Rev. Rul. 68-178

Rev. Rul. 68-178

Advice has been requested whether amounts contributed by a state teachers' retirement system to purchase annuity contracts for employees of the retirement system are excludable from the gross income of the employees under section 403(b) of the Internal Revenue Code of 1954 under the circumstances described below.

A state established a teachers' retirement system for the purpose of administering a retirement program established for the benefit of the teachers and administrators of the state public schools. The retirement system is a qualified employees' trust within the meaning of section 401(a) of the Code. It makes all the rules and regulations necessary for the functioning of the teachers' retirement program and invests the funds contributed to the system. The retirement system entered into an arrangement with its employees, intended to meet the requirements of section 403(b) of the Code, under which the retirement system purchased annuity contracts for those employees.

Section 403(b) of the Code provides that certain amounts contributed by an employer to purchase an annuity contract shall be excluded from the gross income of the employee for the taxable year if the conditions set forth therein are met. Amounts may not be excluded under that section unless the annuity is purchased (1) for an employee by an employer which is exempt from Federal income tax under section 501(c)(3) of the Code or (2) for an employee who performs services for an educational institution as defined in section 151(e)(4) by an employer which is a state, a political subdivision of a state, or an agency or instrumentality of any one or more of the foregoing.

Under section 151(e)(4) of the Code, the term "educational institution" means only an educational institution which normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where its educational activities are carried on.

A person is considered an employee who performs services for an educational institution if he is performing services directly or indirectly for such an institution. The principal, clerical employees, custodial employees, and teachers at a public school are employees performing services directly for such educational institution. An employee who performs services involving the operation or direction of a state's education program, as carried on through educational institutions, is an employee performing services indirectly for such institutions. An employee participating in an "in-home" teaching program is included because such program is merely an extension of the activities carried on by such educational institution. See section 1.403(b)-1(b)(5) of the Income Tax Regulations.

The purpose of the state teachers' retirement system in this case is to administer the retirement program established for the benefit of the teachers and administrators of the state public schools. Since it is a qualified trust under section 401(a), the retirement system is neither an organization exempt from Federal income tax under section 501(c)(3) of the Code, nor is it an educational institution, or a part thereof, within the meaning of section 151(e)(4) of the Code. Further, since the employees' services are limited to the administration of the retirement program, they do not perform services directly or indirectly for an educational institution.

Accordingly, amounts contributed by the state teachers' retirement system to purchase annuity contracts for employees of the retirement system are not excludable from the employees' gross income under section 403(b) of the Code.