SSR 64-59: SECTIONS 209(b), (c), and (e). -- WAGES -- PURCHASE OF ANNUITIES BY SCHOOL DISTRICTS FOR THEIR EMPLOYEES THROUGH VOLUNTARY SALARY REDUCTION PLANS

20 CFR 404.1027(b), (c), and (e)

SSR 64-59

By resolution of their boards of education certain school districts in

the State of Y offered their employees an annuity plan to supplement the

retirement system already in effect. The work of employees of the school

districts is employment covered under the Social Security Act (hereinafter

referred to as the Act), under an agreement entered into by State Y with

the Secretary of Health, Education, and Welfare in accordance with section

218 (providing for voluntary coverage of State and local government

employees).

Under the plan, the school district enters into an agreement with each of

its employees, who so desires, to deduct from that employee's cash pay a

specified amount and to pay this amount to an insurance carrier to provide

an annuity for the employee. Pursuant to such an agreement the board of

education reduces the employee's annual cash compensation for the

beginning year and for each subsequent year by the amount he designates.

He is not permitted to revise the amount authorized for the annuity

purchase during the school contract year. If he decides to terminate the

agreement, he must give written notice of termination to the

superintendent of the school district. His cash remuneration then reverts

to the original sum. The employee does not, because of termination of

employment, expiration of a contract of employment, or termination of his

agreement, forfeit his right to the annuity already purchased for him. The

statutes of State Y pertaining to school affairs permit the amount of

compensation or wages payable to an employee and the medium of payment to

be a matter of contract between the school board and the employee.

not, because of termination of

employment, expiration of a contract of employment, or termination of his

agreement, forfeit his right to the annuity already purchased for him. The

statutes of State Y pertaining to school affairs permit the amount of

compensation or wages payable to an employee and the medium of payment to

be a matter of contract between the school board and the employee.

A question has been raised as to whether the amounts deducted from the

employee's pay and paid to the insurance carrier are creditable as wages

for purposes of the Act. If they are not wages, this could (among other

consequences) tend to reduce the employee's average creditable earnings

and thus reduce the amount of any social security benefit which may later

be payable on his earnings record.

The term "wages" is defined in section 209 of the Act as remuneration for

employment, and includes all such remuneration except for specified types

of payments which are expressly excluded. The provisions of the Act

excluding from wages retirement pay, or payments toward the purchase of

employee annuities, are contained in sections 209(b), (c), and (e) of the

Act (and in the corresponding section 3121(a)(2)(3), and (5) of the

Internal Revenue Code). The language of the statute together with the

expressions of congressional intent contained in H.R. Rep. No. 728, 76th

Cong., 1st Sess. 18 (1939) and S.Rep. No. 1669, 81st Cong. 2d Sess. 82

payments toward the purchase of

employee annuities, are contained in sections 209(b), (c), and (e) of the

Act (and in the corresponding section 3121(a)(2)(3), and (5) of the

Internal Revenue Code). The language of the statute together with the

expressions of congressional intent contained in H.R. Rep. No. 728, 76th

Cong., 1st Sess. 18 (1939) and S.Rep. No. 1669, 81st Cong. 2d Sess. 82

(1950), indicate clearly that these exclusions are intended to apply only

to such payments made by the employer in his own behalf and from his own

funds and thus do not exclude payments made by him if acting as a conduit

for funds of his employees.

The facts in the present case establish that for social security purposes

it is the employee's own funds which are being used to purchase the

annuity and, in effect, constitute a deduction from his salary. Action by

the participating employee in authorizing reduction of current wage

payments is a voluntary one in respect of the compensation otherwise

payable. The payments made through the employer to the insurance carrier,

therefore, do not come within the provisions of sections 209(b), (c), or

(e) of the Social Security Act. The annuity purchase amounts are,

therefore, held not to be excludable from "wages" for social security

purposes. Whether they meet the requirements for income tax deferment

under section 403(b) of the Internal Revenue Code of 1954 is a matter

within the jurisdiction of the Internal Revenue Service. The decision

under that provision of law for the purposes of income tax liability is

not relevant to a decision under the social security provisions of law.