Rev. Rul. 69-629

Rev. Rul. 69-629

Advice has been requested whether, under the circumstances described below, a teacher in a county school system may include prior service with another school system in computing the exclusion allowance under an arrangement that meets the requirements of section 403(b) of the Internal Revenue Code of 1954. Advice has also been requested whether the exclusion allowance must be reduced because of contributions by the state to a separate program, qualified under section 401(a) of the Code, for the benefit of the teacher.

A public school teacher was employed by the school system of County A for a period of two years. During this time, the county made no contributions towards the purchase of an annuity contract for any of its employees. Subsequently, the teacher was employed in the same state by County B's school system. County B does make contributions towards the purchase of nonforfeitable annuities under an arrangement referred to in section 403(b) of the Code.

In addition to the above annuity purchase arrangement, a retirement program, qualified under section 401(a) of the Code, is maintained by County B for the benefit of its teachers. The state makes contributions to this program on behalf of the county teachers although, under state law, County B, and not the state, is their employer.

Section 403(b) of the Code provides that if an annuity contract is purchased for an employee who performs services for a section 501(c)(3) organization or public school and the annuity contract is not one purchased pursuant to a plan qualified under section 401(a), then amounts contributed by the employer for the contract on or after the date the rights become nonforfeitable shall be excluded from the employee's gross income for the taxable year to the extent that the aggregate of these amounts does not exceed the applicable exclusion allowance for the taxable year.

In computing an employee's exclusion allowance for a taxable year, it is necessary to determine the employee's number of years of service for the employer as of the close of such taxable year. Section 1.403(b)-1(f)(1) of the Income Tax Regulations. Furthermore, the exclusion allowance must be reduced by amounts contributed, on behalf of the employee, to a trust meeting the requirements of section 401(a) of the Code. See section 1.403(b)-1(d)(3)(i) of the regulations.

The years of service referred to in section 1.403(b)-1(f)(1) of the regulations are years of service with the employer that purchases the annuity for the employee. Thus in this case, where County B is the present employer of the teacher and is making contributions on his behalf towards the purchase of an annuity within the meaning of section 403(b) of the Code, only years of service with County B may be considered in computing the exclusion allowance. Accordingly, service with County A may not be used in determining the teacher's exclusion allowance.

Where someone other than the employer makes contributions to a plan qualified under section 401(a) of the Code, or to a nonqualified plan under section 403(b), as far as participants are concerned, when they receive benefits they are being compensated for services rendered. This is the theory on which they are taxed both with respect to the contributions made on their behalf and the increments thereon. In this case, the State's contributions to the qualified program on behalf of County B's teachers represent compensation for services rendered and thus, are amounts contemplated by section 1.403(b)-1(d)(3)(i) of the regulations. Accordingly, the teacher's exclusion allowance must be reduced by the amount of such contributions made on his behalf by the State to the qualified retirement program maintained by County B.