March 16, 1983

You request a ruling regarding the Massachusetts income taxation of an employee's tax-sheltered annuity ("TSA") administered by the ******************** ("Association") for the ******************** ("Employer"). The Employer is a religious organization exempt from federal taxation under Internal Revenue Code Section 501(c)(3). The employee ********** has voluntarily agreed to a reduction in salary pursuant to an agreement with the Employer, and the Employer contributes the equivalent amount to the TSA.

Amounts contributed by Code Section 501(c)(3) employers to certain annuities are excludable from the employee's gross income to the extent that the aggregate of the employer's contributions does not exceed the exclusion allowance in Code Section 403(b)(2). Amounts contributed to an annuity by way of a salary reduction agreement are employer contributions. (U.S. Treas. Reg. 1.403(b)-1(b)(3))

Massachusetts gross income is federal gross income with certain modifications (G.L. c. 62, § 2). Contributions to a TSA described in Code Section 403(b) 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 (G.L. c. 62, § 2(a)(1)(D)).

Distributions received by an employee from plans described in Internal Revenue Code Section 403(b) are deductible from federal gross income in determining Massachusetts gross income until the aggregate amount deducted equals the aggregate amount previously included in Massachusetts gross income (G.L. c. 62, § 2(a)(2)(F)).

Based on the foregoing it is ruled that:

1. The Employer contributions to the TSA on behalf of the employee are subject to Massachusetts income taxation.

2. Distributions from the TSA to the employee will be excluded from the employee's Massachusetts gross income in the years the payments are received until the aggregate amount excluded equals the aggregate amount previously taxed. Payments to the employee in excess of that aggregate amount will be included in the employee's Massachusetts gross income.

Very truly yours,

/s/Ira A. Jackson

Ira A. Jackson
Commissioner of Revenue

IAJ:VGS:mf

LR 83-16