TRANSFER OF ANNUITY PROCEEDS FROM ONE INSURER TO ANOTHER IS NOT TAXABLE EVENT.

UIL Number(s) 0401.00-00

                                             Date: May 22, 1992

In a letter to the Office of Financial Institutions and Products, dated June 7, 1990, as supplemented by letters dated October 22 and November 8, 1990, February 7, July 16, August 20, and October 29, 1991, your authorized representative requested a ruling concerning whether a transaction will be treated as a tax-free exchange of one annuity contract for another annuity contract in accordance with section 1035(a)(3) of the Internal Revenue Code. Your request was forwarded to the Employee Plans Technical and Actuarial Division on November 17, 1991, because your request concerns nontransferability restrictions under section 401(g).

You have submitted the following facts and representations:

Employer C was a State A for-profit corporation. Prior to October 31, 1988, Employer C maintained Plan X, a tax-qualified profit-sharing plan described in section 401(a) of the Code and exempt from taxes in accordance with section 501(a). Plan X was funded, in part, with individual annuities issued by Company N. Employer C funded such an annuity for Taxpayer. In 1988, Employer C was sold and Plan X was terminated.

Upon termination, the account balances of all participants became fully vested and all participants were given the option of taking their distributions partly in kind, including the Company N individual annuities. At the time of this termination, the surrender charge then applicable under the individual annuities was in excess of 10%. Due to this high surrender charge, Taxpayer accepted distribution, partly in kind, and thus Annuity Y was endorsed by Company N to Taxpayer. In compliance with the requirements of sections 401(g), 401(a)(11) and 417 of the Code, Annuity Y was both nontransferable and subject to the spousal consent requirements of the Retirement Equity Act of 1984.

Because of the substantial amount of other funds invested by Taxpayer with Company N, and given recent financial failings of certain insurance companies, Taxpayer desires to transfer Annuity Y to another insurer. The reason for the transfer is to reduce the potential risk of loss to Taxpayer in the event of the financial failure of Company N.

In order to achieve this objective, Taxpayer proposes to exchange Annuity Y for a similar fixed deferred annuity contract to be issued through a new insurer.

The annuity contract to be issued by the new insurer will also be nontransferable in accordance with section 401(g) of the Code. In addition, the annuity contract will provide the spousal consent requirements in accordance with sections 401(a)(11) and 417 of the Code. Further, the annuity starting date will remain the same under the annuity contract proposed to be issued as under Annuity Y.

It is proposed that this exchange be accomplished through the direct transfer of the policy proceeds from Company N to the new insurer. Thus, no proceeds will be received by Taxpayer.

Based on the foregoing facts and representations, you request a letter ruling that the transfer of funds from Annuity Y to a substantially similar annuity provided by another insurer does not violate the nontransferability restrictions of section 401(g) of the Code and is not a taxable event.

Section 401(g) of the Code provides that for purposes of sections 401, 402, 403, and 404, the term "annuity" includes a face- amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but does not include any contract or certificate issued after December 31, 1962, which is transferable, if any person other than the trustee of a trust described in section 401(a) which is exempt from tax under section 501(a) is the owner of such contract or certificate.

Section 1.401-9 of the Income Tax Regulations discusses and amplifies section 401(g) of the Code. Section 1.401-9(b)(1)(i) provides, generally, that under section 401(g) of the Code, in order for any face-amount certificate, or any other contract issued after December 31, 1962, to be subject to any provision under sections 401 through 404 which is applicable to annuity contracts, as compared to other forms of investment, such certificate or contract must be nontransferable at any time when it is held by any person other than the trustee of a trust described in section 401(a) and exempt under section 501(a).

In Revenue Ruling 90-24, 1990-1 C.B. 97, the issue presented is whether a transfer of all or part of the holder's interest in a section 403(b)(1) annuity contract or a section 403(b)(7) custodial account to another 403(b)(1) annuity contract or section 403(b)(7) custodial account constitutes an actual distribution to the holder within the meaning of section 403(b)(1).

The revenue ruling holds that the transfer of all or part of the holder's interest in a section 403(b)(1) contract or a section 403(b)(7) custodial account to another section 403(b)(1) or 403(b)(7) investment did not constitute an actual distribution under section 403(b)(1) as long as the transferee accounts/contracts had the same or more stringent distribution restrictions as the transferor accounts/contracts. The revenue ruling also holds that it is irrelevant whether the transferring individual is a current employee, a former employee or a beneficiary of a former employee.

The revenue ruling explains that because the annuity interest is retained throughout this transaction, the direct transfer between section 403(b) investments is a mere change in issuers that does not violate the nontransferability requirement of section 401(g) of the Code.

The conclusions of Revenue Ruling 90-24 are equally applicable to annuity contracts in and distributed from section 401(a) plans. The nontransferability restriction applicable to Code section 403(b) annuity contracts is contained in section 401(g) and is applied in the same manner to annuity contracts used to fund 401(a) plans. Therefore, the nontransferability restriction of 401(g) is not violated if the owner of an annuity contract that was distributed from a Code section 401(a) plan exchanges such contract for another similar contract from a different insurer.

In order for an exchange of section 401 contracts to be like the exchange in Rev. Rul. 90-24, the annuity contract received by a taxpayer must be materially similar to the one exchanged, i.e., it must meet the applicable section 401 requirements, including the minimum distribution rules, the incidental death benefit rules, and the qualified joint and survivor annuity rules.

Taxpayer received Annuity Y purchased from Company N by the trustee of Plan X representing the balance to the credit to Taxpayer after Employer C terminated Plan X. Taxpayer proposes to subsequently authorize Company N to transfer all funds in Annuity Y to another insurer in exchange for a substantially similar annuity.

Although section 1035 provides that no gain or loss shall be recognized on the exchange of an annuity contract for another annuity contract, the exchange of a qualified plan contract for a materially different contract does not come within the ambit of this section. An annuity contract that is nontaxable when distributed from a qualified plan contains certain provisions in order to comply with section 401 and to protect participants and beneficiaries. Many of these provisions must remain in effect until the last payment is received under the annuity contract. If a "401 annuity contract" is exchanged for a materially different contract, the requirements and protections of section 401 of the Code would be lost.

Based on these facts and representations, we conclude that the nontransferability restrictions of section 401(g) are not violated upon the transfer of funds from Annuity Y to a materially similar annuity contract. There would be no income tax consequences to Taxpayer as a result of such an exchange.

This ruling is conditioned upon both Annuity Y and the annuity received in the exchange being qualified under section 401(a) of the Code.

The original of this letter has been sent to your authorized representative in accordance with a power of attorney on file in this office.

                                   Sincerely yours,