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

SSR 64-59

Under an annuity plan established by certain school districts, an employee of such a district can voluntarily agree to enter into a salary reduction agreement and to have the district deduct a portion of his cash pay and use this portion to pay an insurance carrier for an annuity for that employee. Held, the amounts deducted and paid to the carrier by the employer under the annuity plan are not employer contributions under the Social Security Act and hence are not excluded from "wages" for social security purposes under sections 209(b), (c), or (e) of the Act.

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.

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 (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.

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