Rev. Rul. 84-149
Rev. Rul. 84-149; 1984-2 C.B. 97
- Cross-Reference
26 CFR 1.403(b)-1: Taxability of beneficiary under annuity purchased
by a section 501(c)(3) organization of public school.
(Also Section 415; 1.415-6.)
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
PURPOSE
The purpose of this revenue ruling is to restate the position in Rev. Rul. 70-243, 1970-1 C.B. 107, in view of the enactment of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 1974-3 C.B. 1.
ISSUE
How is the exclusion allowance described in section 403(b)(2)(A) of the Internal Revenue Code computed when an annuity contract is purchased under the circumstances described below?
FACTS
A teacher was employed by an educational organization (which the teacher did not control for purposes of section 415 of the Code) on January 1, 1981, at an annual salary of $10,000, and entered into an agreement to reduce the teacher's salary by 10 percent. Under the agreement, the employer is required to contribute $1,000 each year for the purchase of an annuity contract for the teacher. During each of the years 1981, 1982, and 1983, the employee's annual salary remained the same and the employer contributed an amount equal to 18 percent of the employee's salary (before the reduction) to a qualified pension trust and 10 percent (before the reduction) to purchase the annuity contract.
The teacher did not make any election under section 415(c)(4) of the Code for any of the years 1981, 1982, or 1983.
LAW AND ANALYSIS
Section 403(b)(2)(A) of the Code provides that the exclusion allowance for any employee for the taxable year is an amount equal to the excess, if any, of (A) the amount determined by multiplying (i) 20 percent of the employee's includible compensation by (ii) the number of years of service (with the present employer), over (B) 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.
Section 1.403(b)-1(d)(3) of the Income Tax 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 gross income of the employee for any taxable year prior to the taxable year for which the exclusion allowance is being determined, there shall be included all contributions made by the employer for the benefit of the employee which, under section 402(a) or section 403(a) of the Code, were excludable from the employee's gross income for any such prior taxable year by reason of being contributions under a qualified plan.
HOLDING
The amount of the premiums for the annuity contract that is excludable from the teacher's gross income is computed in the manner shown below:
1981
(1) Amount contributed by employer for the
annuity contract in 1981 $1,000
(2) Amount contributed by employer in years
prior to 1981 under the qualified plan
(employee not employed by this employer
in such prior years) None
(3) Includible compensation
($10,000-$1,000) $9,000
(4) 20%x includible compensation $1,800
(5) Number of years of service 1
(6) Item (4) x item (5) $1,800
(7) Employer's contributions excludable in
prior taxable years None
(8) Amount excludable from employee's gross
income under section 403(b) of the Code
for 1981; lesser of either (1) or
((6)-(7)) $1,000
(9) Amount includible in employee's gross
income for 1981 ((1)-(8)) None
1982
(10) Amount contributed by employer for the
annuity contract in 1982 $1,000
(11) Amount contributed by employer in prior
years under the qualified plan
(excludable from employee's gross
income under section 402(a) of
the Code) $1,800
(12) Includible compensation ($10,000-$1,000) $9,000
(13) 20%x includible compensation $1,800
(14) Number of years of service 2
(15) Item (13) x item (14) $3,600
(16) Employer's contributions excludable in
prior taxable years ((8) + (11)) $2,800
(17) Amount excludable from employee's gross
income under section 403(b) of the Code
for 1982; lesser of either (10) or
((15)-(16)) $800
(18) Amount includible in employee's gross
income for 1982 ((10)-(17)) $200
1983
(19) Amount contributed by employer for annuity
contract in 1983 $1,000
(20) Amount contributed by employer in prior
years under a qualified plan (excludable
from the employee's gross income under
section 402(a) of the Code) $3,600
(21) Amount contributed by employer in prior
years for annuity contract and excludable
from the employee's gross income under
section 403(b) of the Code ((8) + (17)) $1,800
(22) Includible compensation ($10,000-$1,000) $9,000
(23) 20%x includible compensation $1,800
(24) Number of years of service 3
(25) Item (23) x item (24) $5,400
(26) Employers contributions excludable in
prior taxable years ((20) + (21)) $5,400
(27) Amount excludable from employee's gross
income under section 403(b) of the Code
for 1983; lesser of either (19) or
((25)-(26)) None
(28) Amount includible in employee's gross
income for 1983 ((19)-(27)) $1,000
However, section 415(a)(2) of the Code provides that the limitations described in section 415(b) or (c), whichever is appropriate, apply to contributions to annuity contracts described in section 403(b) and that the amount of any contributions to such an annuity contract which exceeds those limitations shall reduce the exclusion allowance provided in section 403(b)(2).
Further, section 415(c)(4) of the Code provides for special elections to be made by an employee, which, under certain circumstances will permit a larger excludable contribution to be made on the employee's behalf to a section 403(b) annuity.
The above calculations only compute the amount which is excludable based on section 403(b)(2)(A) of the Code and do not consider the effect of the limitations in section 415.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 70-243 is superseded because the computation is updated and restated under current law in this Revenue Ruling.
- Cross-Reference
26 CFR 1.403(b)-1: Taxability of beneficiary under annuity purchased
by a section 501(c)(3) organization of public school.
(Also Section 415; 1.415-6.)
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
