Rev. Rul. 64-333

Rev. Rul. 64-333 ¹

Public Law 87-370 approved October 4, 1961, C.B. 1961-2, 344, extends to employees performing services for certain educational institutions an exclusion from gross income of amounts paid for certain annuity contracts. The `exclusion allowance' is an amount equal to the excess, if any, of (1) the amount determined by multiplying 20 percent of the employee's includible compensation by the number of years of service, over (2) 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.

Based on the Congressional history of the Technical Amendments Act of 1958, Public Law 85-866, approved September 2, 1958, C.B. 1958-3, 254, and on the attendant facts and circumstances of individual cases, if an employee enters into an agreement with his employer for a period of not less than 1 year (except the initial period may be less), to effect a reduction in salary or to forego receipt of an increase in salary in return for the employer's purchase of an annuity contract on behalf of such employee, the employer will be deemed to have purchased an annuity contract within the meaning of section 403(b) of the Internal Revenue Code of 1954 as amended. Only the amounts so contributed which are not in lieu of any amounts earned by the employee before the agreement is executed will qualify.

The employee's rights under the contract must be nonforfeitable except for failure to pay future premiums, and then only where the contributions are not made pursuant to a plan qualified under section 401(a) of the Code.

In these cases, if all the conditions described under section 403(b) of the Code, as amended, are met at the time annuity premiums are paid by the employer, such amounts would be excludable from the gross income of the employee to the extent of the applicable exclusion allowance.

The employee is not permitted to make more than one agreement with the same employer during any taxable year of such employee beginning after December 31, 1963; the exclusion shall not apply to any amounts which are contributed under any further agreement made with the employer during the same taxable year beginning after such date. However, the employee may be permitted to terminate the agreement with respect to amounts not yet earned. Furthermore, the annuity contract must be nontransferable. Employee participation under such an arrangement may be on an individual basis.

Thus, for example, if an employee enters into an agreement with his employer which in effect results in a reduction in the stated amount of the employee's current salary or similar compensation, and such agreement requires the employer to apply an equivalent amount towards the purchase of an annuity contract, then amounts so applied will be deemed the employer's contribution within section 40-3(b) of the Code.

¹ Based on Technical Information Release 643, dated Oct. 14, 1964.