TAXATION OF EMPLOYEE ANNUITIES.

SEC. 23. TAXATION OF EMPLOYEE ANNUITIES. (a) Annuity Contracts Purchased by Certain Tax-Exempt Organizations.—Section 403 (relating to taxation of employee annuities) is amended by redesignating subsection (b) as subsection (c), and by inserting after subsection (a) the following new subsection: “(b) Taxability of Beneficiary Under Annuity Purchased by Section 501 (c) (3) Organization.— “(1) General rule.— If— “(A) an annuity contract is purchased for an employee by an employer described in section 501 (c) (3) which is exempt from tax under section 501 (a), 72 Stat. 1621 “(B) such annuity contract is not subject to subsection (a), and “(C) the employee’s rights under the contract are nonforfeitable, except for failure to pay future premiums, then amounts contributed by such employer for such annuity contract on or after such rights become nonforfeitable shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such amounts does not exceed the exclusion allowance for such taxable year. The employee shall include in his gross income the amounts received under such contract for the year received as provided in section 72 (relating to annuities) except that section 72 (e) (3) shall not apply. “(2) Exclusion allowance.— For purposes of this subsection, the exclusion allowance for any employee for the taxable year is an amount equal to the excess, if any, of— “(A) the amount determined by multiplying (i) 20percent of his includible compensation, by (ii) the number of years of service, over “(B) the aggregate of the amounts contributed by the employer for annuity contracts and excludable from the gross income of the employee for any prior taxable year. “(3) Includible compensation.—For purposes of this subsection, the term ‘includible compensation’ means, in the case of any employee, the amount of compensation which is received from the employer described in section 501 (c) (3) and exempt from tax under section 501 (a), and which is includible in gross income (computed without regard to sections 105 (d) and 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies. “(4) Years of service.— In determining the number of years of service for purposes of this subsection, there shall be included— “(A) one year for each full year during which the individual was a full-time employee of the organization purchasing the annuity for him, and “(B) a fraction of a year (determined in accordance with regulations prescribed by the Secretary or his delegate) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such organization. In no case shall the number of years of service be less than one. “(5) Application to more than one annuity contract.—If for any taxable year of the employee this subsection applies to 2 or more annuity contracts purchased by the employer, such contracts shall be treated as one contract. “(6) Forfeitable rights which become nonforfeitable.—For purposes of this subsection and section 72 (f) (relating to special rules for computing employees’ contributions to annuity contracts), if rights of the employee under an annuity contract described in subparagraphs (A) and (B) of paragraph (1) change from forfeitable to nonforfeitable rights, then the amount (determined without regard to this subsection) includible in gross income by reason of such change shall be treated as an amount contributed by the employer for such annuity contract as of the time such rights become nonforfeitable.” 72 Stat. 1622 (b) Qualified Plans.— Section 403 (a) (1) (relating to taxability of beneficiary under a qualified annuity plan) is amended to read as follows: “(1) General rule.—Except as provided in paragraph (2),if an annuity contract is purchased by an employer for an employee under a plan which meets the requirements of section 404 (a) (2) (whether or not the employer deducts the amounts paid for the contract under such section), the employee shall include in his gross income the amounts received under such contract for the year received as provided in section 72 (relating to annuities) except that section 72 (e) (3) shall not apply.” (c) Certain Forfeitable Contracts Purchased by Exempt Organizations.—Section 403 is amended by adding after subsection (c) (as redesignated by subsection (a) of this section) the following new subsection: “(d) Taxability of Beneficiary Under Certain Forfeitable Contracts Purchased by Exempt Organizations.—Notwithstanding the first sentence of subsection (c), if rights of an employee under an annuity contract purchased by an employer which is exempt from tax under section 501 (a) or 521 (a) change from forfeitable to nonforfeitable rights, the value of such contract on the date of such change (to the extent attributable to amounts contributed by the employer after December 31, 1957) shall, except as provided in subsection (b), be included in the gross income of the employee in the year of such change.” (d) Amounts Received as Death Benefits.—Section 101 (b) (2) (B) (relating to nonforfeitable rights) is amended to read as follows: “(B) Nonforfeitable rights.—Paragraph (1) shall not apply to amounts with respect to which the employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living. This subparagraph shall not apply to total distributions payable (as defined in section 402 (a) (3)) which are paid to a distributee within one taxable year of the distributee by reason of the employee’s death— “(i) by a stock bonus, pension, or profit-sharing trust described in section 401 (a) which is exempt from tax under section 501 (a), “(ii) under an annuity contract under a plan which meets the requirements of paragraphs (3), (4), (5), and (6) of section 401 (a), or “(iii) under an annuity contract purchased by an employer which is an organization referred to in section 503 (b) (1), (2), or (3) and which is exempt from tax under section 501 (a), but only with respect to that portion of such total distributions payable which bears the same ratio to the amount of such total distributions payable which is (without regard to this subsection) includible in gross income, as the amounts contributed by the employer for such annuity contract which are excludable from gross income under section 403 (b) bear to the total amounts contributed by the employer for such annuity contract.” (e) Exclusion From Gross Estate.— Section 2039 (c) (relating to exemption of annuities under certain trusts and plans) is amended— (1) by striking out “or” at the end of paragraph (1), and by striking out the period at the end of paragraph (2) and inserting in lieu thereof or”; 72 Stat. 1623 (2) by inserting after paragraph (2) the following new paragraph: “(3) a retirement annuity contract purchased for an employee by an employer which is an organization referred to in section 503 (b) (1), (2), or (3), and which is exempt from tax under section 501 (a).”; (3) by inserting after “under a plan described in paragraph (1) or (2)” in the second sentence the following: “or under a contract described in paragraph (3)”; and (4) by striking out the third sentence and inserting in lieu thereof the following: “For purposes of this subsection, contributions or payments made by the decedent’s employer or former employer under a trust or plan described in paragraph (1) or (2) shall not be considered to be contributed by the decedent, and contributions or payments made by the decedent’s employer or former employer toward the purchase of an annuity contract described in paragraph (3) shall, to the extent excludable from gross income under section 403 (b), not be considered to be contributed by the decedent.” (f) Election of Survivor Benefits.— Section 2517 (relating to certain annuities under qualified plans), as added by section 68 of this Act, is amended— (1) by striking out “or” at the end of subsection (a) (1), and by striking out the period at the end of subsection (a) (2) and inserting in lieu thereof “; or”; (2) by inserting after subsection (a) (2) the following new paragraph: “(3) a retirement annuity contract purchased for an employee by an employer which is an organization referred to in section 503 (b) (1), (2), or (3), and which is exempt from tax under section 501 (a).”; and (3) by adding at the end of subsection (b) the following new sentence: “For purposes of the preceding sentence, payments or contributions made by the employee’s employer or former employer toward the purchase of an annuity contract described in subsection (a) (3) shall, to the extent not excludable from gross income under section 403 (b), be considered to have been made by the employee.” (g) Effective Dates.—The amendments made by subsections (a), (b), (c), and (d) shall apply with respect to taxable years beginning after December 31, 1957. The amendments made by subsection (e) shall apply with respect to estates of decedents dying after December 31, 1957. The amendments made by subsection (f) shall apply with respect to calendar years after 1957.