Purchasing an annuity contract with defined contribution money

[FundeK]

If you have a Profit Sharing/401(k) plan with an annuity requirement, and a participant would like to use his account balance to purchase an annuity,how do you code the 1099-R showing the funds are being distributed from the retirement plan? Or do you even need to issue a 1099-R?

[Guest JimD]

It has been awhile since I've been involved with such a situation but if the plan sponsor purchases and distributes a nontransferable annuity contract I don't believe it is reported by the plan. The insurance company reports the distributions on a 1099R. But there are situations where a participant elects to purchase an IRA annuity from an insurance company that would be reported as an eligible rollover distribution by the plan.

[FundeK]

I am a bit confused. I thought you had to report all distributions from a qualified retirement plan. So, how is a distribution of funds from the plan, which is used to purchase a annuity contract reported if it isn't on a 1099-R? Is it on the Form 5500 or something?

[pmacduff]

Whether the annuity is paid directly from the plan or the plan purchases an annuity, or the entire balance in the plan leaves the plan to purchase an annuity, the plan would still prepare the 1099-R form. Is the plan purchasing the annuity or is the particpant getting a lump sum with which he/she is purchasing his/her own annuity?

[Bird]

I think it's a "benefit payment" for 5500 reporting purposes (Schedule H has a separate line - 2(e)(2); I think it gets buried in 2e of Schedule I).

But it's not a "distribution" for 1099-R reporting purposes. It's taxed as (ultimately) distributed from the contract and reported by the insurance company.

[FundeK]

pmacduff - The plan is purchasing the annuity for the participant which is why I am confused. The plan will not hold the annuity contract so I think it needs to be reported that the funds left the plan. However, I don't know what to code the 1099-R, if one is needed.

[pmacduff]

Bird - why wouldn't the plan report it on a 1099-R as a direct rollover code "G" - not taxable to the participant. Then the annuity company would report the payments as taxable when they come out.

[jevd]

See 2004 instructions for 1099R Box 8 Other..

It would appear that the actuarial value of the annuity is not included in the Gross or taxable amount of the distribution.

[Bird]

Bird - why wouldn't the plan report it on a 1099-R as a direct rollover code "G" - not taxable to the participant. Then the annuity company would report the payments as taxable when they come out.

Because it's not an IRA, so it's not a rollover. I believe it's a 403(a) annuity, which is then taxed under section 72. It has pretty much the same effect, but, well, it's different. I think it has something to do with the transfer of responsibilities from the plan to the insurance company but I'm stretching myself pretty thin. I think these were more common, maybe even commonplace, way back before IRA rollovers were allowed, but even I'm not that old to remember.

[pmacduff]

Bird - Thanks - I asked because, like FundeK, I was under the impression that a Qualified Plan ALWAYS reported any $ leaving the Plan on a 1099-R form. I've only seen monthly payments made directly from the plan or the participant takes a lump sum, rolls to an IRA and purchases an annuity outside of the plan. Does the annuity remain under the Plan "umbrella" of assets for reporting purposes? Is this why there is no 1099-R form initially by the plan? Maybe this is just a recordkeeping function of the annuity company (to prepare the 1099-R forms) since the annuity was purchased by the plan?? How are others reporting this on the 5500 form??

[mbozek]

As Jevd has noted the distribution of an annuity contract by qualified plan is reported as a non taxable distribution in box 8 of the 1099-R because the employee will be taxed under IRC 72 as the payments are made.

[FundeK]

As Jevd has noted the distribution of an annuity contract by qualified plan is reported as a non taxable distribution in box 8 of the 1099-R because the employee will be taxed under IRC 72 as the payments are made.

What is the current actuarial value that should be entered in box 8? Also, don't you still have to put something in box 7?

[Bird]

As Jevd has noted the distribution of an annuity contract by qualified plan is reported as a non taxable distribution in box 8 of the 1099-R because the employee will be taxed under IRC 72 as the payments are made.

I agree. Scratch my earlier comment about not reporting it. (But it's not a rollover!)

[FundeK]

(But it's not a rollover!)

Help!! Don't you still have to have a code in box 7?

[pmacduff]

Maybe a "2" or a "7" depending on the taxpayer's age?? The 1099-R instructions do not specify, but do indicate in the Box 7 instructions to "be careful which code you use because this is the code the IRS uses to determine if the taxpayer properly reports the distribution." This is why my initial response was a "G" because we all know that we do not want this amount taxed to the participant when the annuity is purchased. So - I'd like to know also......

[Bird]

My best guess for box 7 would be 1 or 7. Note that the instructions to box 8 say not to use boxes 1 or 2a.

(Next time tell 'em to roll to an IRA and buy the annuity within the IRA!)