Rev. Rul. 57-528

The Internal Revenue Service has given further consideration to the question of the taxability to employees of a contribution by an employer to a trust, forming part of a plan of deferred compensation for its employees, where the deduction for the contribution is governed by the provisions of section 404(a)(5) of the Internal Revenue Code of 1954.

Revenue Ruling 57-37, C.B. 1957-1, 18, holds that contributions conveying fully vested and nonforfeitable interests made by an employer into separate and independently controlled trusts for each employee, each trust created pursuant to a collective bargaining agreement for the purpose of furnishing unemployment and certain other benefits to its eligible employees, although not made directly to each employee, constitute additional compensation to the employees includible in their gross income for the taxable year in which such contributions are made, under section 61 of the Code, and, as such, are subject to income tax withholding under section 3402 of the Code and the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act at the time paid into the trusts. Such amounts constitute business expenses deductible from gross income under section 404(a)(5) of the Code in the taxable year in which paid.

However, section 1.402(b)-1(a)(1) of the Income Tax Regulations states, in part, that except as provided in section 402(d), any contribution made by an employer on behalf of an employee to a trust during a taxable year of the employer which ends within or with a taxable year of the trust for which the trust is not exempt under section 501(a), shall be included in income of the employee for his taxable year during which the contribution is made if the employee's beneficial interest in the contribution is nonforfeitable at the time the contribution is made.

The exception provided by section 402(d) of the Code is that, notwithstanding subsection (b) or any other provision of income tax law, a contribution to a trust by an employer shall not be included in the gross income of the employee in the year in which the contribution is made if (1) such contribution is to be applied by the trustee for the purchase of annuity contracts for the benefit of such employee; (2) such contribution is made to the trustee pursuant to a written agreement entered into prior to October 21, 1942, between the employer and the trustee, or between the employer and the employee; and (3) under the terms of the trust agreement the employee is not entitled during his lifetime, except with the consent of the trustee, to any payments under annuity contracts purchased by the trustee other than annuity payments.

Accordingly, Revenue Ruling 57-37, supra , is hereby modified only to the extent it holds that a contribution by an employer to a trust, forming a part of a plan of deferred compensation for his employees, which is deductible by such employer under the provisions of section 404(a)(5) of the Code, where the employees' rights to or derived from such employer's contribution or such compensation are nonforfeitable at the time the contribution or compensation is paid, is includible in gross income of the employee under section 61 of the Code. Such contributions are hereby held to be taxable to the participating employees under the provisions of section 402(b) of the Code.