Rev. Rul. 65-208

Advice has been requested whether, under the circumstances described below, amounts used by an exempt organization to purchase an annuity contract for one of its employees are `wages' for purposes of the Federal Insurance Contributions Act (Chapter 21, subtitle C, Internal Revenue Code of 1954).

An organization, described in section 501(c)(3) of the Internal Revenue Code and exempt from income tax under section 501(a) of the Code, established a supplemental annuity plan for the benefit of its employees. Under the plan, an employee entered into an agreement with the organization to take a reduction in salary for the purpose of providing funds for the purchase of a nontransferable annuity contract on his behalf. The agreement applies only to amounts earned by the employee subsequent to the effective date of the agreement. The employee is not permitted to make more than one such agreement during any one taxable year.

For purposes of this determination, it is assumed that the purchase of the annuity contract under the circumstances described above meets the requirements of section 403(b) of the Code. Therefore, amounts used to purchase the annuity contract, within the prescribed limits are excluded from the employee's gross income under that section of the Code for the taxable year contributed.

The term `wages', as defined in section 3121(a) of the Federal Insurance Contributions Act, means all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash, with certain exclusions. The exclusion pertinent here is contained in section 3121(a)(2) of the Act, which provides, in part, that the term `wages' shall not include the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally on account of retirement.

The question involved here is whether amounts `paid by an employer' for an annuity contract on behalf of an employee must be given the same treatment for purposes of both section 403(b) of the Code and section 3121(a)(2) of the Federal Insurance Contributions Act.

The purposes of section 403(b) of the Code and section 3121(a)(2) of the Federal Insurance Contributions Act are substantially different. Therefore, a determination under section 403(b) of the Code that a particular amount is `contributed by the employer' for the purchase of an annuity contract for an employee does not necessarily require a similar determination that it is also an amount `paid by an employer' under section 3121(a)(2) of the Federal Insurance Contributions Act.

Accordingly, it is held that, under the circumstances described herein, the amounts used by the organization pursuant to the salary reduction agreement to purchase the annuity for the employee are `wages' for purposes of the Federal Insurance Contributions Act, even though such amounts, within prescribed limits, are excludable from the employee's gross income for purposes of section 403(b) of the Code.

However, the withholding of income tax is not required on such amounts used by the organization to purchase the annuity contract on behalf of the employee. See Rev. Rul. 65-209, page 414 this Bulletin.

The instant case is factually distinguishable from Revenue Ruling 181, C.B. 1953-2, 111, which holds, in effect, that an amount paid by an exempt organization as a premium for the purchase of an annuity contract on behalf of an employee does not fall within the meaning of the term `wages' as defined by the Federal Insurance Contributions Act. That Revenue Ruling contemplates a situation where an organization uses its own funds for the purchase of an annuity contract, rather than one where the employee takes a voluntary reduction in salary to provide the necessary funds.

Revenue Ruling 181, C.B. 1953-2, 111, is hereby distinguished.