3959. How is a death benefit under a tax sheltered annuity taxed to an employee’s beneficiary?Nuco Employeercline202015-07-06T19:50:00Z2015-07-06T19:50:00Z23622069Summit Business Media174242714Site Map/Retirement Plans/403(b) Tax Sheltered Annuities/Amounts Received Under the Plan/Distributions/Taxation of Benefits 2005-01-24T00:00:00ZTaxFactsDefaultArticle117360498-00-tf1.xml501.00;#2218;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1How is a death benefit under a tax sheltered annuity taxed to the employee’s beneficiary?99200.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-15T00:17:55Z3959.01. How is a death benefit under a tax sheltered annuity taxed to an employee’s beneficiary?A death benefit under a tax sheltered annuity generally is taxed in the same way as a death benefit under a qualified pension, qualified plan or profit sharing plan (Q 3865 to Q 3867). In the case of a single sum payment where no life insurance is involved, all amounts received by a beneficiary are taxable as ordinary income except that the beneficiary may exclude from gross income the employee’s unrecovered cost basis, if any. If a death benefit consists of life insurance proceeds, the amount of the proceeds in excess of the cash surrender value of the policy immediately before the insured’s death is excludable from gross income under IRC Section 101(a)(1). For the rule under the final regulations restricting the availability of life insurance in 403(b) arrangements, see Q 3909. Cash surrender value is taxable as ordinary income to the extent that it exceeds the portion of the premiums taxed to the employee as being the cost of life insurance protection (see Q 3935 regarding the proper measure of the value of current life insurance protection), and any other unrecovered cost basis of the employee..IRC Secs. 403(c), 72(m)(3)(C); Treas. Reg. §1.72-16(c).3959.02. Are death benefits paid to an employee’s beneficiary under a tax sheltered annuity subject to withholding?With respect to distributions other than eligible rollover distributions (Q 3890), payments to a surviving spouse or beneficiary are subject to income tax withholding unless the spouse or beneficiary elects not to have withholding apply. Amounts need not be withheld on any part of the distribution where it is reasonable to believe those amounts will not be includable in gross income. Annuity payments are subject to withholding at the rate applicable to wages; other payments are subject to withholding at a 10 percent rate..IRC Sec. 3405; Temp. Treas. Regs. §§35.3405-1, A-17; 35.3405-1, A-28. In the case of an eligible rollover distribution, a surviving spouse or other beneficiary is subject to the same mandatory withholding rules as the employee (Q 3958).