Rev. Rul. 66-312

Rev. Rul. 66-312

Advice has been requested whether an employer's contributions to a State teacher's retirement plan for an employee, which are excludable from the employee's gross income, may be added to the employee's "includible compensation" in order to increase his applicable exclusion allowance under section 403(b)(2) of the Internal Revenue Code of 1954.

Employees performing services for an educational institution of a certain State participate in two retirement plans. The first is a State teachers' retirement system to which the employer makes contributions in behalf of the employee and to which the employee also makes contributions. The amounts of the employer's contributions are excludable from the employee's gross income for Federal income tax purposes but the employee's own contributions are includible. The second is an annuity purchase program, described in section 403(b) of the Code, where the employer purchases an annuity contract for the employee, pursuant to a valid salary reduction agreement executed by the parties.

An employee computes his exclusion allowance under section 403(b)(2) of the Code and section 1.403(b)-1(d) of the Income Tax Regulations, in the following manner: He determines an amount by multiplying 20 percent of his "includible compensation" by the number of years of his service with the employer who is making the contributions for him. He then subtracts from this product the aggregate contributions made in his behalf by such employer for all prior years which were excludable from his gross income under a plan of deferred compensation. See section 1.403(b)-1(d)(3) of the regulations.

The term "includible compensation" is defined in section 403(b)(3) of the Code as compensation, received from a qualifying employer by an employee, which is includible in the employee's gross income for the most recent period which may be counted as 1 year of service. In this connection, section 1.403(b)-1(e)(1) of the regulations provides that for purposes of computing an employee's exclusion allowance for a taxable year, such employee's includible compensation in respect of such taxable year means the amount of compensation which is includible in his gross income.

The exclusion allowance is to be reduced by any amounts which were contributed to purchase an annuity for the employee and which were excludable from gross income for any taxable year prior to the taxable year for which the exclusion allowance is being computed. Thus, section 1.403(b)-1(d)(3) of the regulations provides that in computing the aggregate of the amounts which have been contributed by an employer for annuity contracts for an employee, and which were excludable from the employee's gross income for any prior taxable year, there shall be included all contributions made by the employer for the benefit of the employee which were excludable from his gross income under a qualified pension, annuity, or bond purchase plan or which were not includible in gross income for the taxable year in which his rights to employer contributions changed from forfeitable to nonforfeitable.

Accordingly, the employer contributions to a State teachers' retirement system for an employee, which are excludable from the employee's gross income for Federal income tax purposes, may not be added to the amount of such employee's "includible compensation" for computation of the applicable exclusion allowance under section 403(b)(2) of the Code. Furthermore such employer contributions made in prior years for the employee fall within the scope of section 403(b)(2)(B) of the Code, and section 1.403(b)-1(d)(3) and (4) of the regulations, and must be used to reduce the employee's applicable exclusion allowance.