Rev. Rul. 68-33

Advice has been requested whether a new annuity contract will be considered to have been purchased as of the day the first premium is paid by a new employer, as contemplated under section 403(b) of the Internal Revenue Code of 1954, and, therefore, must be made nontransferable as required by section 401(g).

Prior to January 1963, an organization exempt under section 501(c)(3) of the Code established a qualified pension trust funded by individual annuity contracts. An employee of that organization severed his employment prior to January 1, 1963, and received a distribution of an annuity contract from the trust representing his entire interest in such trust. After December 31, 1962, the employee was employed by a new employer, also an organization exempt under section 501(c)(3) of the Code, that is obligated under an agreement with the employee and the insurance company to pay the premium on the employee's annuity contract.

Section 403(b)(1)(A) of the Code provides that if an annuity contract is purchased for an employee by an organization exempt under section 501(c)(3), then amounts contributed by the employer for such annuity contract on or after the employee's rights become nonforfeitable shall be excluded from the gross income of the employee for the taxable year to the extent that the aggregate of such amounts do not exceed the exclusion allowance provided by section 403(b)(2).

Section 401(g) of the Code provides that the term `annuity' does not include any contract or certificate issued after December 31, 1962, which is transferable, if any person other than the trustee of a trust described in section 401(a), which is exempt from tax under section 501(a), is the owner of such contract or certificate.

Section 1.401-9(b)(4) of the Income Tax Regulations provides that a material modification in the terms of an annuity contract constitutes a new contract regardless of the manner in which the modification is made.

The exclusion allowance of section 403(b)(2) of the Code may be applicable to amounts contributed by an employer pursuant to the terms of an existing annuity contract, by reason of an agreement between the new employer, the employee, and the insurance company, whereby the new employer will assume payment to the insurance company of the premiums on the existing contract. See Revenue Ruling 66-254, C.B. 1966-2, 125. The substitution of the parties effects, both in form and in substance, a new agreement or `contract' for the purposes of section 403(b) of the Code.

Accordingly, a new annuity contract will be considered to have been purchased by the new employer on the date his first premium is paid and the insurance company agrees to the arrangement. Furthermore, if this new contract is so purchased after December 31, 1962, it must be made nontransferable as required by section 401(g) of the Code.