internal_revenue_service national_office technical_advice_memorandum date number release date index no case control no tam-112430-02 cc tege eoeg et2 director employee_plans examinations taxpayer's name taxpayer's address taxpayer's identification no years involved date of conference legend entity plan a plan b plan c university x y z m n date f agreement p agreement q issue s whether compulsory contributions made under retirement plans maintained by the entity and used to purchase retirement annuity_contracts described in sec_403 are wages subject_to federal_insurance_contributions_act fica_taxes conclusion the contributions are wages subject_to fica_taxes tam-112430-02 facts the entity is an organization exempt under sec_501 as an organization described in sec_501 the entity is affiliated with another organization university which is also a sec_501 organization the university has adopted three plans providing retirement benefits to its employees the plans are not qualified_plans described in sec_401 the plans are intended to provide for benefits funded under retirement annuity_contracts described under sec_403 the entity has also adopted the three plans for its employees plan a covers employees who meet the definition of highly compensated employees as provided in sec_414 in this plan employees generally are required to participate beginning on the first day of their appointments although some employees in certain job categories must fulfill service requirements if there is a minimum service requirement applicable to the employee the employee must participate in plan a immediately after completing the service requirement eligible employees include academic appointees appointed to full-time service and persons appointed to full-time service as librarians or officers of the university other employees become eligible employees after completing two years_of_service in certain positions in addition eligible employees include nonacademic employees who are compensated at or above an annual salary level as specified from time to time by the university and persons appointed to full-time service to such other positions meeting such service conditions as may from time to time be designated by specific action of the board_of trustees of the university plan a provides for plan contributions by the entity and by the participant the plan states that participant contributions will be made at a rate equal to x percent of regular salary regular salary is parenthetically explained as benefit base salary including clinical term allowances and administrative supplements regular salary is defined in the definition section of the plan as the salary stated in the academic year contract for faculty for all other employees regular salary means salary exclusive of benefits or overtime plan a provides the entity will make plan contributions equal to y percent of regular salary effective in a future year plan a provides for the cessation of entity contributions if the ratio of the value of the employee’s current retirement annuity expressed on an annual basis over the employee’s current salary equals or exceeds a targeted income replacement ratio also at the point that entity contributions cease under this provision the participant may but shall not be required to continue his or her plan contributions the plan provides for an annual testing of these ratios after the entity discontinues its contributions under this provision with the result that the entity contributions may again commence if the required ratio is not satisfied if the entity contributions again recommence then the contributions shall again commence for the participant to the extent the contributions had been discontinued tam-112430-02 plan a provides that the plan contributions will be subject_to the limitations of sec_415 sec_401 sec_402 and sec_403 if applicable the plan states that participant plan contributions will be made on a tax-deferred basis in accordance with sec_403 plan a provides for three types of funding vehicles funding vehicles are made available to participants under this plan subject_to the university’s approval a group retirement annuity has also been established to hold contributions for those participants who have failed to establish individual retirement annuities or custodial accounts in order to establish an individual_retirement_annuity or custodial_account it is necessary for the employee to complete a document which was titled plan a salary reduction agreement by the taxpayer this document provides that the employee applies for participation under the terms of the plan the document states that under the terms of the plan the employee’s basic_salary is reduced on a pretax basis by x percent and contributed under the plan on the document the employee directs what percentage of his or her contributions will go to a particular vendor the document provides that the employee releases any and all rights present and future to receive payment from the taxpayer of the sums resulting from the employee’s contributions in any form except the right of the employee’s estate to receipt of sums unpaid after death or the right of the employee upon termination of employment by reason other than death personally to receive all or any part of the amount specified for which services with the employer has been rendered but which has not been transmitted to the chosen vendor the document is dated and signed by the employee and by an authorized representative of the taxpayer under plan a a participant is fully and immediately vested in all plan contributions when such plan contributions are made the participant is entitled to receive retirement benefits under various options set forth in the relevant funding vehicles plan b covers employees who do not meet the definition of highly compensated employees as provided in sec_414 participants under plan b accrue benefits in a defined benefit program and a defined contribution program eligible employees include non-academic employees of the university who have either been employed as a benefits-eligible employee for one year who have completed one year_of_service as a benefits-eligible employee or who are benefits-eligible employees who have attained age eligible employees also include the employees of the entity employees covered by a collective bargaining agreement which does not provide for coverage under this plan are not eligible to participate in plan b also nonacademic employees who participate in any other basic retirement_plan maintained by the university or the entity are not eligible to continue to participate actively in the defined contribution program nor will they accrue additional years of participation in the defined benefits program upon commencing participation in such other plan tam-112430-02 in order to become a participant in plan b an eligible_employee must meet certain requirements an eligible_employee may begin voluntary participation in plan b upon the entry date nearest the date on which the employee meets the eligibility requirements provided that he or she must be enrolled in the plan before he or she becomes a participant a decision to participate in the plan voluntarily under this paragraph once made is irrevocable an eligible_employee is required to become a participant in plan b upon the entry date nearest the date on which he or she has both a attained age or such later age as set forth in prior plan documents for certain earlier periods and been employed as a benefits eligible_employee for two consecutive years or has completed two years_of_service as a benefits eligible_employee an eligible_employee must complete a funding vehicle application form and a salary reduction authorization form and submit them to the benefits office to enroll voluntarily in plan b an eligible_employee who is required to become a participant in plan b will be automatically enrolled upon meeting the age and service requirements for required participation and until he or she completes and submits funding vehicle application and salary reduction authorization forms the default funding vehicle for contributions under the defined contribution program shall be a group_annuity_contract that is percent invested in a money market fund in order to provide for funding of an individual annuity_contract or custodial_account the employee must complete a document which is titled plan b salary reduction agreement the document provides that the employee is eligible for participation in plan b and is filing the necessary application_for participation the document states that under the defined contribution portion of the plan the employee’s basic_salary is reduced by z percent and together with a corresponding payment of n percent of the employee’s salary by the employer is contributed to the vendors the employee directs what percentages of his or her reduction in salary are to be placed with particular vendors the document states that t he employee and the entity agree that the employee will participate in and have the benefits of the plan according to its terms and will contribute the indicated amounts as reductions in salary the document also states that the employee releases any and all rights present and future to receive payment from the entity of the sums resulting from the employee’s contributions in any form except the right of the employee’s estate to receipt of sums unpaid upon death or the right of the employee upon termination of employment by reason other than death personally to receive all or any part of the amount specified for such services with the employer has been rendered but which has not been transmitted to the vendors the participant in plan b accrues benefits under both the defined benefit program and the defined contribution program the level of benefits under the defined contribution program is based on the value of benefits accrued in funding vehicles attributable to participant and entity contributions the plan provides that participant contributions tam-112430-02 shall be made during the period of participation in plan b plan b states that participant contributions shall be made at the rate of z percent of compensation participant contributions shall not be made for more than years of participation after a date prior to the years at issue here plan b provides that for purposes of determining a participant’s benefit under the plan compensation means total gross wages paid excluding amounts paid on account of severance such as but not limited to final accrued vacation and sick_pay by the university to the participant during the calendar_year ending with or within the plan_year commencing after date d compensation shall not exceed the limit provided under sec_401 it is also provided under the plan definition of compensation that compensation shall include contributions made by the participant under a salary reduction agreement toward the purchase of individual annuities or custodial accounts described in sec_403 university contributions to the defined benefit program are actuarially determined by the university in order to provide participants the vested benefits which are accrued in the defined benefit program when due university contributions to the defined contribution program shall be made at the rate of m percent of compensation_for each participant the plan also provides for additional allocations to the defined contribution program at the rate of m percent of compensation_for each participant no allocations shall be made after years of participation under the defined benefit program benefits attributable to participant contributions are fully and immediately vested benefits attributable to entity contributions are vested after years_of_service or at age if earlier no participant contributions were made to the defined benefit program after date f prior to that date all participant contributions were made pursuant to salary reduction agreements under sec_403 under the defined contribution program benefits attributable to participant contributions are fully and immediately vested benefits under the defined contribution program attributable to university contributions are also fully and immediately vested plan c is a plan providing for supplemental retirement annuities regular part-time or full- time employees of the entity are eligible to participate in plan c part-time employees must work at least hours per week full-time employees must work at least hours per week an employee is considered to be a regular employee if the employee’s employment is expected to last at least one year participation in plan c is completely voluntary to begin participation in plan c employees needs to compete an application which includes language that the employee is authorizing a salary reduction tam-112430-02 the entity has collective bargaining agreements governing the rate of pay of most of its employees which apply based on the type of services performed by the employee these agreements generally provide detailed charts setting forth the salary or hourly rates that apply in the case of performance of services for the entity by individuals covered by the specific agreement the agreements also in effect provide authority for the reductions in salary provided for under plan b one of the collective bargaining agreements agreement p provides for hourly wage rates that apply to the job categories covered under the agreement and which the entity is obligated to pay for the services agreement p provides that employees covered by this agreement shall participate in plan b to the same extent as other non-academic entity employees a letter of agreement with respect to agreement p provides that generally employees will be covered by the terms of plan b after performing services as an employee for n years agreement p provides for specific benefits calculations with respect to the defined benefit portion of plan b that are applicable to certain employees covered under agreement p and also specific payment options that are available to agreement p employees retiring under plan b another collective bargaining agreement agreement q also provides salary schedules for each job covered by the agreement the entity is required to pay covered employees the amount of the salaries specified in agreement q the agreement provides that during the term of this agreement employees shall remain eligible to participate in plan b to the same extent that such programs are applicable to all non- academic university personnel the agreement specifically provides that except as specifically otherwise provided there shall be no increase in employee contributions required to maintain existing benefits under plan b a letter of understanding that is attached to agreement q provides for special retirement benefit computations with respect to early retirement by individuals who are covered by agreement q and who retire under certain circumstances the other collective bargaining agreements applicable to employees of the entity contain similar provisions setting forth the rates of pay of employees and providing that the employees covered by the collective bargaining agreement will participate in plan b with respect to those employees who are not covered by collective bargaining agreements the taxpayer has stated that it does not make use of employment contracts individuals are offered employment with the taxpayer through offer-of-employment letters these offer-of-employment letters usually provide the salary or hourly wage of the individual the position the individual is being offered the prospective supervisor of the individual and the beginning date of the employment the letter also sets forth certain requirements that must be satisfied by an individual entering into employment with the entity tam-112430-02 entity did not pay fica_taxes with respect to the amounts designated as participant contributions under plan a and plan b the entity’s position is that the contributions are employer contributions but the contributions are not made under a salary reduction agreement the argument is made that the contractual agreements which were titled salary reduction agreements executed by the employees and the entity are not salary reduction agreements because the participant contributions to the plans were mandatory the entity maintains that you cannot have a salary reduction agreement under sec_3121 if participant contributions are mandatory there is no dispute that the salary reduction contributions made to plan c are wages for fica tax purposes the issue presented by the technical_advice request is whether the compulsory contributions which are designated as participant contributions in plan documents made to plan a and plan b during the years at issue are wages for fica tax purposes law and analysis sec_3101 and sec_3111 impose fica_taxes on employees and employers respectively equal to a percentage of the wages received by an individual with respect to employment sec_3121 provides that wages do not include any payment made to or on behalf of an employee or his beneficiary under or to an annuity_contract described in sec_403 other than a payment for the purchase of such contract which is made by reason of a salary reduction agreement whether evidenced by a written instrument or otherwise employee contributions ie after-tax contributions made through salary deductions and used to purchase annuity_contracts are includible in wages for fica tax purposes sec_403 provides that amounts contributed by certain employers for the purchase of an annuity_contract for an employee are excludable from the gross_income of the employee if certain requirements are satisfied while annuity_contracts described in sec_403 are generally purchased with amounts contributed by an employer the employer’s contributions are not required to be merely a supplement to past or current compensation sec_1_403_b_-1 thus the exclusion is applicable to amounts contributed by an employer for an annuity_contract as_a_result_of_an_agreement with an employee to take a reduction in salary as with wages for fica tax purposes employee contributions made through salary deductions and used to purchase annuity_contracts are includible in the employee’s gross_income a background the historical treatment of the fica taxation of contributions to sec_403 plans is useful in understanding current law in addition the taxpayer has maintained that the historical treatment and legislative_history of the enactment of sec_3121 and tam-112430-02 related provisions support its position that the contributions at issue are not wages this history of fica taxation has been shaped by concern for the protection of the social_security revenue base and employees’ social_security_benefits the concern is reflected in the broad interpretation of taxable wages for purposes of the fica taxation of contributions to such plans that broad interpretation of wages has justified the concept that in this context wages for fica tax purposes is a broader term than income for income_tax purposes thus even though employer contributions to a sec_403 annuity_contract are excludable from gross_income such contributions are subject_to fica_taxes if they are made by reason of a salary reduction agreement revrul_65_208 the principle that fica taxation applies to certain sec_403 contributions was set forth in revrul_65_208 1965_2_cb_383 in that ruling an employee entered into an agreement with a nonprofit organization to take a reduction in salary for the purpose of providing funds for the purchase of an annuity_contract meeting the requirements of sec_403 the salary reduction amounts were excludable from the employee’s gross_income for purposes of sec_403 as employer contributions to a sec_403 plan and were not subject_to federal_income_tax withholding at that time sec_3121 in the fica provisions contained an exception from the definition of wages for payments made by an employer under a plan on behalf of an employee on account of retirement however the ruling held that a determination under sec_403 that a particular amount is contributed by the employer for purposes of sec_403 does not necessarily require a similar determination that it is also an amount_paid by an employer under sec_3121 the ruling noted that the purposes of sec_403 and sec_3121 are substantially different the ruling concluded that the amounts contributed to the sec_403 plan pursuant to the salary reduction agreement were wages for purposes of the fica revrul_65_208 distinguished an earlier ruling rev_rul 1953_2_cb_111 which had held that an exempt organization’s payment for the purchase of an annuity_contract on behalf an employee was not wages for purposes of the fica revrul_65_208 states that rev_rul 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 thus in revrul_65_208 a distinction was made between salary reduction contributions made from the funds of the employee and salary supplement contributions made from the funds of the employer the salary reduction contributions were held to be subject_to fica_taxes whereas the salary supplement contributions were not subject_to fica_taxes although the terminology salary supplement contribution was not used in revrul_65_208 discussions of the ruling in later litigation tam-112430-02 discussed below have used this terminology to explain the distinction drawn by revrul_65_208 rowan companies v united_states a supreme court case called the validity of revrul_65_208 into question in 452_us_247 the supreme court considered whether amounts the value of meals_and_lodging that were excludable from gross_income under sec_119 and not subject_to income_tax_withholding were wages subject_to fica_taxes the court overturned a long-standing treasury regulation and held that the amounts were not wages for fica tax purposes in this decision the supreme court set forth the principle that the definition of wages for social_security_tax purposes and the definition of wages for income_tax_withholding purposes must be interpreted in the same manner in the absence of statutory provisions to the contrary the rowan principle could be interpreted as conflicting with revrul_65_208 because rev_rul applies fica_taxes without explicit statutory authority to amounts that were not subject_to federal_income_tax withholding social_security amendments of congress quickly acted to reverse the potential effect of the supreme court’s holding on sec_403 contributions and to overturn the rationale of rowan while also codifying the narrow holding of the case excluding from wages amounts qualifying as excludable from income under sec_119 sec_3121 which applied fica taxation to sec_403 contributions made by reason of a salary reduction agreement was added by the social_security amendments of public law no hereinafter amendments in discussing present law related to the fica taxation of sec_403 plans the senate_finance_committee stated as follows in connection with the amendments the internal_revenue_service has ruled that amounts paid for a tax-sheltered annuity pursuant to a salary reduction agreement are includible in the employee’s social_security_wage_base even though such amounts may not be subject_to income_tax_withholding the validity of the ruling position is in doubt in light of the supreme court decision in rowan companies inc v united_states see following section of this report senate rep no 98th cong 1st sess the reasons for change section of the senate report discussed the concept of subjecting to fica_taxes funds set_aside by an individual under sec_403 plans and also mentioned the importance of maintaining fica tax revenue tam-112430-02 under cash or deferred arrangements certain tax-sheltered annuities certain cafeteria plans and eligible_state_deferred_compensation_plans the employer contributes funds which are set_aside by individual employees for individual savings arrangements and thus the committee believes that such employer contributions should be included in the fica base as is the case for ira contributions otherwise individuals could in effect control which portion of their compensation was to be included in the social_security_wage_base this would make the system partially elective and would undermine the fica tax_base senate report no pincite the taxpayer cites this language as indicating congressional intent that mandatory_contributions cannot be the subject of a salary reduction agreement this interpretation appears questionable because in the same committee report the senate_finance_committee specifically declined to elaborate on what constituted a salary reduction agreement the senate report indicated that the senate_finance_committee did not intend to define what constituted a salary reduction agreement for purposes of sec_3121 but did intend to codify the holding of revrul_65_208 senate report no states at page the bill also provides that any amounts paid_by an employer to a tax-sheltered annuity by reason of a salary reduction agreement between the employer and the employee would be includible in the employee’s social_security_wage_base the committee intended that the provision would merely codify the holding of revrul_65_208 1965_2_cb_383 without any implication with respect to the issue of whether a particular amount_paid by an employer to a tax-sheltered annuity is in fact made by reason of a salary reduction agreement the amendments as finally enacted by congress imposed fica_taxes on a number of deferred_compensation items where the employee had no option to receive the payment in cash or where participation was required by the employer one example is certain nonqualified_deferred_compensation_plans amounts deferred under such plans would be subject_to fica_taxes when no substantial_risk_of_forfeiture existed even if the deferral from the employee’s salary is mandatory as part of the legislative changes enacted in congress also enacted a provision providing that pick-up contributions would be includible in the fica wage_base sec_3121 under the provision enacted by congress these contributions from the employees’ salaries could only be treated as fica wages if they were required_by_law the taxpayer’s argument that only voluntary contributions from the employees’ salaries were intended to be included in fica wages is in direct conflict with the scope of the final legislation of the particular plans named in the excerpt from the committee report discussing making the system partially elective eligible_state_deferred_compensation_plans can be tam-112430-02 funded with mandatory_contributions and are nevertheless still subject_to fica tax under the amendments the principal distinction drawn in the committee reports is between contributions made from funds set_aside by individual employees and contributions made from funds of the employer the above language from the senate report is consistent with the distinction made in revrul_65_208 between salary reduction contributions and salary supplement contributions the salary reduction agreement contributions are set_aside from the funds of the employee the conference_report on the amendments approached the issue of what constituted a salary reduction agreement differently the conference_report related to the amendments described this legislative change as follows the conference agreement generally follows the senate amendment by providing that employer contributions to a sec_403 annuity_contract would be included in the wage_base if made by reason of a salary reduction agreement whether evidenced by a written_agreement or otherwise for this purpose the conferees intend that employment arrangements which under the facts and circumstances are determined to be individually negotiated would be treated as salary reduction agreements of course the mere fact that one individual is receiving employer contributions eg when the employer has only a few employees only one of whom is a member of a class eligible for such contributions is not by itself to be considered proof of individual negotiation h_r rep no 98th cong 1st se sec_147 the taxpayer places reliance on the second sentence of the above-quoted material as representing the exclusive definition of what constitutes a salary reduction agreement regardless of whether a written document purporting to be a salary reduction agreement exists however the second sentence must be read together with the first sentence the second sentence may be viewed as a partial explanation of what is included in the or otherwise language in the first sentence and is not intended to limit the scope of actual written salary reduction agreements it is intended to define certain situations other than actual written agreements which could meet the definition of salary reduction agreement and is further explained by the third sentence of the quoted material contrary to the taxpayer’s argument there is nothing in the quoted material indicating that the second sentence is intended to define exclusively what constitutes a salary reduction agreement to the exclusion of actual written salary reduction agreements between an employer and employee if the taxpayer’s interpretation were correct there would be no vehicle under which compulsory contributions could become employer contributions rather than employee contributions tam-112430-02 the second part of the amendments that is of importance in this context is the amendment made to overturn the broad rationale of rowan this provision which is referred to as the anti-rowan amendment is codified in the penultimate sentence of sec_3121 the anti-rowan amendment provides that nothing in the regulations prescribed for purposes of chapter relating to income_tax_withholding which provides an exclusion from wages as used in such chapter shall be construed to require a similar exclusion from wages in the regulations prescribed for purposes of the fica the amendments were the result of a congressional effort to assure the solvency of the social_security trust funds conf_rep pincite the amendments extended coverage raised fica_taxes imposed income_tax on social_security_benefits and cut certain benefits in order to place the social_security system on a sounder financial footing the senate report gave the following reason for adding the anti-rowan amendment the social_security program aims to replace the income of beneficiaries when that income is reduced on account of retirement and disability thus the_amount_of_wages is the measure used both to define income which should be replaced and to compute fica tax_liability since the social_security system has objectives which are significantly different from the objective underlying the income_tax_withholding rules the committee believes that amounts exempt from income_tax_withholding should not be exempt from fica unless congress provides an explicit fica tax exclusion senate report no pincite in addition congress amended the fica to eliminate the exception from retirement provided by sec_3121 for payments under employer plans on account of retirement generally this amendment had the effect of limiting exceptions from fica wages for retirement plans to specific exceptions provided for employer contributions to certain qualified_plans under sec_3121 such as the exception at issue here sec_3121 as added by the amendments could be read as reinstating the distinction between salary reduction agreement contributions and salary supplement contributions in revrul_65_208 in addition the concept set forth in revrul_65_208 that fica wages can include amounts that are not includible in gross_income was in effect incorporated into the statute by the anti-rowan amendment deficit_reduction_act_of_1984 the congressional concerns of protecting the social_security funding base preserving the social_security_benefits of sec_403 participants and reinstating the validity of revrul_65_208 were further evidenced in when congress changed the tam-112430-02 effective date rules of the anti-rowan amendment in the deficit_reduction_act_of_1984 defra the change was designed to stem the possibility of refunds of fica tax with respect to salary reduction agreement contributions under tax-sheltered annuities for periods prior to the effective date of sec_3121 in effect through passage of this provision congress sought to insure that revrul_65_208 would be effective for prior periods in situations where the employer treated the contributions as subject_to fica_taxes see sec_2662 of defra and 799_f2d_18 2d cir sec_2662 of defra provided that the anti-rowan amendment shall apply to remuneration paid after date and to any such remuneration paid on or before such date which the employer treated as wages when paid the legislative_history in connection with this change provides as follows if the revenue_ruling were determined to be invalid then employers and employees would be eligible for refunds for open years because taxable wages would be lower in addition wages for benefit computation purposes would be reduced leading in some cases to reduction of social_security_benefits being paid to current beneficiaries and recoupment of a portion of benefits which have been paid in recent years on the basis of wage records which included the salary reduction contributions h_r rep 98th cong 2d sess the effective date change was also designed to insure that the prior effective date provision remuneration paid after date would not be used as demonstrating congressional intent that the reasoning of the rowan decision should generally apply before these dates to types of remuneration other than meals_and_lodging excluded under sec_119 eg to contributions under a salary reduction agreement to tax-sheltered annuities sec_403 h conf_rep no 98th cong 2d sess the legislative_history also states as follows in describing the effect of the amendment for example if an employer treated as wages for fica and futa taxes or both the amounts contributed during to an employee’s tax-sheltered annuity pursuant to a salary reduction agreement the fica or futa taxes as the case may be paid_by the employer and employee may not be refunded or credited h_r rep no pincite these changes again demonstrate the importance of the revenue protection feature of the amendments and further support the view that the intent of congress was to essentially incorporate the holding of revrul_65_208 into the statute also as part of the defra congress amended sec_3121 to add language referencing a salary reduction agreement whether evidenced by a written instrument or otherwise identical to the language in sec_3121 the conference_report stated as follows tam-112430-02 the conferees intend that the term salary reduction agreement also includes any salary reduction arrangement regardless of whether there is approval or choice of participation by individual employees or whether such approval or choice is mandated by state statute h conf_rep no pincite although the general_rule is that legislative_history of later enacted legislation in this case the amendment to sec_3121 is given limited effect in interpretations of prior legislation sec_3121 that rule must be considered in the context of the legislation in this case the same congress in a different session is providing its intended interpretation of identical language as noted above the legislation by changing the effective date of the anti-rowan amendment was designed to insure in effect that sec_3121 and the codification of revrul_65_208 would be effective for prior years for those taxpayers who had paid fica_taxes on salary reduction contributions to sec_403 plans congress was clearly focused on the taxation of sec_403 plans in the legislation so that its interpretation of identical language added to the same code section in the legislation is entitled to weight we would also note that the change in the anti-rowan effective date and the amendment to sec_3121 are discussed seriatim in the conference_report with the preface that o nly the following two provisions relating to technical corrections to the social_security amendments of require additional explanation house conf_rep pincite also there is no indication in the committee reports that the interpretation given salary reduction agreement whether evidenced by a written instrument or otherwise in the conference_report is intended to be restricted to sec_3121 and not to reflect its meaning for purposes of other identical language in sec_3121 under these circumstances it is reasonable to consider this congressional statement as reflecting a congressional understanding of what this language found elsewhere in the same code provision would mean sec_403 refund suits taxpayers brought many refund suits seeking refunds of fica_taxes paid with respect to sec_403 contributions for years prior to and challenging the constitutionality of the changed effective dates of the amendments in a series of cases courts upheld the service’s denial of the refund claims these cases emphasized the distinction between salary reductions and salary supplements that is the focus of determining whether fica_taxes apply to sec_403 contributions see 769_f2d_126 3d cir which supports the distinction drawn by revrul_65_208 between salary reduction contributions and contributions from the employer’s own funds see 807_f2d_280 1st cir which rejected the distinction made by tam-112430-02 the government in revrul_65_208 between salary reductions and salary supplements and stated that i n congress amended the statutes to codify revrul_65_208 the court in new england baptist also stated that the law had the effect of making it clear that salary reduction plans are subject_to fica_taxes id pincite see canisius college f 2d pincite which also acknowledged the distinction between salary reduction plans and salary supplement plans the court in canisius college concluded that the provision retroactively validated previously unlawful fica_taxes paid on amounts contributed under salary reduction plans in conformity with revrul_65_208 id pincite summary since the publication of revrul_65_208 a distinction has existed for fica tax purposes between employer contributions made by salary reduction agreement to sec_403 plans and employer contributions made by salary supplement to sec_403 plans this distinction is reflected in the legislative_history of changes made in and to the fica provisions this established distinction supports the position that the contributions made to the annuity_contracts under plan a and plan b pursuant to the documents signed by the employees and by representatives of the entity are made under salary reduction agreements for fica tax purposes and are wages for fica tax purposes b distinction between employee contributions and employer contributions made to retirement annuity_contracts the taxpayer has argued that these contributions are mandatory_contributions from the salaries of the employees and therefore are not made pursuant to a salary reduction agreement if the taxpayer were correct that these contributions from the employee’s salaries are not made pursuant to a salary reduction agreement then case law and service authority would indicate that the contributions would be employee contributions rather than employer contributions for fica tax purposes if the contributions are employee contributions to the sec_403 plan the issue of whether sec_3121 applies would not even be reached sec_3121 applies only to employer contributions to the listed plans in the subparagraphs of sec_3121 no exception is provided for employee contributions to such plans thus employee contributions to sec_403 plans simply fall within the basic definition of wages under sec_3121 with no applicable exception accordingly if the contributions were employee contributions made by salary deduction rather than employer contributions made by salary reduction agreement the contributions would also be subject_to fica_taxes revrul_56_473 1956_2_cb_22 concerns the treatment for income_tax purposes of amounts deducted from the salaries of public employees of the state of arizona and credited to their retirement accounts pursuant to the state’s retirement_system half of tam-112430-02 the contributions were specified as contributions by the employee from the salary of the employee the ruling concludes that for income_tax purposes compulsory contributions designated as employee contributions should be treated as employee contributions for purposes of the employee’s annuities accordingly the ruling held that amounts deducted from the compensation of employees of the state of arizona and credited to their retirement accounts constituted gross_income within the meaning of sec_61 and should be reported in the employees’ annual income_tax returns for the year in which deducted revrul_57_326 1957_2_cb_42 holds that where an ordinance or statute of a municipality or state provides for a state employees’ retirement_plan under which employee participation is compulsory and an employee’s contributions are refunded in the event of termination of the employee’s service prior to retirement or death the amount of the employee’s contributions which have been deducted from the salary of the employee by the employer shall be included in the employee’s gross_income for income_tax purposes revrul_72_94 1972_1_cb_23 concerns the status of contributions made where under an ordinance or statute of a municipality or state or the rules of a governing body of an organization establishing an employees’ nonqualified pension or retirement_plan participation is mandatory and the ordinance statute or other rules require the employee to forfeit his contributions in the event of termination of service prior to death or before becoming eligible for retirement or are silent as to the refund of employee contributions and in the administration of the plan no refund will be made in such event the ruling concludes that the amounts withheld from the salary of an employee as contributions to the plan and applied solely to provide deferred pensions are to be treated as employer contributions under the plan accordingly it was held that those contributions were not includible in the employee’s gross_income for the year in which so contributed consistent with revrul_57_326 revrul_72_94 also holds that where only a portion of the contributions is required to be forfeited in the event of the termination of the employee’s services amounts not subject_to forfeiture are required to be included in the employee’s gross_income each year the courts have reached similar conclusions with regard to whether compulsory contributions to state retirement plans are properly characterized as employer contributions or employee contributions in 743_f2d_273 5th cir the court held that mandatory employee contributions to the employees retirement_system of texas were includible in income on either of two grounds compulsory employee contributions are refundable upon termination of employment for reasons other than death or retirement amounts contributed purchase in the nature of an annuity some valuable present economic benefit the court cited similar cases holding that amounts contributed by federal employees to the federal civil service retirement_system are income received by the employees subject_to federal income_taxation tam-112430-02 in 775_f2d_887 7th cir the court held that compulsory contributions to a state retirement_plan of amounts designated as employee contributions and withheld from the employee’s salary are employee contributions includible in the employee’s gross_income see also 63_tc_129 and feistman v commissioner 35_tcm_1045 similarly revrul_72_250 holds that the portion of a united_states government employee’s compensation that is withheld and contributed to the united_states civil service retirement and disability fund is a contribution by the employee to such fund and is includible in his gross_income in the same taxable_year in which it would have been included had it been paid to him directly this ruling is consistent with other cases considering the status of contributions from employees’ salaries to the united_states civil service retirement and disability fund see 2_tc_267 aff’d sub nom 144_f2d_287 4th cir 21_tc_197 aff’d 218_f2d_687 3d cir 63_tc_267 aff’d per curiam 543_f2d_725 9th cir and 367_fsupp_1022 e d mich aff’d 513_f2d_170 6th cir cert_denied 423_us_836 congress subsequently endorsed and codified the characterization of compulsory contributions as employee contributions with the enactment of sec_414 as part of the employee_retirement_income_security_act_of_1974 pub_l_no date erisa code sec_414 provides that an amount contributed to an employees’ trust described in sec_401 will not be treated as having been made by the employer if it is designated as an employee contribution while the statutory designation test of sec_414 does not literally apply to nonqualified plans the legal principles embodied in sec_414 do the legislative_history to erisa provides the following explanation regarding the significance of designating a contribution as either an employer_contribution or an employee contribution under the plan designated contributions -under present law contributions which are designated as employee contributions are generally treated as employee contributions for purposes of the federal tax law for example this is the case with respect to employee contributions under the federal civil service plan your committee’s bill contains a provision to clarify this rule for the future this provision provides that amounts that are contributed to sec_414 provides an exception to the general_rule stated above for state or local pick up plans in such plans certain governmental units or agencies pick up what would otherwise be an employee contribution by not withholding the employee contribution from the employee’s salary the amount picked up is treated as an employer_contribution under sec_414 tam-112430-02 a qualified_plan are not to be treated as an employer_contribution if they are designated as employee contributions this provision gives effect to the source of the contributions as designated in the plan for example if the appropriate committees of the congress were to report legislation regarding employee contributions under the federal civil service plan so that the present employee’s contributions would become employer contributions under the federal civil service plan and that legislation were to be enacted then those contributions would constitute employer contributions to the plan which would be excludable from the employee’s income when made the same rule would apply to state and local governmental plans which now designate contributions as employee contributions if the appropriate governmental bodies change the provisions of their plans h_r rep no 93rd cong 2nd sess supplement c b in accordance with the forgoing administrative judicial and legislative authority the following three factors are relevant in determining whether compulsory contributions made pursuant to a nonqualified defined_contribution_plan and used to purchase retirement annuity_contracts are employer contributions or employee contributions for purposes of sec_403 and sec_3121 whether the contributions are compulsory under state or local law or are otherwise a condition_of_employment whether the contributions are designated as employee contributions and are deducted from the employee’s base pay salary or compensation and whether the contributions are fully vested and nonforfeitable when credited to the employee’s retirement account in the instant case the contributions at issue are a condition_of_employment the one exception would be contributions made by an employee under plan b when the employee is eligible for participation but is not yet required to participate and completes the document required for enrollment in the plan the contributions are designated as participant contributions and are deducted from the employee’s base pay or salary the contributions are also fully vested and nonforfeitable when credited to the employee’s retirement account accordingly these contributions absent a legally binding salary reduction agreement have the characteristics of employee contributions under the three-factor test described in the preceding paragraph the issue arises whether compulsory contributions made pursuant to a legally binding salary reduction agreement constitute employer contributions for purposes of sec_3121 under the facts of revrul_70_582 1970_2_cb_95 a state statute required employee contributions toward retirement and permitted such contributions to be made by salary reduction agreements or salary deduction the ruling concluded tam-112430-02 that if the employer entered into a valid salary reduction agreement with the employee the compulsory contributions were employer contributions and the income_tax exclusion provisions of sec_403 were applicable to the contributions the ruling demonstrates the dichotomy between compulsory contributions made by salary reduction agreement which are employer contributions and compulsory contributions made by salary deduction which are employee contributions in 603_f2d_702 8th cir the court held that a salary reduction agreement could be effective to defer income_taxation if it is adopted in lieu of mandatory employee contributions to a state plan under the facts of the case employees were given an option to make annuity contributions through salary deductions or to have their salary reduced by the amount that would otherwise be deducted from their salaries under the court’s ruling if an employee enters into a legally binding salary reduction agreement a compulsory contribution that would otherwise be taxable as an employee contribution may be taxable as an employer_contribution if such characterization is not inconsistent with statutory intent or with the underlying plan c interpretations of salary reduction agreement in sec_402 and sec_403 for income_tax purposes the question of whether a salary reduction agreement exists is significant for several purposes under sec_403 differing nondiscrimination requirements apply based on whether a salary reduction agreement exists also under sec_403 and sec_403 the situations in which distributions may be made differ based on whether a salary reduction agreement exists in addition the question of whether the elective_deferral limitations apply may depend upon whether a salary reduction agreement exists see sec_403 and sec_402 difference in interpretation of the term salary reduction agreement for fica and for other purposes has been incorporated into the statute with respect to certain matters for example the term salary reduction agreement is defined in a manner different from the fica for the purpose of determining whether a sec_403 plan meets the nondiscrimination requirements of sec_403 see the flush language after sec_403 which states that for purposes of sec_403 a contribution shall be treated as not made pursuant to a salary reduction agreement if under the agreement it is made pursuant to a one-time irrevocable election made by the employee at the time of initial eligibility to participate in the program or is made pursuant to a similar arrangement involving a one-time irrevocable election specified in regulations tam-112430-02 in sec_403 congress created a special rule for salary reduction agreements to the effect that a contribution will not be deemed to be pursuant to such an agreement if it is made pursuant to a one-time irrevocable election no such special rule was placed in sec_3121 it is well-settled that where congress included particular language in one section of a statute but omits it in another section of the same act it is generally presumed that congress acts intentionally and purposely in the disparate inclusion or exclusion 498_us_395 quoting 464_us_16 although the ordinary common meaning of agreement would include an agreement made pursuant to a one-time irrevocable election congress created a special rule in sec_403 that was explicitly made applicable only to clause i of that section thus it may be inferred that congress intentionally decided not to incorporate this special rule into sec_3121 the legislative_history of sec_402 offers further support that congress intended a broad interpretation of salary reduction agreement in sec_3121 this legislative_history indicates the distinction between salary reduction agreements and elective_deferrals the legislative_history supports the conclusion that contributions made pursuant to a salary reduction agreement are not necessarily treated as elective_deferrals for purposes of sec_402 the language in sec_402 indicates that the agreements in the instant case could be salary reduction agreements but not elective_deferrals sec_402 provides that for purposes of sec_402 the term elective_deferral means with respect to any taxable_year the sum of several types of contributions including c any employer_contribution to purchase an annuity_contract under sec_403 under a salary reduction agreement within the meaning of sec_3121 the last sentence of sec_402 further provides that a n employer_contribution shall not be treated as an elective_deferral described in subparagraph c if under the salary reduction agreement such contribution is made pursuant to a one-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement or is made pursuant to a similar arrangement involving a one-time irrevocable election specified in regulations sec_402 was added by section a of the tax_reform_act_of_1986 and was amended to add the last sentence in sec_402 by the technical_and_miscellaneous_revenue_act_of_1988 tamra sec_402 originally listed several items that were included within the term elective_deferrals but did not provide for what was not included within the term our interpretation of the distinction between elective_deferrals and salary reduction agreements for purposes of sec_3121 is supported by the legislative_history related to the and amendments the conference_report for the tax_reform_act_of_1986 h_r rep 99th cong 2d sess ii-405 is careful to use the term elective_deferrals in describing the changes that were intended to be made by sec_402 tam-112430-02 the conference agreement clarifies the definition of elective_deferrals to which the annual_limit applies in the case of an employer that allows employees a one- time election to participate in a contributory defined benefit pension_plan with a single mandatory contribution rate or a tax-sheltered annuity program with elective_deferrals neither the election of an employee to participate in the defined_benefit_plan nor the employee contributions made to the defined_benefit_plan are to be treated as elective_deferrals for purposes of the annual_limit similarly if an employee is required to contribute a fixed percentage of compensation to a tax-sheltered annuity as a condition_of_employment the contributions are not treated as elective_deferrals this is considered elective_deferrals sic if the employer and employee enter into temporary employment contracts the conferees do not intend these examples to constitute the only situations in which contributions are not treated as elective_deferrals the conferees direct the secretary to provide guidance to employers on other contributions that are not to be treated as elective_deferrals when the last sentence of sec_402 providing the rule about one-time irrevocable elections was added in the committee specifically stated that congress intended this amendment to have no effect on fica taxation both the house and the senate reports in connection with the change contain the same language present law under present law employer contributions to purchase an annuity_contract under a salary reduction agreement within the meaning of sec_3121 are considered elective_deferrals the statement of managers with respect to the tax_reform_act_of_1986 provides that an employer_contribution is not treated as an elective_deferral if the contribution is made pursuant to a one-time election to participate in the tax-sheltered annuity even though such contribution would be considered made under a salary reduction agreement under sec_3121 explanation of provision the bill conforms the statutory language to the legislative_history by providing that contributions to a tax-sheltered annuity are not considered elective_deferrals if the contributions are made pursuant to a one-time irrevocable election made by the employee at the time of initial eligibility to participate in the annuity or are made pursuant to a similar arrangement specified in regulations the bill does not change the definition of salary reduction agreement for purpose of sec_3121 the amendment also does not affect the definition of elective_deferrals other than with respect to tax-sheltered annuities tam-112430-02 emphasis added h_r rep 100th cong 2d sess and sen_rep 100th cong 2d sess see also conference_report h_r rep thus sec_402 indicates that a salary reduction agreement described in sec_3121 is distinct from an elective_deferral under sec_402 and is intended to be a broader term the additional breadth intended to be provided to the definition of salary reduction agreement under sec_3121 and sec_3121 is also indicated by the additional parenthetical language contained in these provisions whether evidenced by a written_agreement or otherwise this additional language imparting breadth of coverage is not found in the sec_403 and sec_402 provisions sec_402 and its legislative_history provide support for the treatment of the contributions made under the salary reduction arrangement to plan a and plan b as fica wages d form of transaction under the facts here the employee is promised a gross salary and that salary is reduced for contributions to plan a or plan b under contract law the documents that the participants sign to have their salaries reduced for contributions to plan a are binding agreements under sec_3 of the restatement of contracts second an agreement is defined as a manifestation of mutual assent on the part of two or more persons comment b to sec_3 provides that this manifestation of assent may be made by words or by any other conduct here the employee signs the document agreeing to the reduction in salary and a representative of the employer signs the document the taxpayer maintains that the agreement titled salary reduction agreement signed by the employee is merely a selection by the employee of a vendor for his or her sec_403 contributions and is not a salary reduction agreement the taxpayer in essence argues that much of the substance of its salary reduction agreement contracts is without legal effect however here both the form and the substance of the transaction support the treatment of the agreement as a salary reduction agreement see 417_us_134 in which the supreme court stated that w hile a taxpayer is free to organize his affairs as he chooses nevertheless once having done so he must accept the tax consequences of his choice whether contemplated or not and may not enjoy the benefit of some other route he might have chosen to follow but did not e public employees’ retirement board v shalala tam-112430-02 in 153_f3d_1160 10th cir the court considered whether amounts designated as employee contributions that were picked up under sec_414 were paid under a salary reduction agreement and therefore were wages for fica tax purposes under sec_3121 the language in sec_3121 is similar to the language at issue in sec_3121 sec_3121 provides that n othing in any paragraph of subsection a other than paragraph shall exclude from the term wages b any amount treated as an employer_contribution under sec_414 where the pickup referred to in such section is pursuant to a salary reduction agreement whether evidenced by a written instrument or otherwise sec_3121 provides an exception for any payment made to or on behalf of an employee or his beneficiary under or to an annuity_contract described in sec_403 other than a payment for the purchase of such contract which is made by reason of a salary reduction agreement whether evidenced by a written instrument or otherwise the taxpayer in public employees’ retirement board argued that there was no salary reduction agreement because the pick up and the resulting salary reductions were mandated by the new mexico statutes under which the pension plans were administered the argument was made that an individually negotiated contract is necessary for a salary reduction agreement under a sec_414 plan however the court noted that a salary reduction agreement under the taxpayer’s definition could have never qualified as a valid pickup plan under sec_414 thus the court rejected the taxpayer’s interpretation noting that if that interpretation were correct no sec_414 pickups would be made pursuant to salary reduction agreements and sec_3121 would have had no legal effect the court stated as follows in deciding that a salary reduction agreement existed given the irs’s interpretation of pickup and given congress’s subsequent endorsement of that interpretation in sec_3121 a salary reduction agreement necessarily includes any arrangement in which there is a reduction in an employee’s salary in exchange for the employer’s contribution of the amount of the reduction to a pension_plan on the employee’s behalf an agreement is not limited to individually negotiated contracts as the state suggests but may also refer generally to a manifestation of mutual assent on the part of two or more persons restatement second of contracts sec_3 such manifestation of assent may be made by words or by any other conduct id at comment b see also id at elaborating on conduct as manifestation of assent here an employee’s decision to go to work or continue to work as a state employee constitutes conduct manifesting assent to a salary reduction by continuing employment with the state f 3d pincite tam-112430-02 plans a and b are similar to the plan at issue in public employees’ retirement board in that the participant contributions were mandatory under the plan however here the employees execute written salary reduction agreements with respect to the participant contributions thus the current fact situation represents an even stronger case for the existence of an agreement we note the court found the term ‘salary reduction agreement’ is not ambiguous but rather has a plain meaning f 3d pincite emphasis added although the court’s rationale included a discussion of the requirement that valid sec_414 plans are mandatory in nature there is no provision within sec_3121 indicating the similar language in sec_3121 should be interpreted differently furthermore in the case of sec_3121 the legislative_history and case law have stressed the distinction between salary reduction contributions and salary supplement contributions in revrul_65_208 that is in effect consistent with public employees of particular significance is the fact this identical clause salary reduction agreement whether evidenced by a written instrument or otherwise is found only in sec_3121 and sec_3121 the public employees case is consistent with the salary reduction and salary supplement dichotomy found in the fica taxation of sec_403 plans in that the case would seem to hold that salary reduction contributions that were picked up under sec_414 would be subject_to fica_taxes conversely if the sec_414 contributions had been made pursuant to a salary supplement plan rather than a salary_reduction_plan the contributions would presumably be employer contributions that would not be subject_to fica taxation in light of the above we have concluded the compulsory contributions at issue here are being made pursuant to salary reduction agreements and therefore are includible in wages for fica tax purposes under sec_3121 pursuant to the analysis above in the event that a salary reduction agreement is found not to exist with respect to an employee the compulsory contributions for that employee are also wages for fica tax purposes caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom corp - plr-119263-98 date date acquiring acquiring sub target target sub state a state b business x business y date plr-119263-98 this letter is in reply to your letter dated date requesting rulings about the federal_income_tax consequences of a proposed transaction the information submitted is summarized below acquiring is a state a corporation engaged in business x acquiring is a closely_held_corporation with common and preferred_stock authorized and common_stock outstanding acquiring files its federal_income_tax returns on a calendar_year basis using the accrual_method of accounting acquiring sub was a state b corporation organized by acquiring solely for the purpose of acquiring target acquiring sub conducted no business or operations except those necessary to facilitate the transaction before the transactions described below acquiring owned all of the stock of acquiring sub target is a state b corporation engaged in business y prior to the transaction described below target was a closely_held_corporation with one subsidiary target sub target had common and four series of preferred_stock authorized and outstanding target and target sub filed a federal consolidated_income_tax_return on a calendar_year basis using the accrual_method of accounting on date pursuant to state b law and in accordance with a plan_of_reorganization acquiring sub merged with and into target the acquisition merger target survived the merger and target shareholders received shares of acquiring stock in exchange for their target stock the taxpayers represent that the acquisition merger viewed independently of the proposed upstream_merger qualified as a reorganization under sec_368 and sec_368 of the internal_revenue_code it became clear to the management of acquiring and target that for good business reasons the businesses of acquiring and target and target sub should be operated as one enterprise accordingly acquiring proposes to merge target sub with and into target and to merge target with and into acquiring the upstream_merger the taxpayers represent that the upstream_merger will qualify as a statutory merger under applicable state law and viewed independently of the acquisition merger would qualify under sec_332 in addition the taxpayers represent that acquiring’s acquisition of target is not a reverse_acquisition within the meaning of sec_1_1502-75 the taxpayers further represent that if the acquisition merger had not occurred and target had merged directly into acquiring such merger would have qualified as a reorganization under sec_368 pursuant to sec_3 of revproc_98_3 1998_1_irb_100 the internal_revenue_service will not rule as to whether a proposed transaction qualifies under sec_368 however the service has the discretion to rule on significant subissues that must be resolved to determine whether a transaction qualifies under sec_368 plr-119263-98 accordingly based on the information submitted and the representations made and provided that i the acquisition merger and the upstream_merger are treated as steps in an integrated_plan pursuant to the step-transaction doctrine and ii the acquisition merger and the upstream_merger qualify as statutory mergers under applicable state law we hold as follows for federal_income_tax purposes the acquisition merger and the upstream_merger will be treated as if acquiring directly acquired the target assets in exchange for acquiring stock and acquiring’s assumption of target liabilities through a statutory merger as that term is used in sec_368 see revrul_67_274 1967_2_cb_141 and revrul_72_405 1972_2_cb_217 we express no opinion regarding whether the acquisition merger and the upstream_merger are steps in an integrated_plan or whether the acquisition merger or the upstream_merger qualifies as a reorganization under sec_368 we express no opinion about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings this ruling is directed only to the taxpayers on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent each affected taxpayer should attach a copy of this letter to its federal_income_tax return for the taxable_year in which the transaction covered by this ruling letter is consummated we have sent a copy to the taxpayer as designated on the power_of_attorney on file in this office sincerely yours assistant chief_counsel corporate by ken cohen senior technical reviewer branch