Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

TAX DEFERRED ANNUITIES UNDER § 403(b) OF INTERNAL REVENUE CODE

AGLO 1982 No. 2 -
Attorney General Ken Eikenberry

OFFICES AND OFFICERS ‑- STATE ‑- DEPARTMENT OF SOCIAL AND HEALTH SERVICES ‑- TAX DEFERRED ANNUITIES UNDER § 403(b) OF INTERNAL REVENUE CODE

The department of Social and Health Services is not authorized to provide and pay for tax deferred annuities for those employees of the department eligible for such annuities pursuant to § 403(b) of the Internal Revenue Code;  however, those employees may be covered by the state deferred compensation program authorized by RCW 41.04.250-41.04.260.

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                                                                 February 5, 1982

Honorable Karen Schmidt
State Representative, 23rd District
439 House Office Building
Olympia, Washington 98504                                                                                                                 Cite as:  AGLO 1982 No. 2

Dear Representative Schmidt:

            By letter previously acknowledged, you requested our opinion on the following question:

            "Is the Department of Social and Health Services authorized to provide and pay for tax deferred annuities for those employees of the department eligible for such annuities pursuant to 403(b) of the Internal Revenue Code?"

            We answer your question in the negative for the reasons set forth in our analysis.

                                                                     ANALYSIS

            Section 403(b) of the Internal Revenue Code1/ authorizes what are commonly described as "tax-sheltered annuities" or "tax-deferred annuities"  for certain classes of public employees.  As these descriptions suggest, those annuities provide a method for deferring the receipt and taxation of income which would otherwise be currently taxable as received.

             [[Orig. Op. Page 2]]

            There are, for purposes of your question, two features of the annuities which should be noted.  First, they are purchased "for an employee . . . by an employer. . . ."  Section 403(b)(1)(A)(ii).  Secondly, that employee must be one who "performs services for an educational institution," and the employer must be "a State, a political subdivision of a State, or any agency or instrumentality of the foregoing."  Ibid.

            Often, the employee will agree with the employer to take a reduced salary, and the employer will use these funds so diverted to purchase the annuity for the employee.  Nevertheless, under the Code it is the employer‑-and not the employee‑-who purchases the annuity.

            Certain types of public employers in the State of Washington are expressly authorized to purchase these annuities for their employees.  Thus, RCW 28A.58.560 provides the following:

            "The board of directors of any school district, the Washington state teachers' retirement system, the superintendent of public instruction, and educational service district superintendents are authorized to provide and pay for tax deferred annuities for their respective employees in lieu of a portion of salary or wages as authorized under the provisions of 26 U.S.C., section 403(b), as amended by Public Law 87-370, 75 Stat. 796, as now or hereafter amended.  The superintendent of public instruction and educational service district superintendents, if eligible, may also be provided with such annuities."

            Similarly, RCW 28B.10.480 provides as follows:

            "The regents or trustees of any of the state's institutions of higher education are authorized to provide and pay for tax deferred annuities for their respective employees in lieu of a portion of salary or wages as authorized under the provisions of 26 U.S.C., section 403(b), as amended by Public Law 87-370, 75 Stat. 796 as now or hereafter amended."

             [[Orig. Op. Page 3]]

            These, however, are the only two provisions authorizing the purchase of tax deferred annuities within the purview of § 403(b), supra.  Since they do not extend to the Department of Social and Health Services, we must therefore answer your question in the negative.2/

             We trust that the foregoing will be of assistance to you.

Very truly yours,

KENNETH O. EIKENBERRY
Attorney General

TIMOTHY R. MALONE
Assistant Attorney General

                                                         ***   FOOTNOTES   ***

1/26 U.S.C. 403(b).

2/In so concluding we do not mean to imply, however, that the various employees of the Department of Social and Health Services‑-like other state employees generally‑-may not be afforded any form of deferred compensation plan with accompanying federal income tax deferral consequences.   On the contrary, such a deferred compensation program is now in effect, pursuant to statutory authorization, in accordance with RCW 41.04.250-41.04.260.  The basis for tax deferral in the case of that plan, however, is a different section of the Internal Revenue Code, specifically, 26 U.S.C. 457.