Rev. Procedure 99-44 issued 11-17-99

[jlf]

Dear Ms Calhoun: Does this Procedure mean that a 403(B)(7) custodial account holder can direct his Custodian to invest directly in publicly traded securities as an alternative to mutual funds? Thanks, Joel L. Frank

[Carol V. Calhoun]

No, the revenue procedure does not permit direct investment in such funds. The revenue procedure deals with a situation in which someone has invested in a contract which constitutes an annuity contract under applicable state law. However, because the contract is a variable annuity contract, it will not be treated as an annuity for federal tax purposes unless it meets the diversification standards of Code section 817(h). (You can click here for a general description of the tax requirements for and treatment of variable annuities.) For purposes of section 817(h), if a variable annuity contract is invested in a mutual fund which has no owners other than insurance companies and their separate accounts, you look to the underlying investments of the mutual fund to determine whether the diversification standards are met. However, if a variable annuity contract is invested in a mutual fund which is available to the public, you treat the mutual fund as being a single investment. Thus, if the only investment of a variable annuity contract is a publicly available mutual fund, the contract would not meet the diversification standards.

Code section 817(h) was primarily developed with commercial annuities, not annuities under 403(B) plans or IRAs, in mind. The alleged abuses it was intended to deal with are simply not normally present in a 403(B) contract or IRA. Thus, the revenue procedure in effect says the Code section 817(h) will be disregarded in examining annuities purchased under such arrangements.

Hope this helps!

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Employee benefits legal resource site

[Carol V. Calhoun]

More news on Rev. Proc. 99-44: It appears that the revenue procedure was issued by the financial products division, with no input by the employee plans division. The IRS has been getting numerous frantic calls about it, because the lack of understanding of employee benefits issues caused it to be unclear or misleading in several important respects. It is now being coordinated with the employee plans division, with the hope that it can be fixed within the next few days, so that the corrected version can appear in the next IRB.

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Employee benefits legal resource site

[Dave Baker]

Link to Rev Proc 99-44:

http://www.benefitslink.com/IRS/revproc99-44.shtml

[Carol V. Calhoun]

Thanks, Dave! Of course, it's a little scary to find someone even more obsessive than me around here. I thought I held the prize in that regard!

[Guest ak]

Real basic question. Why was this procedure necessary. 817(h) says that it doesn't apply to "pension plan contracts" which are defined to include 403(B) contracts? Thus, weren't 403(B) contracts (or at least some of them) already exempt from 817(h) since they are pension plan contracts.