Rev. Rul. 77-462

Public school teachers in a state are required by law to participate in and contribute to the state pension plan. The pension plan meets the qualification requirements of section 401(a) of the Internal Revenue Code of 1954, and the employees' trust established under the plan is exempt from Federal income tax under section 501(a).

An employer-school district agreed to "pick up" (assume and pay) the required teachers' contributions to the plan. However, the state still designates these contributions as employee contributions for purposes of determining employee rights under the plan and employee remuneration for services.

Section 414(h) of the Code deals with contributions to state plans involving an employees' trust described in section 401(a). In the instant case, since the plan meets the qualification requirements of section 401(a), the plan is considered "described in" section 401(a) for purposes of section 414(h) of the Code. Section 414(h)(2) provides, in part, that where a governmental employing unit picks up plan contributions otherwise designated as employee contributions, the contributions so picked up shall be treated as employer contributions.

Section 3401(a)(12)(A) of the Code, relating to the Collection of Income Tax at Source on Wages (chapter 24 subtitle C of the Code), excludes from the definition of "wages", remuneration paid on behalf of an employee to a trust described in section 401(a) that is exempt from tax under section 501(a) at the time of such payment. See section 31.3401(a)(12)-1(a) of the Employment Tax Regulations.

Held, the school district's contributions to the plan are excluded from wages for purposes of the Collection of Income Tax at Source on Wages; therefore no withholding is required from the employees' salaries with respect to such picked-up contributions. See H.R. Rep. No. 93-807, 93d Cong., 2d Sess. 145 (1974), 1974-3 C.B. Supp. 236, 380.

Held further, the school district's picked-up contributions to the plan are excluded from the employees' gross incomes until such time as they are distributed or made available to the employees. See section 402(a) of the Code.