contribution is a section 403(b)
elective deferral only if it is a result of a compensa-
tion reduction, D cannot make section 403(b) elective
deferrals in excess of D’s actual compensation.
Example 11.(i)Facts illustrating calculation of
the special section 403(b) catch-up. For 2006, em-
ployee E, who is age 50, is eligible to participate in a
section 403(b) plan of hospital H, which is a section
501(c)(3) organization. H’s plan permits section
403(b) elective deferralsand provides for an em-
ployer contribution of 10 percent of a participant’s
compensation with that employer for the taxable
year. The plan provides limitations on section 403(b)
elective deferrals up to the maximum permitted un-
der paragraphs (c)(1), (2), and (3) of this section.
For 2006, E’s includible compensation is $50,000. E
wishes to elect to have the maximum section 403(b)
elective deferral possible contributed in 2006. E has
previously made $62,000 of section 403(b) elective
deferrals under the plan, but has never made an
election for a special section 403(b) catch-up elective
deferral. For 2006, the basic dollar limit for section
403(b) elective deferrals under paragraph (c)(1) of
this section is $15,000, the additional dollar amount
permitted under the age 50 catch-up is $5,000, E’s
employer will make a nonelective contribution of
$5,000 (10% of $50,000 compensation), and E is
a qualified employee of a qualified employer as
defined in paragraph (c)(3) of this section.
(ii)Conclusion. The maximum section 403(b)
elective deferrals that E may elect for 2006 is
$23,000. This is the sum of the basic limit on section
403(b) elective deferrals for 2006 under paragraph
(c)(1) of this section equal to $15,000, plus the
$3,000 maximum additional special section 403(b)
catch-up amount for which D qualifies in 2006 under
paragraph (c)(3) of this section, plus the additional
age 50 catch-up amount of $5,000. The limitation
on the additional special section 403(b) catch-up
amount is not less than $3,000 because the limitation
at paragraph (c)(3)(i)(B) of this section is $15,000
($15,000 minus zero) and the limitation at paragraph
(c)(3)(i)(C) of this section is $13,000 ($5,000 times
15, minus $62,000 of total deferrals in prior years).
Example 12.(i)Facts illustrating calculation
of the special section 403(b) catch-up in the next
calendar year. The facts are the same as inExample
11, except that, for 2007, E has includible compen-
sation of $60,000. For 2007, E now has previously
made $85,000 of section 403(b) elective deferrals
($62,000 deferred before 2006, plus the $15,000 in
basic section 403(b) elective deferrals in 2006, the
$3,000 maximum additional special section 403(b)
catch-up amount in 2006, plus the $5,000 age 50
catch-up amount in 2006). However, the $5,000 age
50 catch-up amount deferred in 2006 is disregarded
for purposes of applying the limitation at paragraph
(c)(3)(i)(B) of this section to determine the special
section 403(b) catch-up amount. Thus, for 2007,
only $80,000 of section 403(b) elective deferrals are
taken into account in applying the limitation at para-
graph (c)(3)(i)(B) of this section. For 2007, the basic
dollar limit for section 403(b) elective deferrals un-
der paragraph (c)(1) of this section is assumed to be
$16,000, the additional dollar amount permitted un-
der the age 50 catch-up is assumed to be $5,000, and
E’s employer contributes $6,000 (10% of $60,000
compensation) as a non-elective contribution.
(ii)Conclusion. The maximum section 403(b)
elective deferral that D may elect for 2007 is $21,000.
This is the sum of the basic limit on section 403(b)
elective deferrals under paragraph (c)(1) of this
section equal to $16,000, plus the additional age 50
catch-up amount of $5,000. E is not entitled to any
additional special section 403(b) catch-up amount
for 2007 under paragraph (c)(3) due to the limitation
at paragraph (c)(3)(i)(C) of this section (16 times
$5,000 equals $80,000, minus D’s total prior section
403(b) elective deferrals of $80,000 equals zero).
(d)Employer contributions for former
employees—(1)Includible compensation
deemed to continue for nonelective contri-
butions. For purposes of applying para-
graph (b) of this section, a former em-
ployee is deemed to have monthly includi-
ble compensation for the period through
the end of the taxable year of the employee
in which he or she ceases to be an em-
ployee and through the end of each of the
next five taxable years. The amount of the
monthly includible compensation is equal
to one twelfth of the former employee’s in-
cludible compensation during the former
employee’s most recent year of service.
Accordingly, nonelective employer contri-
butions for a former employee must not ex-
ceed the limitation of section 415(c)(1) up
to the lesser of the dollar amount in section
415(c)(1)(A) or the former employee’s an-
nual includible compensation based on the
former employee’s average monthly com-
2004–49 I.R.B.940December 6, 2004

pensation during his or her most recent
year of service.
(2)Examples. The provisions of para-
graph (d)(1) of this section are illustrated
by the following examples:
Example 1.(i)Facts. College M is a section
501(c)(3) organization operated on the basis of a June
30 fiscal year that maintains a section 403(b) plan for
its employees. In 2004, M amends the plan to pro-
vide for a temporary early retirement incentive un-
der which the college will make a nonelective contri-
bution for any participant who satisfies certain mini-
mum age and service conditions and who retires be-
fore June 30, 2006. The contribution will equal 110
percent of the participant’s rate of pay for one year
and will be payable over a period ending no later than
the end of the fifth fiscal year that begins after retire-
ment. It is assumed for purposes of thisExample 1
that, in accordance with § 1.401(a)(4)–10(b) and un-
der the facts and circumstances, the post-retirement
contributions made for participants who satisfy the
minimum age and service conditions and retire be-
fore June 30, 2006 do not discriminate in favor of for-
mer employees who are highly compensated employ-
ees. Employee A retires under the early retirement
incentive on March 12, 2006, and A’s annual includi-
ble compensation for the period from March 1, 2005,
through February 28, 2006 (which is A’s most recent
one year of service), is $30,000. The applicable dol-
lar limit under section 415(c)(1)(A) is assumed to be
$44,000 for 2006 and $45,000 for 2007. The college
contributes $30,000 for A for 2006 and $3,000 for A
for 2007 (totaling $33,000 or 110 percent of $30,000).
No other contributions are made to a section 403(b)
contract for A for those years.
(ii)Conclusion. The contributions made for A do
not exceed A’s includible compensation for 2006 or
2007.
Example 2.(i)Facts. College N is a section
501(c)(3) organization that maintains a section 403(b)
plan for its employees. The plan provides for N to
make monthly nonelective contributions equal to 20
percent of the monthly includible compensation for
each eligible employee. In addition, the plan provides
for contributions to continue for 5 years following the
retirement of any employee after age 64 and com-
pletion of at least 20 years of service (based on the
employee’s average annual rate of base salary in the
preceding 3 calendar years ended before the date of
retirement). It is assumed for purposes of thisExam-
ple 2that, in accordance with § 1.401(a)(4)–10(b) and
under the facts and circumstances, the post-retirement
contributions made for participants who satisfy the
minimum age and service conditions do not discrim-
inate in favor of former employees who are highly
compensated employees. Employee B retires on July
1, 2006, at age 64 after completion of 20 or more
years of service. At that date, B’s annual includible
compensation for the most recently ended fiscal year
of N is $72,000 and B’s average monthly rate of base
salary for 2003 through 2005 is $5,000. N contributes
$1,200 per month (20 percent of 1/12th of $72,000)
from January of 2006 through June of 2006 and con-
tributes $1,000 (20 percent of $5,000) per month for
B from July of 2006 through June of 2011. The ap-
plicable dollar limit under section 415(c)(1)(A) is as-
sumed to be at least $44,000 for 2006 through 2011.
No other contributions are made to a section 403(b)
contract for B for those years.
(ii)Conclusion. The contributions made for B do
not exceed B’s includible compensation for any of the
years from 2006 through 2010.
(3)Disabled employees. See also sec-
tion 415(c)(3)(C) which sets forth a spe-
cial rule under which compensation may
be treated as continuing for purposes of
section 415 for certain former employees
who are disabled.
(e)Special rules for determining years
of service—(1)In general. For purposes
of determining a participant’s includible
compensation under paragraph (b)(2) of
this section and a participant’s years of ser-
vice under paragraphs (c)(3) (special sec-
tion 403(b) catch-up for qualified employ-
ees of certain organizations) and (d) (em-
ployer contributions for former employ-
ees) of this section, an employee’s number
of years of service depend on whether the
employee has a full year during which the
individual is a full-time employee of the el-
igible employer, and any fraction of a year
for each part of a year during which the
individual is a full-time or part-time em-
ployee of the eligible employer. An indi-
vidual’s number of years of service equals
the aggregate of the annual work periods
during which the individual is employed
by the eligible employer.
(2)Work period. A year of service is
based on the employer’s annual work pe-
riod, not the employee’s taxable year. For
example, in determining whether a univer-
sity professor is employed full time, the an-
nual work period is the school’s academic
year. However, in no case may an em-
ployee accumulate more than one year of
service in a twelve-month period.
(3)Service with more than one eligible
employer—(i)General rule. With respect
to any section 403(b) contract of an eligi-
ble employer, except as provided in para-
graph (e)(3)(ii) of this section, any period
during which an individual is not an em-
ployee of that eligible employer is disre-
garded for purposes of this paragraph (e).
(ii)Special rule for church employ-
ees. With respect to any section 403(b)
contract of an eligible employer that is a
church-related organization, any period
during which an individual is an employee
of that eligible employer and any other
eligible employer that is a church-related
organization that has an association (as
definedinsection414(e)(3)(D))withthat
eligible employer is taken into account on
an aggregated basis, but any period during
which an individual is not an employee
of a church-related organization or is an
employee of a church-related organization
that does not have an association with
that eligible employer is disregarded for
purposes of this paragraph (e).
(4)Full-time employee for full year.
Each annual work period during which an
individual is employed full time by the eli-
gible employer constitutes one year of ser-
vice. In determining whether an individual
is employed full-time, the amount of work
which he or she actually performs is com-
pared with the amount of work that is nor-
mally required of individuals performing
similar services fromwhich substantially
all of their annual compensation is derived.
(5)Other employees. (i) An individual
is treated as performing a fraction of a year
of service for each annual work period dur-
ing which he or she is a full-time employee
for part of the annual work period and for
each annual work period during which he
or she is a part-time employee either for the
entire annual work period or for a part of
the annual work period.
(ii) In determining the fraction that rep-
resents the fractional year of service for an
individual employed full time for part of
an annual work period, the numerator is
the period of time (e.g., weeks or months)
during which the individual is a full-time
employee during that annual work period,
and the denominator is the period of time
that is the annual work period.
(iii) In determining the fraction that rep-
resents the fractional year of service of an
individual who is employed part time for
the entire annual work period, the numer-
ator is the amount of work performed by
the individual, and the denominator is the
amount of work normally required of indi-
viduals who perform similar services and
who are employed full time for the entire
annual work period.
(iv) In determining the fraction repre-
senting the fractional year of service of an
individual who is employed part time for
part of an annual work period, the frac-
tional year of service that would apply if
the individual were a part-time employee
for a full annual work period is multi-
plied times the fractional year of service
that would apply if the individual were a
full-time employee for the part of an an-
nual work period.
December 6, 20049412004–49 I.R.B.

(6)Work performed. For purposes
of this paragraph (e), in measuring the
amount of work of an individual per-
forming particular services, the work
performed is determined based on the
individual’s hours of service (as defined
under section 410(a)(3)(C)), except that
a plan may use a different measure of
work if appropriate under the facts and
circumstances. For example, a plan may
provide for a university professor’s work
to be measured by the number of courses
taught during an annual work period in
any case in which that individual’s work
assignment is generally based on a speci-
fied number of courses to be taught.
(7)Most recent one-year period of ser-
vice. For purposes of paragraph (d) of this
section, in the case of a part-time employee
or a full-time employee who is employed
for only part of the year determined on the
basis of the employer’s annual work pe-
riod, the employee’s most recent periods
of service are aggregated to determine his
or her most recent one-year period of ser-
vice. In such a case, there is first taken
into account his or her service during the
annual work period for which the last year
of service’s includible compensation is be-
ing determined; then there is taken into ac-
count his or her service during his next pre-
ceding annual work period based on whole
months; and so forth, until the employee’s
service equals, in the aggregate, one year
of service.
(8)Less than one year of service con-
sidered as one year. If, at the close of a
taxable year, an employee has, after ap-
plication of all of the other rules in this
paragraph (e), some portion of one year of
service (but has accumulated less than one
year of service), the employee is deemed
to have one year of service. Except as pro-
vided in this paragraph (e)(8), fractional
years of service are not rounded up.
(9)Examples. The provisions of this
paragraph (e) are illustrated by the follow-
ing examples:
Example 1.(i)Facts. Individual C is employed
half-time in 2004 and 2005 as a clerk by H, a hospital
which is a section 501(c)(3) organization. C earns
$20,000 from H in each of those years, and retires on
December 31, 2005.
(ii)Conclusion. For purposes of determining C’s
includible compensation during C’s last year of ser-
vice under paragraph (d) of this section, C’s most re-
cent periods of service are aggregated to determine
C’s most recent one-year period of service. In this
case, since C worked half-time in 2004 and 2005,
the compensation C earned in those two years are ag-
gregated to produce C’s includible compensation for
C’s last full year in service. Thus, in this case, the
$20,000 that C earned in 2004 and 2005 for C’s half-
time work are aggregated, so that C has $40,000 of
includible compensation for C’s most recent one-year
of service for purposes of applying paragraphs (b)(2),
(c)(3), and (d) of this section.
Example 2.(i)Facts. Individual A is employed
as a part-time professor by public University U dur-
ing the first semester of its two-semester 2004–2005
academic year. While A teaches one course gener-
ally for 3 hours a week during the first semester of the
academic year, U’s full-time faculty members gener-
ally teach for 9 hours a week during the full academic
year.
(ii)Conclusion. For purposes of calculating how
much of a year of service A performs in the 2004–05
academic year (before application of the special rules
of paragraphs (e)(7) and (8) of this section concerning
less than one year of service), paragraph (e)(5)(iv) of
this section is applied as follows: since A teaches one
course at U for 3 hours per week for 1 semester and
other faculty members at U teach 9 hours per week for
2 semesters, A is considered to have completed
3
/18or
1
/6of a year of service during the 2004–05 academic
year, determined as follows:
(A) The fractional year of service if A were a part-
timeemployeeforafullyearis
3
/9(number of hours
employed divided by the usual number of hours of
work required for that position).
(B) The fractional year of service if A were a full-
time employee for half of a year is
1
/2(one semester,
divided by the usual 2-semester annual work period).
(C) These fractions are multiplied to obtain the
fractional year of service:
3
/9times
1
/2,or
3
/18, equals
1
/6of a year of service.
(f)Excess contributions or defer-
rals—(1)In general. Any contribution
made for a participant to a section 403(b)
contract for the taxable year that exceeds
either the maximum annual contribution
limit set forth in paragraph (b) of this
section or the maximum annual section
403(b) elective deferral limit set forth in
paragraph (c) of this section constitutes
an excess contribution that is included
in gross income for that taxable year.
A contract does not fail to satisfy the
requirements of §1.403(b)–3, the distribu-
tion rules of §§1.403(b)–6 or 1.403(b)–9,
or the funding rules of §1.403(b)–8 solely
by reason of a distribution made under this
paragraph (f). See also section 4973 for an
excise tax applicable with respect to ex-
cess contributions to a custodial account.
(2)Excess section 403(b) elective defer-
rals. A section 403(b) contract may pro-
vide that any excess deferral as a result
of a failure to comply with the limitation
under paragraph (c) of this section for a
taxable year with respect to any section
403(b) elective deferral made for a partici-
pant by the employer will be distributed to
the participant, with allocable net income,
no later than April 15 of the following tax-
able year or otherwise in accordance with
section 402(g). See section 402(g)(2)(A)
for rules permitting the participant to al-
locate excess deferrals among the plans in
which the participant has made elective de-
ferrals, and see section 402(g)(2)(C) for
special rules to determine the tax treatment
of such a distribution.
(3)Special rule for small excess
amount. See section 4979(f)(2)(B) for a
special rule applicable if excess matching
contributions, excess after-tax contribu-
tions, and excess section 403(b) elective
deferrals do not exceed $100.
(4)Example. The provisions of this
paragraph (f) are illustrated by the follow-
ing example:
Example.(i)Facts. Individual D makes section
403(b) elective deferrals totaling $15,500 for 2006,
when D is age 45 and the applicable limit on section
403(b) elective deferrals is $15,000. On April 14,
2007, the plan refunds the $500 excess along with
applicable earnings of $65.
(ii)Conclusion. The $565 payment constitutes
a distribution of an excess deferral under paragraph
(f)(2) of this section. Under section 402(g), the $500
excess deferral is included in D’s gross income for
2006. The additional $65 is included in D’s gross
income for 2007 and, becausethe distribution is made
by April 15, 2007 (as provided in section 402(g)(2)),
the $65 is not subject to the additional 10 percent
income tax on early distributions under section 72(t).
§1.403(b)–5 Nondiscrimination rules.
(a)Nondiscrimination rules for contri-
butions other than section 403(b) elective
deferrals—(1)General rule. Under sec-
tion 403(b)(12)(A)(i), employer contribu-
tions and employee after-tax contributions
must satisfy all of the following require-
ments (the nondiscrimination require-
ments) in the same manner as a qualified
plan under section 401(a):
(i) Section 401(a)(4) (relating to
nondiscrimination in contributions and
benefits), taking section 401(a)(5) into
account.
(ii) Section 401(a)(17) (limiting the
amount of compensation that can be taken
into account).
(iii) Section 401(m) (relating to match-
ing and after-tax contributions).
(iv) Section 410(b) (relating to mini-
mum coverage).
(2)Nonapplication to section 403(b)
elective deferrals. The requirements of
this paragraph (a) do not apply to section
403(b) elective deferrals.
2004–49 I.R.B.942December 6, 2004

(3)Compensation for testing. Except
as may otherwise be specifically permit-
ted under the sections referenced in para-
graph (a)(1) of this section, compliance
with those provisions is tested using com-
pensation as defined in section 414(s) (and
without regard to section 415(c)(3)(E)).
(4)Employer aggregation rules.See
regulations under section 414 for rules
treating entities as a single employer for
purposes of the nondiscrimination require-
ments.
(5)Special rules for governmental
plans. Paragraphs (a)(1)(i), (iii), and (iv)
of this section do not apply to a govern-
mental plan as defined in section 414(d)
(but contributions to a governmental plan
must comply with paragraphs (a)(1)(ii)
and (b) of this section).
(b)Universal availability required
for section 403(b) elective defer-
rals—(1)General rule. Under section
403(b)(12)(A)(ii), all employees of the
eligible employer must be permitted to
have section 403(b) elective deferrals con-
tributed on their behalf if any employee
of the eligible employer may elect to
have the organization make section 403(b)
elective deferrals. The employee’s right
to have section 403(b) elective deferrals
made on his or her behalf includes the
right to section 403(b) elective deferrals
up to the lesser of the applicable limits
in §1.403(b)–4(c) (including any permis-
sible catch-up elective deferrals under
§1.403(b)–4(c)(2) and (3)) or the appli-
cable limits under the contract with the
largest limitation, and applies to part-time
employees as well as full-time employees.
(2)Effective opportunity required.A
section 403(b) plan satisfies this paragraph
(b) only if the plan provides an employee
with an effective opportunity to make
(or change) a cash or deferred election
(as defined at §1.401(k)–1(a)(3)) at least
once during each plan year. Whether an
employee has an effective opportunity is
determined based on all the relevant facts
and circumstances, including notice of
the availability of the election, the period
of time during which an election may be
made, and any other conditions on elec-
tions. An effective opportunity is not con-
sidered to exist if there are any other rights
or benefits that are conditioned (directly
or indirectly) upon a participant making or
failing to make a cash or deferred election
with respect to a contribution to a section
403(b) contract.
(3)Special rules. (i) In the case of a sec-
tion 403(b) plan that covers the employees
of more than one section 501(c)(3) organ-
ization, the universal availability require-
ment of this paragraph (b) applies sepa-
rately to each common law entity,i.e.,to
each section 501(c)(3) organization. In the
case of a section 403(b) plan that covers
the employees of more than one State en-
tity, this requirement applies separately to
each entity that is not part of a common
payroll. An employer may condition the
employee’s right to have section 403(b)
elective deferrals made on his or her behalf
on the employee electing a section 403(b)
elective deferral of more than $200 for a
year.
(ii) For purposes of this paragraph
(b)(3), an employer that historically has
treated one or more of its various geo-
graphically distinct units as separate for
employee benefit purposes may treat each
unit as a separate organization if the unit
is operated independently on a day-to-day
basis. Units are not geographically dis-
tinct if such units are located within the
same Standard Metropolitan Statistical
Area (SMSA).
(4)Special exclusions—(i)Exclusions
for special types of employees.Aplan
does not fail to satisfy the universal avail-
ability requirement of this paragraph (b)
merely because it excludes one or more of
the types of employees listed in paragraph
(b)(4)(ii) of this section. If any employee
listed in paragraph (b)(4)(ii)(A) through
(E) of this section has the right to have sec-
tion 403(b) elective deferrals made on his
or her behalf, then no employees listed in
that subparagraph may be excluded under
this paragraph (b)(4).
(ii)List of special types of excludi-
ble employees. The following types of
employees are listed in this paragraph
(b)(4)(ii):
(A) Employees who are eligible under a
section 457(b) eligible governmental plan
of the employer which permits an amount
to be contributed or deferred at the election
of the employee.
(B) Employees who are eligible to make
a cash or deferred election (as defined at
§1.401(k)–1(a)(3)) under a section 401(k)
plan of the employer.
(C) Employees who are non-resident
aliens described in section 410(b)(3)(C).
(D) Subject to the conditions applica-
ble under section 410(b)(4) (including sec-
tion 410(b)(4)(B) permitting separate test-
ing for employees not meeting minimum
age and service requirements), employees
who are students performing services de-
scribed in section 3121(b)(10).
(E) Subject to the conditions applicable
under section 410(b)(4), employees who
normally work fewer than 20 hours per
week. For this purpose, an employee nor-
mally works fewer than 20 hours per week
if and only if—
(1) For the 12-month period beginning
on the date the employee’s employment
commenced, the employer reasonably ex-
pects the employee to work fewer than
1,000 hours of service (as defined in sec-
tion 410(a)(3)(C)) in such period; and
(2) For each plan year ending after the
close of the 12-month period beginning
on the date the employee’s employment
commenced (or, if the plan so provides,
each subsequent 12-month period), the
employee worked fewer than 1,000 hours
of service in the preceding 12-month pe-
riod. (See, however, section 202(a)(1) of
the Employee Retirement Income Secu-
rity Act of 1974 (ERISA) (88 Stat. 829)
Public Law 93–406, and regulations under
section 410(a) of the Internal Revenue
Code applicable with respect to plans that
are subject to Title I of ERISA.)
(c)Plan required. Contributions to an
annuity contract do not satisfy the require-
ments of this section unless the contribu-
tions are made pursuant to a plan, as de-
fined in §1.403(b)–3(b)(3), and the terms
of the plan satisfy this section.
(d)Certain requirements not applicable
toachurchplan. This section does not ap-
plytoasection403(b)contractpurchased
by a church (as defined in §1.403(b)–2).
(e)Other rules. This section only
reflects requirements of the Internal Rev-
enue Code applicable for purposes of
section 403(b) and does not include other
requirements. Specifically, this section
does not reflect the requirements of the
ERISA that may apply with respect to
section 403(b), such as the vesting re-
quirements at 29 U.S.C. 1053.
§1.403(b)–6 Timing of distributions and
benefits.
(a)Distributions generally. This sec-
tion includes special rules regarding the
December 6, 20049432004–49 I.R.B.

timing of distributions from, and the ben-
efits that may be provided under, a section
403(b) contract, including limitations on
when early distributions can be made (in
paragraphs (b) through (d) of this section),
required minimum distributions (in para-
graph (e) of this section), and special rules
relating to loans (in paragraph (f) of this
section) and incidental benefits (in para-
graph (g) of this section).
(b)Distributions from contracts other
than custodial accounts or amounts attrib-
utable to section 403(b) elective deferrals.
Except as provided in paragraph (c) of
this section relating to distributions from
custodial accounts, paragraph (d) of this
section relating to distributions attribut-
able to section 403(b) elective deferrals,
§1.403(b)–4(f) (relating to correction
of excess deferrals), or §1.403(b)–10(a)
(relating to plan termination), a section
403(b) contract is permitted to distribute
retirement benefits to the participant no
earlier than upon the earliest of the par-
ticipant’s severance from employment or
upon the prior occurrence of some event,
such as after a fixed number of years, the
attainment of a stated age, or disability.
See §1.401–1(b)(1)(ii) for additional guid-
ance.
(c)Distributions from custodial ac-
counts that are not attributable to sec-
tion 403(b) elective deferrals. Except
as provided in §1.403(b)–4(f) (relat-
ing to correction of excess deferrals)
or §1.403(b)–10(a) (relating to plan ter-
mination), distributions from a custodial
account, as defined in §1.403(b)–8(d)(2),
may not be paid to a participant before the
participant has a severance from employ-
ment, dies, becomes disabled (within the
meaning of section 72(m)(7)), or attains
age 59
1
/2. Any amounts transferred out of
a custodial account to an annuity contract
or retirement income account, including
earnings thereon, continue to be subject to
this paragraph (c). This paragraph (c) does
not apply to distributions that are attribut-
able to section 403(b) elective deferrals.
(d)Distribution of section 403(b) elec-
tive deferrals—(1)Limitation on dis-
tributions—(i)General rule. Except
as provided in paragraph (d)(2) of this
section (relating to distributions on ac-
count of hardship), §1.403(b)–4(f) (relat-
ing to correction of excess deferrals), or
§1.403(b)–10(a) (relating to plan termina-
tion), distributions of amounts attributable
to section 403(b) elective deferrals may
not be paid to a participant earlier than the
earliest of the date on which the partici-
pant has a severance from employment,
dies, has a hardship, becomes disabled
(within the meaning of section 72(m)(7)),
or attains age 59
1
/2.
(ii)Special rule for pre–1989 section
403(b) elective deferrals. For special rules
relating to amounts held as of the close
of the taxable year beginning before Jan-
uary 1, 1989 (which does not apply to
earnings thereon), see section 1123(e)(3)
of the Tax Reform Act of 1986 (100 Stat.
2085, 2475) Public Law 99–514, and sec-
tion 1011A(c)(11) of the Technical and
Miscellaneous Revenue Act of 1988 (102
Stat. 3342, 3476) Public Law 100–647.
(2)Hardship rules. A hardship dis-
tribution under this paragraph (d) is de-
fined as, and is subject to the rules in,
§1.401(k)–1(d)(3) (including limiting the
amount of a distribution in the case of
hardship to the amount necessary to satisfy
the hardship). In addition, a hardship dis-
tribution is limited to the aggregate dollar
amount of the participant’s section 403(b)
elective deferrals under the contract (and
may not include any income thereon), re-
duced by the aggregate dollar amount of
the distributions previously made to the
participant from the contract.
(3)Failure to keep separate accounts.
If a section 403(b) contract includes both
section 403(b) elective deferrals and other
contributions and thesection 403(b) elec-
tive deferrals are not maintained in a sepa-
rate account, then distributions may not be
made earlier than the later of:
(i) Any date permitted under this para-
graph (d) with respect to 403(b) elective
deferrals; and
(ii) Any date permitted under paragraph
(b) or (c) of this section with respect to
contributions that are not section 403(b)
elective deferrals (whichever applies to the
contributions that are not section 403(b)
elective deferrals).
(e)Minimum required distributions for
eligible plans—(1)In general. Under sec-
tion 403(b)(10), a section 403(b) contract
must meet the minimum distribution re-
quirements of section 401(a)(9) (in both
form and operation). See section 401(a)(9)
and the regulations thereunder for these re-
quirements.
(2)Treatment as IRAs. For purposes
of applying the distribution rules of sec-
tion 401(a)(9) to section 403(b) contracts,
section 403(b) contracts are treated as
individual retirement annuities described
in section 408(b) and individual retire-
ment accounts described in section 408(a)
(IRAs). Consequently, except as other-
wise provided in paragraphs (e)(3) through
(e)(5) of this section, the distribution rules
in section 401(a)(9) are applied to section
403(b) contracts in accordance with the
provisions in §1.408–8 for purposes of
determining required minimum distribu-
tions.
(3)Required beginning date.There-
quired beginning date for purposes of sec-
tion 403(b)(10) is April 1 of the calen-
dar year following the later of the calen-
dar year in which the employee attains
70
1
/2or the calendar year in which the em-
ployee retires from employment with the
employer maintaining the plan. However,
for any section 403(b) contract that is not
part of a government plan or church plan,
the required beginning date for a 5–per-
cent owner is April 1 of the calendar year
following the earlier of the calendar year
in which the employee attains 70
1
/2or the
calendar year in which the employee re-
tires from employment with the employer
maintaining the plan.
(4)Surviving spouse rule does not ap-
ply. The special rule in §1.408–8, A–5 (re-
lating to spousal beneficiaries), does not
apply to a section 403(b) contract. Thus,
the surviving spouse of a participant is not
permitted to treat a section 403(b) contract
as the spouse’s own section 403(b) con-
tract, even if the spouse is the sole bene-
ficiary.
(5)Retirement income accounts.For
purposes of §1.401(a)(9)–6, A–4 (relating
to annuity contracts), annuity payments
provided with respect to retirement in-
come accounts do not fail to satisfy the
requirements of section 401(a)(9) merely
because the payments are not made un-
der an annuity contract purchased from
an insurance company, provided that the
relationship between the annuity pay-
ments and the retirement income accounts
is not inconsistent with any rules pre-
scribed by the Commissioner in revenue
rulings, notices, or other guidance pub-
lished in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b)ofthischapter).
See §1.403(b)–9(a)(5).
(6)Special rules for benefits accruing
before December 31, 1986. (i) The distri-
2004–49 I.R.B.944December 6, 2004

bution rules provided in section 401(a)(9)
do not apply to the undistributed portion
of the account balance under the section
403(b) contract valued as of December 31,
1986, exclusive of subsequent earnings
(pre-’87 account balance). The distribu-
tionrulesprovidedinsection401(a)(9)
apply to all benefits under section 403(b)
contracts accruing after December 31,
1986 (post-’86 account balance), includ-
ing earnings after December 31, 1986.
Consequently, the post-’86 account bal-
ance includes earnings after December
31, 1986, on contributions made before
January 1, 1987, in addition to the con-
tributions made after December 31, 1986,
and earnings thereon.
(ii) The issuer or custodian of the sec-
tion 403(b) contractmust keep records
that enable it to identify the pre-’87 ac-
count balance and subsequent changes
as set forth in paragraph (d)(6)(iii) of
this section and provide such information
upon request to the relevant employee or
beneficiaries with respect to the contract.
If the issuer or custodian does not keep
such records, the entire account balance is
treated as subject to section 401(a)(9).
(iii) In applying the distribution rules
in section 401(a)(9), only the post-’86 ac-
count balance is used to calculate the re-
quired minimum distribution for a calen-
dar year. The amount of any distribution
from a contract is treated as being paid
from the post-’86 account balance to the
extent the distribution is required to sat-
isfy the minimum distribution requirement
with respect to that contract for a calendar
year. Any amount distributed in a calen-
dar year from a contract in excess of the
required minimum distribution for a cal-
endar year with respect to that contract is
treated as paid from the pre-’87 account
balance, if any, of that contract.
(iv) If an amount is distributed from the
pre-’87 account balance and rolled over
to another section 403(b) contract, the
amount is treated as part of the post-’86
account balance in that second contract.
However, if the pre-’87 account bal-
ance under a section 403(b) contract
is directly transferred to another sec-
tion 403(b) contract (as permitted under
§1.403(b)–10(b)), the amount transferred
retains its character as a pre-’87 account
balance, provided the issuer of the trans-
feree contract satisfies the recordkeeping
requirements of paragraph (e)(6)(ii) of this
section.
(v) The distinction between the pre-’87
account balance and the post-’86 account
balance provided for under this paragraph
(e)(6) of this section has no relevance for
purposes of determining the portion of a
distribution that is includible in income un-
der section 72.
(vi) The pre-’87 account balance
must be distributed in accordance with
the incidental benefit requirement of
§1.401–1(b)(1)(i). Distributions attrib-
utable to the pre-’87 account balance are
treated as satisfying this requirement if all
distributions from the section 403(b) con-
tract (including distributions attributable
to the post-’86 account balance) satisfy the
requirements of §1.401–1(b)(1)(i) without
regard to this section, and distributions
attributable to the post-’86 account bal-
ance satisfy the rules of this paragraph (e).
Distributions attributable to the pre-’87
account balance are treated as satisfying
the incidental benefit requirement if all
distributions from the section 403(b) con-
tract (including distributions attributable
to both the pre-’87 account balance and
the post-’86 account balance) satisfy the
rules of this paragraph (e).
(7)Application to multiple contracts
for an employee. The required minimum
distribution must be separately determined
for each section 403(b) contract of an em-
ployee. However, because, as provided in
paragraph (e)(2) of this section, the dis-
tribution rules in section 401(a)(9) apply
to section 403(b) contracts in accordance
with the provisions in §1.408–8, the re-
quired minimum distribution from one
section 403(b) contract of an employee
is permitted to be distributed from an-
other section 403(b) contract in order to
satisfy section 401(a)(9). Thus, as pro-
vided in §1.408–8, A–9, with respect to
IRAs, the required minimum distribution
amount from each contract is then totaled
and the total minimum distribution taken
from any one or more of the individual
section 403(b) contracts. However, con-
sistent with the rules in §1.408–8, A–9,
only amounts in section 403(b) contracts
that an individual holds as an employee
may be aggregated. Amounts in section
403(b) contracts that an individual holds
as a beneficiary of the same decedent may
be aggregated, but such amounts may not
be aggregated with amounts held in sec-
tion 403(b) contracts that the individual
holds as the employee or as the beneficiary
of another decedent. Distributions from
section 403(b) contracts do not satisfy
the minimum distribution requirements
for IRAs, nor do distributions from IRAs
satisfy the minimum distribution require-
ments for section 403(b) contracts.
(f)Loans. The determination of
whether the availability of a loan, the
making of a loan, or a failure to repay
aloanmadefromanissuerofasection
403(b) contract to a participant or benefi-
ciary is treated as a distribution (directly
or indirectly) for purposes of this sec-
tion, and the determination of whether
the availability of the loan, the making
of the loan, or a failure to repay the loan
is in any other respect a violation of
the requirements of section 403(b) and
these regulations, depends on the facts
and circumstances. Among the facts and
circumstances are whether the loan has
a fixed repayment schedule and bears a
reasonable rate of interest, and whether
there are repayment safeguards to which
a prudent lender would adhere. Thus, for
example, a loan must bear a reasonable
rate of interest in order to be treated as
not being a distribution. However, a plan
loan offset is a distribution for purposes
of this section. See §1.72(p)–1, Q&A–13.
See also §1.403(b)–7(d) relating to the
application of section 72(p) with respect
to the taxation of a loan made under a
section 403(b) contract. (Further, see 29
CFR 2550.408b–1 of the Department of
Labor regulations concerning additional
requirements applicable with respect to
plans that are subject to Title I of ERISA.)
(g)Death benefits and other inci-
dental benefits. An annuity is not a
section 403(b) contract if it fails to sat-
isfy the incidental benefit requirement of
§1.401–1(b)(1)(i). For this purpose, to the
extent the incidental benefit requirement
of §1.401–1(b)(1)(i) requires a distribu-
tion of the participant’s or beneficiary’s
accumulated benefit, that requirement is
deemed to be satisfied if distributions
satisfy the minimum distribution require-
ments of section 401(a)(9).
(h)Special rule regarding severance
from employment. For purposes of this
section, severance from employment oc-
curs on any date on which an employee
ceases to be an employee of an eligible
employer (e.g., by the section 501(c)(3)
December 6, 20049452004–49 I.R.B.

organization that maintains the plan, as-
suming that only one section 501(c)(3)
organization maintains the plan), even
though the employee may continue to be
employed either by another entity that is
treated as the same employer where either
that other entity is not an entity that can
be an eligible employer (such as transfer-
ring from a section 501(c)(3) organization
to a for-profit subsidiary of the section
501(c)(3) organization) or in a capacity
that is not employment with an eligible
employer (e.g., ceasing to be an employee
performing services for a public school
but continuing to work for the same State
employer).
(i)Certain limitations do not apply
to rollover contributions. The limita-
tions on distributions in paragraphs (b)
through (d) of this section do not apply
to amounts held in a separate account for
eligible rollover distributions as described
in §1.403(b)–10(d).
§1.403(b)–7 Taxation of distributions and
benefits.
(a)General rules for when amounts are
included in gross income. Except as pro-
vided in this section (or in §1.403(b)–10(c)
relating to payments pursuant to a qual-
ified domestic relations order), amounts
actually distributed from a section 403(b)
contract are includible in the gross income
of the recipient participant or beneficiary
(in the year in which so distributed) un-
dersection72(relatingtoannuities). For
an additional income tax that may apply to
certain early distributions that are includi-
ble in gross income, see section 72(t).
(b)Rollovers to individual retire-
ment arrangements and other eligible
retirement plans—(1)Timing of taxation
of rollovers. In accordance with sec-
tions 402(c), 403(b)(8), and 403(b)(10),
a direct transfer in accordance with sec-
tion 401(a)(31) (generally referred to as
a direct rollover) is not includible in the
gross income of a participant or benefi-
ciary in the year transferred. In addition,
any payment made in the form of an el-
igible rollover distribution (as defined
in section 402(c)(4)) is not includible
in gross income in the year paid to the
extent the payment is transferred to an
eligible retirement plan (as defined in
section 402(c)(8)(B)) within 60 days,
including the transfer to the eligible retire-
ment plan of any property distributed. For
this purpose, the rules of section 402(c)(2)
through (7) and (c)(9) apply. Any direct
rollover under this paragraph (b)(1) is a
distribution that is subject to the distribu-
tion requirements of §1.403(b)–6.
(2)Requirement that contract provide
rollover options for eligible rollover distri-
butions. As required in §1.403(b)–3(a)(7),
an annuity contract is not a section 403(b)
contract unless the contract provides that if
the distributee of an eligible rollover distri-
bution elects to have the distribution paid
directly to an eligible retirement plan (as
defined in section 402(c)(8)(B)) and spec-
ifies the eligible retirement plan to which
the distribution is to be paid, then the dis-
tribution will be paid to that eligible retire-
ment plan in a direct rollover. For pur-
poses of determining whether a contract
satisfies this requirement, the provisions of
section 401(a)(31) apply to the annuity as
though it were a plan qualified under sec-
tion 401(a) unless otherwise provided in
section 401(a)(31). In applying the provi-
sions of this paragraph (b)(2), the payor of
the eligible rollover distribution from the
contract is treated as the plan administra-
tor.
(3)Requirement that contract payor
provide notice of rollover option to dis-
tributees. To ensure that the distributee of
an eligible rollover distribution from a sec-
tion 403(b) contract has a meaningful right
to elect a direct rollover, section 402(f) re-
quires that the distributee be informed of
the option. Thus, within a reasonable time
period before making the initial eligible
rollover distribution, the payor must pro-
vide an explanation to the distributee of
his or her right to elect a direct rollover
and the income tax withholding conse-
quences of not electing a direct rollover.
For purposes of satisfying the reasonable
time period requirement, the plan timing
rule provided in section 402(f)(1) and
the regulations thereunder applies to sec-
tion 403(b) contracts.
(4)Mandatory withholding upon cer-
tain eligible rollover distributions from
contracts. If a distributee of an eligible
rollover distribution from a section 403(b)
contract does not elect to have the eli-
gible rollover distribution paid directly
to an eligible retirement plan in a direct
rollover, the eligible rollover distribution
is subject to 20-percent income tax with-
holding imposed under section 3405(c).
See section 3405(c) and the regulations
thereunder for provisions regarding the
withholding requirements relating to eli-
gible rollover distributions.
(5)Automatic rollover for certain
mandatory distributions under section
401(a)(31)(B). [Reserved].
(c)Special rules for certain corrective
distributions. See section 402(g)(2)(C) for
special rules to determine the tax treat-
ment of a distribution of excess deferrals,
and see §1.401(m)–1(e)(3)(v) for the tax
treatment of corrective distributions of af-
ter-tax and matching contributions to com-
ply with section 401(m).
(d)Amounts taxable under section
72(p)(1). In accordance with section
72(p), the amount of any loan from a
section 403(b) contract to a participant
or beneficiary (including any pledge or
assignment treated as a loan under section
72(p)(1)(B)) is treated as having been re-
ceived as a distribution from the contract
under section 72(p)(1), except to the ex-
tent set forth in section 72(p)(2) (relating
to loans that do not exceed a maximum
amount and that are repayable in accor-
dance with certain terms) and §1.72(p)–1.
Thus, except to the extent a loan satisfies
section 72(p)(2), any amount loaned from
a section 403(b) contract to a participant
or beneficiary (including any pledge or
assignment treated as a loan under section
72(p)(1)(B)) is includible in the gross in-
come of the participant or beneficiary for
the taxable year in which the loan is made.
See generally §1.72(p)–1.
§1.403(b)–8 Funding.
(a)Investments permitted. Section
403(b) and §1.403(b)–3 only apply to
amounts held in an annuity contract (as
defined in §1.403(b)–2), including a cus-
todial account that is treated as an annuity
contract under this section or a retirement
income account that is treated as an annu-
ity contract under §1.403(b)–9.
(b)Contributions to the plan. Contri-
butions to a section 403(b) plan must be
transferred to the insurance company issu-
ing the annuity contract (or the entity hold-
ing assets of any custodial or retirement in-
come account that is treated as an annuity
contract) within a period that is not longer
than is reasonable for the proper adminis-
tration of the plan. For purposes of this re-
quirement, the plan may provide for sec-
2004–49 I.R.B.946December 6, 2004

tion 403(b) elective deferrals for a partici-
pant under the plan to be transferred to the
annuity contract within a specified period
after the date the amounts would otherwise
have been paid to the participant. For ex-
ample, the plan could provide for section
403(b) elective deferrals under the plan to
be contributed within 15 business days fol-
lowing the month in which these amounts
would otherwise have been paid to the par-
ticipant.
(c)Annuity contracts—(1)Generally.
As defined in §1.403(b)–2, and except as
otherwise permitted under this section, an
annuity contract means acontract that is is-
sued by an insurance company qualified to
issue annuities in a State and that includes
payment in the form of an annuity. This
paragraph (c) sets forth additional rules re-
garding annuity contracts.
(2)Certain insurance contracts.Nei-
ther a life insurance contract, as defined
in section 7702, an endowment contract, a
health or accident insurance contract, nor
a property, casualty, or liability insurance
contract meets the definition of an annu-
ity contract. See §1.401(f)–4(e). Also see
§1.403(b)–11(d) for a transition rule.
(3)Special rule for certain contracts.
This paragraph (c)(3) applies in the case
of a contract issued under a State section
403(b) plan established on or before May
17, 1982, or for an employee who becomes
covered for the first time under the plan
after May 17, 1982, unless the Commis-
sioner had before that date issued any writ-
ten communication (either to the employer
or financial institution) to the effect that
the arrangement under which the contract
was issued did not meet the requirements
of section 403(b). The requirement that the
contract be issued by an insurance com-
pany qualified to issue annuities in a State
does not apply to that contract if one of the
following two conditions is satisfied and
that condition has been satisfied continu-
ously since May 17, 1982—
(i) Benefits under the contract are pro-
vided from a separately funded retirement
reserve that is subject to supervision of the
State insurance department; or
(ii) Benefits under the contract are pro-
vided from a fund that is separate from
thefundusedtoprovidestatutorybene-
fits payable under a State retirement sys-
tem and that is part of a State teachers re-
tirement system to purchase benefits that
are unrelated to the basic benefits provided
under the retirement system, and the death
benefit provided under the contract does
not at any time exceed the larger of the re-
serve or the contribution made for the em-
ployee.
(d)Custodial accounts—(1)Treat-
ment as a section 403(b) contract.Under
section 403(b)(7), a custodial account is
treated as an annuity contract for purposes
of §§1.403(b)–1 through 1.403(b)–11.
See section 403(b)(7)(B) for special rules
regarding the tax treatment of custodial
accounts and section 4973(c) for an excise
tax that applies to excess contributions to
a custodial account.
(2)Custodial account defined.Acus-
todial account means a plan, or a separate
account under a plan, in which an amount
attributable to section 403(b) contributions
(or amounts rolled over to a section 403(b)
contract, as described in §1.403(b)–10(d))
is held by a bank or a person who satisfies
the conditions in section 401(f)(2), if—
(i) All of the amounts held in the ac-
count are invested in stock of a regulated
investment company (as defined in section
851(a) relating to mutual funds);
(ii) The requirements of §1.403(b)–6(c)
(imposing restrictions on distributions
with respect to a custodial account) and
§1.403(b)–6(d) are satisfied with respect
to the amounts held in the account;
(iii) The assets held in the account
cannot be used for, or diverted to, pur-
poses other than for the exclusive benefit
of plan participants or their beneficiaries
(for which purpose, assets are treated as
diverted to the employer if the employer
borrows assets from the account); and
(iv) The account is not part of a retire-
ment income account.
(3)Effect of definition. The require-
ment in paragraph (d)(2)(i) of this section
is not satisfied if the account includes any
assets that other than stock of a regulated
investment company.
(e)Retirement income accounts.See
§1.403(b)–9 for special rules under which
a retirement income account for em-
ployees of a church-related organization
is treated as a section 403(b) contract
for purposes of §§1.403(b)–1 through
1.403(b)–11.
(f)Combining assets.Totheextent
permitted by the Commissioner in rev-
enue rulings, notices, or other guidance
published in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b) of this chap-
ter), trust assets held under a custodial
account and trust assets held under a re-
tirement income account, as described in
§1.403(b)–9(a)(6), may be invested in a
group trust with trust assets held under
a qualified plan or individual retirement
plan. For this purpose, a trust includes a
custodial account that is treated as a trust
under section 401(f).
§1.403(b)–9 Special rules for church
plans.
(a)Retirement income accounts—(1)
Treatment as a section 403(b) contract.
Under section 403(b)(9), a retirement
income account for employees of a
church-related organization (as defined
in §1.403(b)–2) is treated as an annuity
contract for purposes of §§1.403(b)–1
through 1.403(b)–11.
(2)Retirement income account de-
fined—(i)In general.Aretirementin-
come account means a defined contribu-
tion program established or maintained
by a church-related organization under
which—
(A) There is separate accounting for the
retirement income account’s interest in the
underlying assets (i.e., there must be suffi-
cient separate accounting for it to be possi-
ble at all times to determine the retirement
income account’s interest in the underly-
ing assets and to distinguish that interest
from any interest that is not part of the re-
tirement income account);
(B) Investment performance is based on
gains and losses on those assets; and
(C) The assets held in the account can-
not be used for, or diverted to, purposes
other than for the exclusive benefit of plan
participants or their beneficiaries. For this
purpose, assets are treated as diverted to
the employer if the employer borrows as-
sets from the account.
(ii)Plan required. A retirement income
account must be maintained pursuant to
a program which is a plan (as defined in
§1.403(b)–3(b)(3)) and the plan document
must state (or otherwise evidence in a sim-
ilarly clear manner) the intent to constitute
a retirement income account.
(3)Ownership or use constitutes distri-
bution. Any asset of a retirement income
account that is owned or used by a par-
ticipant or beneficiary is treated as having
been distributed to that participant or ben-
December 6, 20049472004–49 I.R.B.

eficiary. See §§1.403(b)–6 and 1.403(b)–7
for rules relating to distributions.
(4)Coordination of retirement income
account with custodial account rules.A
retirement income account that is treated
as an annuity contractis not a custodial ac-
count (defined in §1.403(b)–8(d)(2)), even
if it is invested solely in stock of a regu-
lated investment company.
(5)Life annuities. A retirement income
account may distribute benefits in a form
that includes a life annuity only if—
(i) The amount of the distribution form
has an actuarial present value, at the
annuity starting date, equal to the par-
ticipant’s or beneficiary’s accumulated
benefit, based on reasonable actuarial as-
sumptions, including regarding interest
and mortality; and
(ii) The plan sponsor guarantees bene-
fits in the event that a payment is due that
exceeds the participant’s or beneficiary’s
accumulated benefit.
(6)Combining retirement income ac-
count assets with other assets. For pur-
poses of §1.403(b)–8(f) relating to com-
bining assets, retirement income account
assets held in trust (including a custodial
account that is treated as a trust under sec-
tion 401(f)) are subject to the same rules
regarding combining of assets as custodial
account assets. In addition, retirement
income account assets are permitted to
be commingled in a common fund with
amounts devoted exclusively to church
purposes (such as a fund from which un-
funded pension payments are made to
former employees of the church). How-
ever, unless otherwise permitted by the
Commissioner, no assets of the plan spon-
sor, other than retirement income account
assets, may be combined with custodial
account assets or any other assets permit-
ted to be combined under §1.403(b)–8(f).
This paragraph (a)(6) is subject to any ad-
ditional rules issued by the Commissioner
in revenue rulings, notices, or other guid-
ance published in the Internal Revenue
Bulletin (see §601.601(d)(2)(ii)(b)ofthis
chapter).
(7)Trust treated as tax exempt.A
trust (including a custodial account that is
treated as a trust under section 401(f)) that
includes no assets other than assets of a
retirement income account is treated as an
organization that is exempt from taxation
under section 501(a).
(b)No compensation limitation up to
$10,000. See section 415(c)(7) for special
rules regarding certain employer contribu-
tions not exceeding $10,000.
(c)Special deduction rule for self-em-
ployed ministers. See section 404(a)(10)
for a special rule regarding the deductibil-
ityofacontributionmadebyaself-em-
ployed minister.
§1.403(b)–10 Miscellaneous provisions.
(a)Plan terminations and frozen
plans—(1)In general.Anemployer
may amend its section 403(b) plan to
eliminate future contributions for existing
participants. Alternatively, an employer
mayamenditssection403(b)plantolimit
participation to existing participants and
employees (to the extent consistent with
§1.403(b)–5). A section 403(b) plan may
contain provisions that permit plan termi-
nation and permit accumulated benefits to
be distributed on termination. However,
in the case of a section 403(b) contract that
is subject to the distribution restrictions in
§1.403(b)–6(c) or (d) (relating to custo-
dial accounts and section 403(b) elective
deferrals), termination of the plan and
the distribution of accumulated benefits
is permitted only if the employer (taking
into account all entities that are treated
as the employer under section 414 on the
date of the termination) does not make
contributions to an alternative section
403(b) contract that is not part of the plan.
For purposes of this rule, contributions
are made to an alternative section 403(b)
contract if and only if contributions are
made to a section 403(b) contract during
the period beginning on the date of plan
termination and ending 12 months after
distribution of all assets from the termi-
nated plan. However, if at all times during
the period beginning 12 months before the
termination and ending 12 months after
distribution of all assets from the termi-
natedplan,fewerthan2percentofthe
employees who were eligible under the
section 403(b) plan as of the date of plan
termination are eligible under the alterna-
tive section 403(b) contract, the alterna-
tive section 403(b) contract is disregarded.
In order for a section 403(b) plan to be
considered terminated, all accumulated
benefits under the plan must be distributed
to all participants and beneficiaries as
soon as administratively practicable after
termination of the plan. A distribution
includes delivery of a fully paid individ-
ual insurance annuity contract. The mere
provision for, and making of, distributions
to participants or beneficiaries upon plan
termination does not cause a contract to
cease to be a section 403(b) contract. See
§1.403(b)–7 for rules regarding the tax
treatment of distributions.
(2)Employers that cease to be eligible
employers. An employer that ceases to be
an eligible employer may no longer con-
tribute to a section 403(b) contract for any
subsequent period, and the contract will
fail to satisfy §1.403(b)–3(a) if any further
contributions are made with respect to a
period after the employer ceases to be an
eligible employer.
(b)Contract exchanges and plan-to-
plan transfers—(1)Contract exchanges
and transfers—(i)General rule.Ifthe
conditions in paragraph (b)(2) of this sec-
tion are met, a section 403(b) contract
held under a section 403(b) plan may be
exchanged for another section 403(b) con-
tract held under that section 403(b) plan.
Further, if the conditions in paragraph
(b)(3) of this section are met, a section
403(b) plan may provide for the trans-
ferofitsassets(i.e., the section 403(b)
contracts held thereunder, including any
assets held in a custodial account or re-
tirement income account that are treated
as section 403(b) contracts) to another
section 403(b) plan. In addition, if the
conditions in paragraph (b)(4) of this sec-
tion (relating to permissive service credit
and repayments under section 415) are
met, a section 403(b) plan may provide for
the transfer of its assets to a qualified plan
under section 401(a). However, neither a
qualified plan nor an eligible plan under
section 457(b) may transfer assets to a
section 403(b) plan,and a section 403(b)
plan may not accept such a transfer. In
addition, a section 403(b) contract may
not be exchanged for an annuity contract
that is not a section 403(b) contract. Nei-
ther a plan-to-plan transfer nor a contract
exchange permitted under this paragraph
(b) is treated as a distribution for pur-
poses of the distribution restrictions at
§1.403(b)–6. Therefore, such a transfer or
exchange may be made before severance
from employment or another distribution
event. Further, no amount is includible in
gross income by reason of such a transfer
or exchange.
2004–49 I.R.B.948December 6, 2004

(ii)ERISA rules. See §1.414(l)–1 for
other rules that are applicable to section
403(b) plans that are subject to section 208
of the Employee Retirement Income Secu-
rity Act of 1974 (88 Stat. 829, 865).
(2)Requirements for contract exchange
within the same plan. A section 403(b)
contract of a participant or beneficiary may
be exchanged under paragraph (b)(1) of
this section for another section 403(b) con-
tract of that participant or beneficiary un-
der the same section 403(b) plan if the fol-
lowing conditions are met—
(i) The plan under which the contract is
issued provides for the exchange;
(ii) The participant or beneficiary has
an accumulated benefit immediately after
the transfer at least equal to the accumu-
lated benefit of that participant or bene-
ficiary immediately before the exchange
(taking into account the accumulated ben-
efit of that participant or beneficiary under
both section 403(b) contracts immediately
before the exchange); and
(iii) The other contract provides that,
to the extent a contract that is exchanged
is subject to any distribution restrictions
under §1.403(b)–6, the other contract im-
poses restrictions on distributions to the
participant or beneficiary that are not less
stringent than those imposed on the con-
tract being exchanged.
(3)Requirements for plan-to-plan
transfers. A plan-to-plan transfer un-
der paragraph (b)(1) of this section from
a section 403(b) plan to another section
403(b) plan is permitted if the following
conditions are met—
(i) The participant or beneficiary whose
assets are being transferred is an employee
of the employer providing the receiving
plan;
(ii) The transferor plan provides for
transfers;
(iii) The receiving plan provides for the
receipt of transfers;
(iv) The participant or beneficiary
whose assets are being transferred has an
accumulated benefit immediately after the
transfer at least equal to the accumulated
benefit with respect to that participant or
beneficiary immediately before the trans-
fer.
(v) The receiving planprovides that, to
the extent any amount transferred is sub-
ject to any distribution restrictions under
§1.403(b)–6, the receiving plan imposes
restrictions on distributions to the partici-
pant or beneficiary whose assets are being
transferred that are not less stringent than
those imposed on the transferor plan.
(vi) If a plan-to-plan transfer does not
constitute a complete transfer of the partic-
ipant’s or beneficiary’s interest in the sec-
tion 403(b) plan, the transferee plan treats
the amount transferred as a continuation of
apro rataportion of the participant’s or
beneficiary’s interest in the section 403(b)
plan (e.g.,apro rataportion of the partic-
ipant’s or beneficiary’s interest in any af-
ter-tax employee contributions).
(4)Purchase of permissive service
credit by contract-to-plan transfers from
a section 403(b) contract to a qualified
plan—(i)General rule. If the conditions
in paragraph (b)(4)(ii) of this section are
met, a section 403(b) plan may provide for
the transfer of assets held thereunder to
a qualified defined benefit governmental
plan (as defined in section 414(d)).
(ii)Conditions for plan-to-plan trans-
fers. A transfer may be made under this
paragraph (b)(4) only if the transfer is ei-
ther—
(A) For the purchase of permissive
service credit (as defined in section
415(n)(3)(A)) under the receiving de-
fined benefit governmental plan; or
(B) A repayment to which section
415 does not apply by reason of section
415(k)(3).
(c)Qualified domestic relations orders.
In accordance with the second sentence of
section 414(p)(9), any distribution from
an annuity contract under section 403(b)
(including a distribution from a custodial
account or retirement income account
that, under section 403(b)(7) or (9), is
treated as a section 403(b) contract) pur-
suant to a qualified domestic relations
order is treated in the same manner as a
distribution from a plan to which section
401(a)(13) applies. Thus, for example, a
section 403(b) plan does not fail to sat-
isfy the distribution restrictions set forth
in §1.403(b)–6(b), (c), or (d) merely as a
result of distribution made pursuant to a
qualified domestic relations order under
section 414(p), so that such a distribution
is permitted without regard to whether the
employee from whose contract the distri-
bution is made has had a severance from
employment or other event permitting
a distribution to be made under section
403(b).
(d)Rollovers to a section 403(b) con-
tract. A section 403(b) contract may
accept contributions that are eligible
rollover distributions (as defined in sec-
tion 402(c)(4)) made from another eligible
retirement plan (as defined in section
402(c)(8)(B)). Amounts contributed to a
section 403(b) contract as eligible rollover
distributions are not taken into account
for purposes of the limits in §1.403(b)–4,
but, except as otherwise specifically pro-
vided (for example, at §1.403(b)–6(i)), are
otherwise treated in the same manner as
amounts held under a section 403(b) con-
tract for purposes of §§1.403(b)–3 through
1.403(b)–9 and this section.
(e)Deemed IRAs. See regulations un-
der section 408(q) for special rules relating
to deemed IRAs.
(f)Defined benefit plans—(1)TEFRA
church defined benefit plans. See sec-
tion 251(e)(5) of the Tax Equity and Fis-
cal Responsibility Act of 1982, Public Law
97–248, for a provision permitting certain
arrangements established by a church-re-
lated organization and in effect on Septem-
ber 3, 1982 (a TEFRA church defined ben-
efit plan), to be treated as section 403(b)
contract even though it is a defined benefit
arrangement. In accordance with section
403(b)(1), for purposes of applying sec-
tion 415 to a TEFRA church defined ben-
efit plan, the accruals under the plan are
limited to the maximum amount permitted
under section 415(c) when expressed as an
annual addition, and, for this purpose, the
rules at §1.402(b)–1(a)(2) for determining
the present value of an accrual under a non-
qualified defined benefit plan also apply
for purposes of converting the accrual un-
der a TEFRA church defined benefit plan
to an annual addition. See section 415(b)
for additional limits for TEFRA church de-
fined benefit plans.
(2)Other defined benefit plans. Except
for a TEFRA church defined benefit plan,
section 403(b) does not apply to any con-
tributions or accrual under a defined bene-
fit plan.
(g)Other rules relating to section
501(c)(3) organizations. See section
501(c)(3) and regulations thereunder for
the substantive standards for tax-exemp-
tion under that section, including the
requirement that no part of the organiza-
tion’s net earnings inure to the benefit of
any private shareholder or individual. See
also sections 4941 (self dealing), 4945
December 6, 20049492004–49 I.R.B.

(taxable expenditures), and 4958 (excess
benefit transactions), and the regulations
thereunder, for rules relating to excise
taxes imposed on certain transactions in-
volving organizations described in section
501(c)(3).
§1.403(b)–11 Effective dates.
(a) Except as otherwise provided
in this section, §§1.403(b)–1 through
1.403(b)–10 apply for taxable years be-
ginning after December 31, 2005.
(b) In the case of a section 403(b) con-
tract maintained pursuant to a collective
bargaining agreement that is ratified and
in effect on the date of publication of fi-
nal regulations in theFederal Register,
§§1.403(b)–1 through 1.403(b)–10 do not
apply before the date on which the collec-
tive bargaining agreement terminates (de-
termined without regard to any extension
thereof after the date of publication of fi-
nal regulations in theFederal Register).
(c) In the case of a section 403(b) con-
tract maintained by a church-related organ-
ization for which the authority to amend
the contract is held by a church convention
(withinthemeaningofsection414(e)),
§§1.403(b)–1 through 1.403(b)–10 do not
apply before the earlier of—
(1) January 1, 2007; or
(2) 60 days following the earliest
church convention that occurs after the
date of publication of final regulations in
theFederal Register.
(d) Section 1.403(b)–8(c)(2) does not
apply to a contract issued before February
14, 2005.
Par. 6. Section 1.414(c)–5 is redesig-
nated as §1.414(c)–6 and new §1.414(c)–5
is added to read as follows:
§1.414(c)–5 Certain tax-exempt
organizations.
(a)Application. This section applies
to an organization that is exempt from tax
under section 501(a). The rules of this
section are in addition to the rules other-
wise applicable under section 414(b) and
414(c). Except to the extent set forth in
paragraphs (d), (e), and (f) of this section,
this section does not apply to any church,
as defined in section 3121(w)(3)(A), or
any qualified church-controlled organiza-
tion, as defined in section 3121(w)(3)(B).
(b)General rule. Inthecaseofanor-
ganization that is exempt from tax under
section 501(a) (an exempt organization)
whose employees participate in a plan, the
employer with respect to that plan includes
the exempt organization and any other or-
ganization that is under common control
with the exempt organization whose em-
ployees participate in the plan. For this
purpose, common control exists between
exempt organizations if at least 80 per-
cent of the directors or trustees of one
organization are either representatives of,
or directly or indirectly controlled by, the
other organization. A trustee or director is
treated as a representative of another ex-
empt organization if he or she also is a
trustee, director, agent, or employee of the
other exempt organization. Existence of
control is determined based on the facts
and circumstances. A trustee or director
is controlled by another organization if the
other organization has the power to remove
such trustee or director and designate a
new trustee or director. For example, if
exempt organization A appoints at least 80
percent of the trustees of exempt organiza-
tion B (which is the owner of the outstand-
ing shares of corporation C, which is not an
exempt organization) and has the power to
control at least 80 percent of the directors
of exempt organization D, then, under this
paragraph (b) and §1.414(b)–1, entities A,
B, C, and D are treated as the same em-
ployer with respect to any plan maintained
by A, B, C, or D for purposes of the sec-
tions referenced in sections 414(b), 414(c),
and 414(t).
(c)Permissive aggregation with entities
having a common exempt purpose.For
purposes of this section, exempt organi-
zations that maintain a single plan cover-
ing one or more employees from each or-
ganization may treat themselves as under
common control for purposes of section
414(c) if each of the organizations regu-
larly coordinate their day-to-day exempt
activities. For example, an entity that pro-
vides a type of emergency relief within one
geographic region and another exempt or-
ganization that provides that type of emer-
gency relief within another geographic re-
gion may treat themselves as under com-
mon control if they have a single plan cov-
ering employees of both entities and reg-
ularly coordinate their day-to-day exempt
activities. Similarly, a hospital that is an
exempt organization and another exempt
organization with which it coordinates the
delivery of medical services or medical re-
search may treat themselves as under com-
mon control if there is a single plan cover-
ing employees of the hospital and employ-
ees of the other exempt organization and
the coordination is a regular part of their
day-to-day exempt activities.
(d)Permissive disaggregation between
qualified church controlled organizations
and other entities. In the case of a church
plan (as defined in section 414(e)) to which
contributions are made by more than one
common law entity, any employer may
apply paragraphs (b) and (c) of this sec-
tion to those entities that are not a church
(as defined in section 403(b)(12)(B) and
§1.403(b)–2) separately from those enti-
ties that are churches. For example, in
the case of a group ofentities consist-
ing of a church (as defined in section
3121(w)(3)(A)), a secondary school (that
is treated as a church under §1.403(b)–2),
and a nursing home that receives more
than 25 percent of its support from fees
paid by residents (so that it is not treated
as a qualified church-controlled organ-
ization under §1.403(b)–2 and section
3121(w)(3)(B)), the nursing home may
treat itself as not being under common
control with the church and the school,
even though the nursing home may be
under common control with the school
and the church under paragraph (b) of this
section.
(e)Application to certain church enti-
ties. [Reserved].
(f)Anti-abuse rule. In any case in
which the Commissioner determines that
the structure of one or more exempt or-
ganizations (including an exempt organ-
ization and an entity that is not exempt
from income tax) or the positions taken
by those organizations has the effect of
avoiding or evading §1.403(b)–5(a) or an-
other requirement imposed under section
401(a), 403(b), or 457(b), or any applica-
ble section (as defined in section 414(t)),
the Commissioner may treat an entity as
under common control with the exempt
organization.
(g)Examples. The provisions of this
section are illustrated by the following ex-
amples:
Example 1.(i)Facts. Organization A is a tax-
exempt organization undersection 501(c)(3) which
owns 80% or more of the total value of all classes of
stock of corporation B, which is a for profit organiza-
tion.
(ii)Conclusion. Under paragraph (a) of this sec-
tion, this section does not alter the rules of section
2004–49 I.R.B.950December 6, 2004

414(b) and (c), so that organization A and corporation
B are under common control under §1.414(c)–2(b).
Example 2.(i)Facts. Organization M is a hos-
pital which is a tax-exempt organization under sec-
tion 501(c)(3) and organization N is a medical clinic
which is also a tax-exempt organization under section
501(c)(3). N is located in a city and M is located in
a nearby suburb. There is a history of regular coor-
dination of day-to-day activities between M and N,
including periodic transfers of staff, coordination of
staff training, common sources of income, and coor-
dination of budget and operational goals. A single
section 403(b) plan covers professional and staff em-
ployees of both the hospital and the medical clinic.
While a number of members of the board of directors
of M are also on the board of directors of N, there is
less than 80% overlap in board membership. Both or-
ganizations have approximately the same percentage
of employees who are highly compensated and have
appropriate business reasons for being maintained in
separate entities.
(ii)Conclusion. M and N are not under common
control under this section, but, under paragraph (c) of
this section, may chose to treat themselves as under
common control, assuming both of them act in a man-
ner that is consistent with that choice for purposes of
§1.403(b)–5(a), sections 401(a), 403(b), and 457(b),
and any other applicable section (as defined in sec-
tion 414(t)).
(h)Effective date. This section applies
for taxable years beginning after Decem-
ber 31, 2005.
PART 31—EMPLOYMENT TAXES
Par. 7. The authority citation for part
31 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 8. Section 31.3121(a)(5)–2 is
added to read as follows:
§31.3121(a)(5)–2 Payments under or to
an annuity contract described in section
403(b).
[The text of proposed §31.3121(a)(5)–2
is the same as the text of
§31.3121(a)(5)–2T(a) through (b)(1)
published elsewhere in this issue of the
Bulletin].
Nancy Jardini,
Acting Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on November 15,
2004, 8:45 a.m., and published in the issue of the Federal
Register for November 16, 2004, 69 F.R. 67075)
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2004-95
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
December 6, 20049512004–49 I.R.B.

Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to suspension from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may suspend an attorney, certified public
accountant, enrolled agent, or enrolled ac-
tuary in accordance with the consent of-
fered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Sanchez, Wayne L.Derby, KSAttorneyIndefinite
from
July 12, 2004
Gatti, John T.Orlando, FLEnrolled AgentIndefinite
from
July 16, 2004
Hall, Beverly J.Newberg, OREnrolled AgentIndefinite
from
July 26, 2004
Spencer, Robert E.Wilmington,NCEnrolled AgentIndefinite
from
August 11, 2004
Lebaron, Betty J.Mesa, AZEnrolled AgentIndefinite
from
August 17, 2004
Worrell, DouglasStreamwood, ILAttorneyIndefinite
from
August 23, 2004
Singleton, Stan R.Derby, KSAttorneyIndefinite
from
August 30, 2004
Halpern, BarbaraWeston, CTCPAIndefinite
from
September 15, 2004
Johnson, Jeanne M.Hoquiam, WAEnrolled AgentIndefinite
from
September 27, 2004
Fisher, RobertHolbrook, AZEnrolled AgentIndefinite
from
October 5, 2004
Valdez II, ArthurAlbuquerque, NMCPAIndefinite
from
October 19, 2004
2004–49 I.R.B.952December 6, 2004

NameAddressDesignationDate of Suspension
Wilshire Jr., Raymond B.Fort Worth, TXEnrolled AgentIndefinite
from
December 1, 2004
Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Daly, Thomas J.Elmsford, NYCPAIndefinite
from
August 20, 2004
Jewett, Jerry A.Fremont, OHAttorneyIndefinite
from
September 8, 2004
Kyllo, Harry N.Portland, ORCPAIndefinite
from
September 9, 2004
Pearl, David S.Reisterstown, MDAttorneyIndefinite
from
September 21, 2004
Graugnard, Paul E.Alexandria, LAAttorneyIndefinite
from
September 21, 2004
Thomas, Robert C.Natchitoches, LAAttorneyIndefinite
from
September 21, 2004
Culver Jr., Allan J.Bel Air, MDAttorneyIndefinite
from
September 21, 2004
Christovich, MichaelNew Orleans, LAAttorneyIndefinite
from
September 27, 2004
Turner, Haiden W.Farmers Branch, TXCPAIndefinite
from
September 27, 2004
Tuttle, HeidiUnionville, CTAttorneyIndefinite
from
September 27, 2004
December 6, 20049532004–49 I.R.B.

NameAddressDesignationDate of Suspension
Oberhauser Jr., LouisWayzata, MNAttorneyIndefinite
from
September 27, 2004
Nelson, John A.Wilmar, MNAttorneyIndefinite
from
September 27, 2004
Judd Jr., John K.Taft, CACPAIndefinite
from
September 30, 2004
McGrady, Michael S.Hankins, NYAttorneyIndefinite
from
October 1, 2004
Wahl-Taylor, KimberlyCouncil Bluffs, IAAttorneyIndefinite
from
October 4, 2004
Haneberg III, Elmer C.W.Chicago, ILAttorneyIndefinite
from
October 6, 2004
McDonald, Michael G.Methuen, MAAttorneyIndefinite
from
October 6, 2004
Mason Jr., MauriceDracut,MAAttorneyIndefinite
from
October 6, 2004
Aaron, Stanley R.Baton Rouge, LAAttorneyIndefinite
from
October 6, 2004
McFarland, Sheila E.Chicago, ILAttorneyIndefinite
from
October 6, 2004
Deutchman, Murray L.Barnesville, MDAttorneyIndefinite
from
October 6, 2004
Wolfert, Marvin L.Foxboro, MAAttorneyIndefinite
from
October 6, 2004
Andricopoulos, MaureenChelmsford, MAAttorneyIndefinite
from
October 6, 2004
Ezuruike, MauriceAustin, TXAttorneyIndefinite
from
October 6, 2004
Jones, Thomas C.Dekalb, ILAttorneyIndefinite
from
October 6, 2004
2004–49 I.R.B.954December 6, 2004

NameAddressDesignationDate of Suspension
Yopp, L. GregoryLouisville, KYAttorneyIndefinite
from
October 6, 2004
Waples, Alan N.Burlington, IAAttorneyIndefinite
from
October 6, 2004
Ghitelman, Gayle S.Brookline, MAAttorneyIndefinite
from
October 6, 2004
Bulas Jr., LuisHollywood, FLEnrolled AgentIndefinite
from
October 15, 2004
Earl, Thomas J.Moses Lake, WAAttorneyIndefinite
from
October 8, 2004
George, Gary R.Milwaukee, WIAttorneyIndefinite
from
October 8, 2004
Jordan, David M.San Antonio, TXAttorneyIndefinite
from
October 8, 2004
Young III, George G.Havertown, PAAttorneyIndefinite
from
October 8, 2004
Tanner, MartinSalt Lake City, UTAttorneyIndefinite
from
October 8, 2004
Jensen, GeorgCheyenne, WYAttorneyIndefinite
from
October 8, 2004
Slowiaczek, Peter A.Lakewood, WAAttorneyIndefinite
from
October 8, 2004
Fennell, David E.New Castle, WAAttorneyIndefinite
from
October 8, 2004
Gish, RobertBasin, WYAttorneyIndefinite
from
October 8, 2004
Ramirez, SilverioRoselle, NJAttorneyIndefinite
from
October 8, 2004
Flaherty, Patrick J.Traverse City, MICPAIndefinite
from
October 19, 2004
Vanden Berg, StevenMason City, IAAttorneyIndefinite
from
October 25, 2004
December 6, 20049552004–49 I.R.B.

NameAddressDesignationDate of Suspension
Johnson, Jamis M.Salt Lake City, UTAttorneyIndefinite
from
October 25, 2004
Braskey, James F.Frostburg, MDAttorneyIndefinite
from
October 25, 2004
Mills, Laurence A.Wellesley, MAAttorneyIndefinite
from
October 26, 2004
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Dayandayan, Angel Y.Irvine, CAEnrolled AgentJuly 27, 2004
Summers, Todd W.Stockton, CAEnrolled AgentAugust 10, 2004
Barrett Sr., Jeffrey J.Catskill, NYCPAAugust 31, 2004
Davis, Charles W.San Francisco, CAEnrolled AgentSeptember 28, 2004
Giles, Benjamin M.Wichita, KSCPASeptember 30, 2004
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Reg-
ulations, Part 10, after notice and an op-
portunity for a proceeding before an ad-
ministrative law judge, the following indi-
viduals have been placed under suspension
from practice before the Internal Revenue
Service:
NameAddressDesignationEffective Date
Lim, Edgar E.St. Louis, MOAttorneyAugust 2, 2004
to
July 31, 2007
2004–49 I.R.B.956December 6, 2004

Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of res-
ignation as an enrolled agent from the
following individuals:
NameAddressDate of Resignation
Gleason, Daniel J.Franklin, TNSeptember 30, 2004
Consent Disbarment From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to disbarment from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may disbar an attorney, certified public ac-
countant, enrolled agent, or enrolled actu-
ary in accordance with the consent offered.
The following individuals have been
placed under consent disbarment from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Disbarment
Fort, Gala J.Las Vegas, NVCPAIndefinite
from
October 19, 2004
Regulat
ed Investment
Company
(RIC); Correction
Announc
ement 2004–97
PURPOSE
This doc
ument contains a correction to
Rev. Ru
l. 2003–84, 2003–32 I.R.B. 289,
and 2003
–2 C.B. 289. As published, Rev.
Rul. 200
3–84 contains an error that may
prove to
be misleading and is in need of
clarifi
cation.
CORRECT
ION
On page 2
90 of I.R.B. 2003–32 and
C.B. 200
3–2, under HOLDING, on the
second l
ine of the paragraph, the reference
to§851
(g)(3) should read “§ 851(b)(3)”.
FOR FURT
HER INFORMATON
CONTACT
:
Susan Th
ompson Baker at (202)
622–393
0 (not a toll-free number).
December 6, 20049572004–49 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2004–49 I.R.B.iDecember 6, 2004

Numerical Finding List
1
Bulletins 2004–27 through 2004–49
Announcements:
2004-55, 2004-27 I.R.B.15
2004-56, 2004-28 I.R.B.41
2004-57, 2004-27 I.R.B.15
2004-58, 2004-29 I.R.B.66
2004-59, 2004-30 I.R.B.94
2004-60, 2004-29 I.R.B.43
2004-61, 2004-29 I.R.B.67
2004-62, 2004-30 I.R.B.103
2004-63, 2004-31 I.R.B.149
2004-64, 2004-35 I.R.B.402
2004-65, 2004-33 I.R.B.300
2004-66, 2004-35 I.R.B.402
2004-67, 2004-36 I.R.B.459
2004-68, 2004-38 I.R.B.508
2004-69, 2004-39 I.R.B.542
2004-70, 2004-39 I.R.B.543
2004-71, 2004-40 I.R.B.569
2004-72, 2004-41 I.R.B.650
2004-73, 2004-39 I.R.B.543
2004-74, 2004-40 I.R.B.579
2004-75, 2004-40 I.R.B.580
2004-76, 2004-40 I.R.B.588
2004-77, 2004-41 I.R.B.662
2004-78, 2004-40 I.R.B.592
2004-79, 2004-41 I.R.B.662
2004-80, 2004-41 I.R.B.663
2004-81, 2004-42 I.R.B.675
2004-82, 2004-45 I.R.B.834
2004-83, 2004-43 I.R.B.712
2004-84, 2004-43 I.R.B.712
2004-85, 2004-43 I.R.B.712
2004-86, 2004-46 I.R.B.842
2004-87, 2004-45 I.R.B.834
2004-88, 2004-44 I.R.B.779
2004-89, 2004-45 I.R.B.835
2004-90, 2004-45 I.R.B.835
2004-91, 2004-45 I.R.B.835
2004-92, 2004-45 I.R.B.835
2004-93, 2004-48 I.R.B.882
2004-94, 2004-46 I.R.B.842
2004-95, 2004-46 I.R.B.845
2004-96, 2004-47 I.R.B.872
2004-97, 2004-49 I.R.B.957
Notices:
2004-41, 2004-28 I.R.B.31
2004-43, 2004-27 I.R.B.10
2004-44, 2004-28 I.R.B.32
2004-45, 2004-28 I.R.B.33
2004-46, 2004-29 I.R.B.46
2004-47, 2004-29 I.R.B.48
Notices— Continued:
2004-48, 2004-30 I.R.B.88
2004-49, 2004-30 I.R.B.88
2004-50, 2004-33 I.R.B.196
2004-51, 2004-30 I.R.B.89
2004-52, 2004-32 I.R.B.168
2004-53, 2004-33 I.R.B.209
2004-54, 2004-33 I.R.B.209
2004-55, 2004-34 I.R.B.319
2004-56, 2004-35 I.R.B.375
2004-57, 2004-35 I.R.B.376
2004-58, 2004-39 I.R.B.520
2004-59, 2004-36 I.R.B.447
2004-60, 2004-40 I.R.B.564
2004-61, 2004-41 I.R.B.596
2004-62, 2004-40 I.R.B.565
2004-63, 2004-41 I.R.B.597
2004-64, 2004-41 I.R.B.598
2004-65, 2004-41 I.R.B.599
2004-66, 2004-42 I.R.B.677
2004-67, 2004-41 I.R.B.600
2004-68, 2004-43 I.R.B.706
2004-69, 2004-43 I.R.B.706
2004-70, 2004-44 I.R.B.724
2004-71, 2004-45 I.R.B.793
2004-72, 2004-46 I.R.B.840
2004-73, 2004-46 I.R.B.841
2004-74, 2004-48 I.R.B.875
2004-75, 2004-48 I.R.B.876
2004-76, 2004-48 I.R.B.878
2004-77, 2004-47 I.R.B.855
2004-78, 2004-48 I.R.B.879
2004-79, 2004-49 I.R.B.898
Proposed Regulations:
REG-208246-90, 2004-36 I.R.B.450
REG-138176-02, 2004-43 I.R.B.710
REG-153841-02, 2004-31 I.R.B.145
REG-155608-02, 2004-49 I.R.B.924
REG-163679-02, 2004-35 I.R.B.390
REG-163909-02, 2004-38 I.R.B.499
REG-108637-03, 2004-37 I.R.B.472
REG-120616-03, 2004-37 I.R.B.474
REG-124405-03, 2004-35 I.R.B.394
REG-131486-03, 2004-28 I.R.B.36
REG-131786-03, 2004-38 I.R.B.500
REG-145987-03, 2004-39 I.R.B.523
REG-145988-03, 2004-42 I.R.B.693
REG-149524-03, 2004-39 I.R.B.528
REG-150562-03, 2004-32 I.R.B.175
REG-152549-03, 2004-36 I.R.B.451
REG-154077-03, 2004-37 I.R.B.476
REG-169135-03, 2004-42 I.R.B.697
REG-171386-03, 2004-37 I.R.B.477
REG-101282-04, 2004-42 I.R.B.698
REG-101447-04, 2004-34 I.R.B.344
Proposed Regulations— Continued:
REG-106889-04, 2004-38 I.R.B.501
REG-114726-04, 2004-47 I.R.B.857
REG-116265-04, 2004-38 I.R.B.505
REG-117307-04, 2004-28 I.R.B.39
REG-124872-04, 2004-39 I.R.B.533
REG-128767-04, 2004-39 I.R.B.534
REG-129274-04, 2004-40 I.R.B.567
REG-129706-04, 2004-37 I.R.B.478
REG-129771-04, 2004-36 I.R.B.453
REG-130863-04, 2004-39 I.R.B.538
REG-131264-04, 2004-38 I.R.B.506
REG-135898-04, 2004-40 I.R.B.568
REG-136481-04, 2004-37 I.R.B.480
Revenue Procedures:
2004-38, 2004-27 I.R.B.10
2004-39, 2004-29 I.R.B.49
2004-40, 2004-29 I.R.B.50
2004-41, 2004-30 I.R.B.90
2004-42, 2004-31 I.R.B.121
2004-43, 2004-31 I.R.B.124
2004-44, 2004-31 I.R.B.134
2004-45, 2004-31 I.R.B.140
2004-46, 2004-31 I.R.B.142
2004-47, 2004-32 I.R.B.169
2004-48, 2004-32 I.R.B.172
2004-49, 2004-33 I.R.B.210
2004-50, 2004-33 I.R.B.211
2004-51, 2004-33 I.R.B.294
2004-52, 2004-34 I.R.B.319
2004-53, 2004-34 I.R.B.320
2004-54, 2004-34 I.R.B.325
2004-55, 2004-34 I.R.B.343
2004-56, 2004-35 I.R.B.376
2004-57, 2004-38 I.R.B.498
2004-58, 2004-41 I.R.B.602
2004-59, 2004-42 I.R.B.678
2004-60, 2004-42 I.R.B.682
2004-61, 2004-43 I.R.B.707
2004-62, 2004-44 I.R.B.728
2004-63, 2004-45 I.R.B.795
2004-64, 2004-49 I.R.B.898
2004-69, 2004-49 I.R.B.906
2004-70, 2004-49 I.R.B.918
Revenue Rulings:
2004-63, 2004-27 I.R.B.6
2004-64, 2004-27 I.R.B.7
2004-65, 2004-27 I.R.B.1
2004-66, 2004-27 I.R.B.4
2004-67, 2004-28 I.R.B.28
2004-68, 2004-31 I.R.B.118
2004-69, 2004-36 I.R.B.445
2004-70, 2004-37 I.R.B.460
2004-71, 2004-30 I.R.B.74
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin
2004–26, dated June 28, 2004.
December 6, 2004ii2004–49 I.R.B.

Revenue Rulings— Continued:
2004-72, 2004-30 I.R.B.77
2004-73, 2004-30 I.R.B.80
2004-74, 2004-30 I.R.B.84
2004-75, 2004-31 I.R.B.109
2004-76, 2004-31 I.R.B.111
2004-77, 2004-31 I.R.B.119
2004-78, 2004-31 I.R.B.108
2004-79, 2004-31 I.R.B.106
2004-80, 2004-32 I.R.B.164
2004-81, 2004-32 I.R.B.161
2004-82, 2004-35 I.R.B.350
2004-83, 2004-32 I.R.B.157
2004-84, 2004-32 I.R.B.163
2004-85, 2004-33 I.R.B.189
2004-86, 2004-33 I.R.B.191
2004-87, 2004-32 I.R.B.154
2004-88, 2004-32 I.R.B.165
2004-89, 2004-34 I.R.B.301
2004-90, 2004-34 I.R.B.317
2004-91, 2004-35 I.R.B.357
2004-92, 2004-37 I.R.B.466
2004-93, 2004-37 I.R.B.462
2004-94, 2004-38 I.R.B.491
2004-95, 2004-38 I.R.B.492
2004-96, 2004-41 I.R.B.593
2004-97, 2004-39 I.R.B.516
2004-98, 2004-42 I.R.B.664
2004-99, 2004-44 I.R.B.720
2004-100, 2004-44 I.R.B.718
2004-101, 2004-44 I.R.B.719
2004-102, 2004-45 I.R.B.784
2004-103, 2004-45 I.R.B.783
2004-104, 2004-46 I.R.B.837
2004-105, 2004-48 I.R.B.873
2004-106, 2004-49 I.R.B.893
2004-107, 2004-47 I.R.B.852
2004-108, 2004-47 I.R.B.853
Tax Conventions:
2004-60, 2004-29 I.R.B.43
2004-81, 2004-42 I.R.B.675
Treasury Decisions:
9131, 2004-27 I.R.B.2
9132, 2004-28 I.R.B.16
9133, 2004-28 I.R.B.25
9134, 2004-30 I.R.B.70
9135, 2004-30 I.R.B.69
9136, 2004-31 I.R.B.112
9137, 2004-34 I.R.B.308
9138, 2004-32 I.R.B.160
9139, 2004-38 I.R.B.495
9140, 2004-32 I.R.B.159
9141, 2004-35 I.R.B.359
9142, 2004-34 I.R.B.302
9143, 2004-36 I.R.B.442
9144, 2004-36 I.R.B.413
Treasury Decisions— Continued:
9145, 2004-37 I.R.B.464
9146, 2004-36 I.R.B.408
9147, 2004-37 I.R.B.461
9148, 2004-37 I.R.B.460
9149, 2004-38 I.R.B.494
9150, 2004-39 I.R.B.514
9151, 2004-38 I.R.B.489
9152, 2004-39 I.R.B.509
9153, 2004-39 I.R.B.517
9154, 2004-40 I.R.B.560
9155, 2004-40 I.R.B.562
9156, 2004-42 I.R.B.669
9157, 2004-40 I.R.B.545
9158, 2004-42 I.R.B.665
9159, 2004-49 I.R.B.895
9160, 2004-45 I.R.B.785
9161, 2004-43 I.R.B.704
2004–49 I.R.B.iiiDecember 6, 2004

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–27 through 2004–49
Announcements:
99-76
Obsoleted by
T.D. 9157, 2004-40 I.R.B.545
2003-54
Updated and superseded by
Ann. 2004-72, 2004-41 I.R.B.650
2004-70
Amended by
Ann. 2004-77, 2004-41 I.R.B.662
Notices:
88-128
Supplemented by
Notice 2004-61, 2004-41 I.R.B.596
98-65
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
2001-50
Modified by
Rev. Proc. 2004-46, 2004-31 I.R.B.142
2002-70
Modified by
Notice 2004-65, 2004-41 I.R.B.599
2003-76
Supplemented and superseded by
Notice 2004-67, 2004-41 I.R.B.600
Modified by
Notice 2004-65, 2004-41 I.R.B.599
2004-2
Modified by
Notice 2004-50, 2004-33 I.R.B.196
2004-2,
Corrected by
Ann. 2004-67, 2004-36 I.R.B.459
2004-66
Amplified and superseded by
Notice 2004-76, 2004-48 I.R.B.878
Proposed Regulations:
INTL-116-90
Withdrawn by
REG-208246-90, 2004-36 I.R.B.450
REG-208254-90
Withdrawn by
REG-136481-04, 2004-37 I.R.B.480
REG-104683-00
Partially withdrawn by
Ann. 2004-64, 2004-35 I.R.B.402
Proposed Regulations— Continued:
REG-165579-02
Withdrawn by
Ann. 2004-69, 2004-39 I.R.B.542
REG-150562-03
Corrected by
Ann. 2004-68, 2004-38 I.R.B.508
Ann. 2004-73, 2004-39 I.R.B.543
Revenue Procedures:
79-61
Superseded by
Rev. Proc. 2004-44, 2004-31 I.R.B.134
89-37
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
94-64
Superseded by
Rev. Proc. 2004-38, 2004-27 I.R.B.10
96-18
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
96-53
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
96-60
Superseded by
Rev. Proc. 2004-53, 2004-34 I.R.B.320
98-41
Superseded by
Rev. Proc. 2004-56, 2004-35 I.R.B.376
2000-37
Modified by
Rev. Proc. 2004-51, 2004-33 I.R.B.294
2002-9
Modified and amplified by
Rev. Proc. 2004-41, 2004-30 I.R.B.90
2003-28
Superseded by
Rev. Proc. 2004-58, 2004-41 I.R.B.602
2003-30
Superseded by
Rev. Proc. 2004-54, 2004-34 I.R.B.325
2003-52
Superseded by
Rev. Proc. 2004-50, 2004-33 I.R.B.211
2003-73
Superseded by
Rev. Proc. 2004-62, 2004-44 I.R.B.728
2003-76
Superseded by
Rev. Proc. 2004-64, 2004-49 I.R.B.898
Revenue Procedures— Continued:
2003-80
Superseded by
Rev. Proc. 2004-60, 2004-42 I.R.B.682
2003-83
Superseded by
Rev. Proc. 2004-63, 2004-45 I.R.B.795
2004-4
Modified by
Rev. Proc. 2004-44, 2004-31 I.R.B.134
2004-23
Modified by
Rev. Proc. 2004-57, 2004-38 I.R.B.498
Revenue Rulings:
54-379
Superseded by
Rev. Rul. 2004-68, 2004-31 I.R.B.118
58-120
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
62-60
Amplified by
Rev. Proc. 2004-53, 2004-34 I.R.B.320
70-58
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
73-354
Obsoleted by
Rev. Rul. 2004-76, 2004-31 I.R.B.111
78-371
Distinguished by
Rev. Rul. 2004-86, 2004-33 I.R.B.191
79-64
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
80-7
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
80-366
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
81-100
Clarified and modified by
Rev. Rul. 2004-67, 2004-28 I.R.B.28
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin 2004–26, dated June 28, 2004.
December 6, 2004iv2004–49 I.R.B.

Revenue Rulings— Continued:
85-70
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
92-105
Distinguished by
Rev. Rul. 2004-86, 2004-33 I.R.B.191
95-63
Modified by
Rev. Rul. 2004-103, 2004-45 I.R.B.783
2003-84
Corrected by
Ann. 2004-97, 2004-49 I.R.B.957
2003-118
Supplemented and superseded by
Rev. Rul. 2004-108, 2004-47 I.R.B.853
2003-119
Supplemented and superseded by
Rev. Rul. 2004-107, 2004-47 I.R.B.852
2004-75
Amplified by
Rev. Rul. 2004-97, 2004-39 I.R.B.516
Treasury Decisions:
9031
Removed by
T.D. 9152, 2004-39 I.R.B.509
9141
Corrected by
Ann. 2004-86, 2004-46 I.R.B.842
2004–49 I.R.B.vDecember 6, 2004
*U.S. G.P.O.: 2004—310–365/60164