Annuity: What It Means for Employers

What it means in practice

What the term means. The DOL describes a life annuity as "equal, periodic payments, often as a monthly benefit, for the rest of your life." The annuity starting date is the first day of the first period for which an amount is payable as an annuity (IRC 417(f)(2)), and it drives the notice, consent and tax rules below. This entry covers annuities as an employer plan benefit, not personal investments.

Which plans must offer an annuity. Section 401(a)(11) applies the survivor annuity rules to every defined benefit plan, every defined contribution plan subject to the section 412 funding standards (such as a money purchase plan), and any other defined contribution plan unless three conditions are met: the vested balance is payable in full to the surviving spouse at death unless the spouse consents to another beneficiary, the participant does not elect a life annuity, and the plan holds no assets transferred from a plan that had to offer survivor annuities. So a profit-sharing or 401(k) plan that offers a life annuity brings these rules into play for a participant who picks it.

The qualified joint and survivor annuity. Under section 417(b), a QJSA is an annuity for the participant's life with a survivor annuity for the spouse's life of not less than 50% and not more than 100% of the amount paid during their joint lives, and it must be the actuarial equivalent of a single life annuity for the participant. The DOL notes that this reduces monthly payments. For an unmarried participant, Treasury regulations say the QJSA is a single life annuity, and the participant must still receive the written explanation (26 CFR 1.401(a)-20, Q&A-25). A participant who waives the QJSA must be able to elect a qualified optional survivor annuity (QOSA): if the plan's QJSA survivor percentage is under 75%, the QOSA pays 75%; if it is 75% or more, the QOSA pays 50% (section 417(g)).

The qualified preretirement survivor annuity. If a vested participant dies before the annuity starting date, section 401(a)(11) requires a qualified preretirement survivor annuity (QPSA) for the surviving spouse. In a defined benefit plan it is at least the survivor amount the spouse would have received under the QJSA. In a defined contribution plan it is a life annuity worth at least 50% of the vested account balance (section 417(c)). The QPSA explanation is generally due between the start of the plan year in which the participant turns 32 and the end of the plan year before the one in which the participant turns 35, with other periods for later entrants and early leavers (section 417(a)(3)(B)).

Waivers, notices and spousal consent. Section 417(a) lets a participant waive the QJSA or QPSA, and revoke the waiver, during the applicable election period; for the QJSA, the Pension Protection Act of 2006 lengthened it from 90 days to the 180-day period ending on the annuity starting date. The plan must explain the QJSA and QOSA terms, the waiver and its effect, and the spouse's rights, generally at least 30 days before the annuity starting date (26 CFR 1.417(e)-1); under section 417(a)(7) a participant may waive the 30 days if distribution begins more than 7 days after the explanation. The spouse's consent must be written, acknowledge the effect of the election and be witnessed by a plan representative or notary public, unless a plan representative is satisfied there is no spouse or the spouse cannot be located. A plan may treat couples married less than one year as unmarried (section 417(d)). Pledging a vested benefit as security for a plan loan also needs written spousal consent within 90 days before the loan is secured.

Cash-outs and lump sums. A plan may pay out a QJSA or QPSA immediately, without consent, if its present value does not exceed the section 411(a)(11) limit. SECURE 2.0 raised that limit from $5,000 to $7,000 for distributions after December 31, 2023. Above that amount, both the participant and the spouse must consent in writing. Present value may not be less than the value figured using the IRS applicable mortality table and the section 417(e)(3) segment interest rates. The IRS QJSA web page still cited $5,000 and a 90-day consent window when checked in November 2026; the statute shows $7,000 and 180 days.

Distribution forms in defined benefit plans. The DOL says defined benefit and money purchase plans must offer a life annuity and may offer other options, while other defined contribution plans may pay a lump sum, installments over a set period, or an annuity. The section 415(b) cap on annual defined benefit payments is $290,000 for 2026 (IRS COLA table); as of November 4, 2026, the IRS had not announced 2027 limits.

403(b) annuity contracts. A 403(b) plan, also called a tax-sheltered annuity plan, can be funded through annuity contracts issued by insurance companies, custodial accounts invested in mutual funds, or church retirement income accounts. The IRS says they cannot be funded with life insurance issued after September 24, 2007.

Lifetime income illustrations. SECURE Act section 203 added a lifetime income disclosure to ERISA section 105. The DOL rule at 29 CFR 2520.105-3 (85 FR 59154, September 18, 2020) requires individual account plan benefit statements to show the account balance as a monthly single life annuity and a monthly qualified joint and 100% survivor annuity. It assumes payments start on the last day of the statement period at age 67 (or actual age if older), a spouse of the same age, the 10-year constant maturity Treasury rate and the section 417(e)(3) mortality table. Using the DOL model explanations brings the rule's limit on liability. ERISA requires statements quarterly for participant-directed accounts and annually otherwise; the illustration is needed on one statement in any 12-month period.

Choosing an annuity provider. Selecting an insurer is a fiduciary act. The DOL safe harbor at 29 CFR 2550.404a-4 requires an objective, thorough and analytical search; consideration of the insurer's ability to make all future payments and of cost (including fees and commissions) against benefits and services; a conclusion at selection that the insurer is financially able and the cost reasonable; and expert advice if necessary. SECURE Act section 204 added ERISA section 404(e), under which written insurer representations (licensing, state regulatory standing for the 7 preceding plan years, a state financial examination at least every 5 years) satisfy the financial-capability test. The fiduciary need not pick the lowest-cost contract and, if the safe harbor is met, is not liable for losses from the insurer's later inability to pay.

How annuity payments are taxed. IRS Topic 410 says payments are fully taxable when the recipient has no after-tax investment in the contract and partly taxable otherwise. For payments from a qualified plan or 403(b) plan with an annuity starting date after November 18, 1996, the recipient generally must use the Simplified Method if under age 75 or entitled to less than 5 years of guaranteed payments (Pub. 575). The tax-free part of each monthly payment is the cost divided by a number of expected payments from Table 1 (one life, based on age: 360 at 55 or under, 310 at 56-60, 260 at 61-65, 210 at 66-70, 160 at 71 or older) or, for annuity starting dates after 1997, Table 2 (joint lives, based on combined ages). Payments before age 59 1/2 may face an additional 10% tax unless an exception applies.

Withholding on annuity payments. Pub. 15-A (2026) says withholding on periodic payments (installments at regular intervals over more than 1 year) is generally figured like wage withholding, using the payee's Form W-4P and the Pub. 15-T tables. A payee may elect no withholding, but generally not for payments delivered outside the United States and its territories. Nonperiodic payments and eligible rollover distributions use Form W-4R instead, with 20% mandatory withholding on eligible rollover distributions not directly rolled over. Payers report the withheld income tax on Form 945, not on Form 941 or 944, which keeps it separate from federal income tax withholding on employee pay.

Form 1099-R reporting. The payer files Form 1099-R for each person who receives a designated distribution of $10 or more. Pub. 15-A says the statement must reach the payee by January 31 of the following year. The 2026 instructions renumber the distribution code box to 7a; code 7 marks a normal distribution. The payer must use the Simplified Method to figure the taxable amount in box 2a for a qualified plan annuity starting in 1998 or later, and may show total employee contributions in box 9b.

Required minimum distributions. The IRS says plan participants generally must begin taking RMDs by April 1 following the later of the year they reach age 73 or the year they retire, if the plan allows the delay. A 5% owner cannot delay until retirement. A defined benefit plan generally satisfies RMDs through periodic annuity payments for the participant's life, joint lives, or a period certain. A shortfall can trigger a 25% excise tax, or 10% if corrected within 2 years.

Step by step for an employer. (1) Confirm from the plan document which benefit forms it offers and whether section 401(a)(11) applies. (2) Keep marital status and beneficiary records current. (3) Give the QPSA explanation in the age 32 to 35 window and the QJSA explanation before each annuity starting date. (4) Get a witnessed spousal consent before paying a married participant any other form. (5) Confirm benefit statements include both lifetime income illustrations. (6) Document any insurer selection. (7) Confirm the payer has Forms W-4P, files Form 945 and sends Forms 1099-R by January 31.

Example 1 (illustration): Simplified Method. A retiree aged 63 starts a single life annuity of $1,500 a month on January 1, 2026, and had $26,000 of after-tax contributions. Table 1 gives 260 payments, so $100 of each payment ($26,000 divided by 260) is tax-free. For 12 payments in 2026, $1,200 is tax-free and $16,800 is taxable; $24,800 of cost remains to be recovered.

Example 2 (illustration): survivor percentage. A plan's QJSA pays the participant $1,800 a month with a 50% survivor benefit, so a surviving spouse would receive $900 a month. Because the QJSA survivor percentage is under 75%, the plan must also offer a QOSA paying a 75% survivor benefit, which would be the actuarial equivalent of a single life annuity under the plan's own factors.

Example 3 (illustration): notice timing. For an annuity starting date of January 1, 2027, the waiver election period is the 180 days ending on that date. Giving the QJSA explanation by December 2, 2026 provides the 30-day period; if the participant, with spousal consent, waives it, payments may begin more than 7 days after the explanation is provided.

Where states differ. Federal law (4 U.S.C. 114) bars a state from taxing retirement income, including qualified plan and 403(b) annuity income, of an individual who is not a resident or domiciliary of that state. State withholding rules vary. Example: California's Form DE 4P (Rev. 46, 1-26) says state law requires California income tax withholding from pension and annuity payments unless the payee elects otherwise, but not for recipients living outside California.

Question: Does a 401(k) have to offer an annuity? No. The DOL says defined contribution plans other than money purchase plans may pay a lump sum.

Question: Are lifetime income illustrations a promise of payment? No. The DOL model language says the estimates "are for illustrative purposes only; they are not a guarantee."

This entry summarizes federal rules and two state-level examples; it does not decide whether a particular plan, election or payment meets them.

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