Rev. Rul. 67-69

Rev. Rul. 67-69

Advice has been requested whether an employer, pursuant to a salary reduction an annuity purchase agreement may, under section 403(b) of the Internal Revenue Code of 1954, retain amounts arising therefrom until the end of a contract year, and then pay a premium, in order to obtain a more favorable annual premium rate for such contract and whether such salary reduction agreement may coincide with the employee's contract year rather than to his taxable year.

Employees of a certain school district who perform services for an educational institution, as defined in section 151(e)(4) of the Code, participate in an annuity purchase program. The employer proposes to retain amounts, withheld monthly under the agreement, until the end of the contract year. At this time the total amount standing to the credit of each participant will be paid to the insurance company, thereby obtaining an annual premium rate for each contract. This annuity purchase agreement is related to the school contract year running from September 1 through August 31 of the following year.

Section 403(b)(1) of the Code provides that, if the provisions set forth therein are met, the amounts contributed by an employer for an annuity shall be excluded from the gross income of the employee for the taxable year to the extent that such amounts do not exceed the applicable exclusion allowance.

Section 1.403(b)-1(b)(3) of the Income Tax Regulations provides that the exclusion is applicable if an employee agrees to take a reduction in salary in return for his employer's agreement to purchase an annuity contract for him. It is further provided that the employee must not be permitted to make more than one agreement with the same employer during any taxable year of the employee beginning after December 31, 1963.

Section 403(b) of the Code and the applicable regulations do not specify the manner in which an employer is to pay for the contract purchased for an employee under a salary reduction agreement. Thus, it makes no difference whether the annuity contract was paid for or purchased on a monthly, quarterly, or annual basis. Accordingly, it is held that as long as the requirements of section 403(b) of the Code are met at the time the annual premium is paid, the employer may retain the amounts arising by means of the employee's salary reduction until the end of an employee's contract year to obtain the more favorable annual rate for such annuity. It is further held that this annuity contract purchase arrangement may coincide with the employee's contract year extending from September 1 through August 31 of the following year, but the employee is not permitted to make more than one agreement during any taxable year of such employee.