|March 18, 1981|
|********** ("Employer") provides a basic and a supplementary retirement plan for its employees through participation in two Teachers Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF) annuities. Both of these annuities are nontransferable and non-forfeitable.|
|Under the basic retirement plan, the employee contributes 5% of his gross salary towards the purchase of an annuity. This contribution may be made either as a payroll deduction or pursuant to a salary reduction agreement. The Employer contributes an amount equal to 7% of the employee's gross salary up to the Social Security earnings base and 10% of the gross salary thereafter.|
|After one year of employment, an employee may elect coverage under the basic retirement plan. After five years of employment and the attainment of age 35, participation in the basic plan is mandatory.|
|Under the supplementary retirement plan, an employee may increase his contribution to the purchase of the basic retirement annuity or contribute to the purchase of a supplemental annuity. Contributions to the supplemental annuity may only be made through a salary reduction agreement.|
|You ask whether any of these contributions are includible in an employee's Massachusetts gross income, and thus subject to Massachusetts income taxation.|
|Under Internal Revenue Code Section 403(b), amounts contributed by Code Section 501(c)(3) employers to certain annuities are excludible from the employee's gross income to the extent that the aggregate of the employer's contributions does not exceed the exclusion allowance as defined in Section 403(b)(2). U.S. Treas. Reg. 1.403(b)-1(b)(3) characterizes amounts contributed to an annuity by way of a salary reduction agreement as employer contributions.|
|Contributions resulting from a salary reduction agreement are not "wages" for federal withholding tax purposes. (Rev. Rul. 65-209, 1965-2 C.B. 414).|
|Massachusetts gross income is federal gross income with certain modifications (G.L. c. 62, s. 2). Under Chapter 62, Section 2(a)(1)(D), contributions to an annuity which are made pursuant to a salary reduction agreement and which are not required under a retirement program of the employer are includible in Massachusetts gross income.|
|Income is subject to Massachusetts withholding if it is both taxable under Massachusetts General Laws Chapter 62 and either constitutes "wages" as defined in Internal Revenue Code Section 3401(a), or is subject to voluntary withholding under Code Section 3402(o). (G.L. c. 62B, ss. 1 and 2).|
|Base on the foregoing, it is ruled that:|
|1. (a) All Employer and employee contributions made under the basic retirement plan before participation in the plan is mandated as part of the Employer's retirement program are includible in an employee's Massachusetts gross income if the employee has entered into a salary reduction agreement with his Employer.|
|(b) If these contributions are not made as part of a salary reduction agreement, the employer contributions will be excluded from the employee's Massachusetts gross income to the extent excluded from his federal gross income, and the employee contributions will be included in the employee's Massachusetts gross income to the extent included in his federal gross income.|
|2. All Employer and employee contributions made under the basic retirement plan after participation in the plan is mandated as part of the Employer's retirement program are excludible from the employee's Massachusetts gross income to the extent excludible from his federal gross income.|
|3. All contributions under the supplemental retirement plan are includible in an employee's Massachusetts gross income.|
|4. All contributions includible in Massachusetts gross income should be reported on the employee's Wage and Tax Statement (Form W-2) under "State Wages, Tips, Etc."|
|5. Only those contributions which are wages subject to federal withholding are wages subject to Massachusetts withholding.|
|Very truly yours,|
|/s/L. Joyce Hampers|
|L. Joyce Hampers|
|Commissioner of Revenue|
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