4033 / What organizations can make tax sheltered annuities available to their employees?

An organization must be either a tax-exempt organization of one of the types described in IRC Section 501(c)(3) or a public school system. An organization in either of these two categories may make tax sheltered annuity benefits available to one or more of its full-time or part-time employees.

A participant must be an employee; persons working for an organization in a self-employed capacity generally are not eligible.¹

A tax sheltered annuity also may be purchased for a duly ordained, commissioned, or licensed minister of a church by the minister himself if the minister is self-employed or by an organization that employs the minister and with respect to which the minister shares common religious bonds.² This definition includes chaplains ( Q 4052).

IRC Section 501(c)(3) organizations are nonprofit organizations that are organized and operated exclusively for religious, charitable, scientific, literary, educational, or safety testing purposes, or for the prevention of cruelty to children or animals. Organizations other than public schools that are wholly owned by a state or other local government generally are not eligible employers. Some of these organizations will qualify as 501(c)(3) organizations if they are separately organized, are not an integral part of the government, and meet the description of a 501(c)(3) organization, such as some state or city hospitals.³

A school or college that is operated exclusively for educational purposes by a separate educational instrumentality may qualify doubly, both as a public school and as an IRC Section 501(c)(3) organization.⁴ A state department of education may qualify as a part of a public school system if its services involve the operation or direction of the state’s public school program.⁵ Likewise, a state agency that administers a guaranteed student loan program and is part of a state department of insurance may qualify.⁶ Thus, annuities may be purchased for employees of these organizations as well as public school teachers, teachers in private and parochial schools, school superintendents, college professors, clergymen, and social workers.

A doctor who works as an employee for a hospital is eligible provided the hospital is a qualified employer. A doctor generally is not eligible, however, unless the doctor is an employee of the hospital for all purposes, such as Social Security and withholding tax purposes. If the doctor’s relationship to the hospital is that of an independent contractor, the doctor is not eligible and any premiums paid on the doctor’s behalf for an annuity will be currently taxable.⁷

Although teachers who are covered under a state teachers’ retirement system also may participate in a tax sheltered annuity plan, the employees of the retirement system itself are not eligible.⁸ The Uniformed Services University of the Health Sciences will be treated as a 501(c)(3) employer for purposes of providing tax sheltered annuities for employee members of a civilian faculty or staff with respect to service after December 31, 1979.⁹