DISTRICTS ‑- SCHOOLS ‑- BOARDS OF DIRECTORS ‑- PURCHASE OF TAX SHELTERED ANNUITIES FOR CERTIFIED EMPLOYEES.
The board of directors of a school district does not have the statutory authority to purchase for certificated employees tax sheltered annuities in lieu of salaries as defined in 26 U.S.C.A. (I.R.C. 1954) § 403 (b) as amended by Public Law 87-370, 75 Stat. 796.
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April 24, 1962
Honorable Louis Bruno
State Superintendent of
Old Capitol Building
Cite as: AGO 61-62 No. 123
By letter previously acknowledged you requested an opinion upon a question which we paraphrase as follows:
May school districts in this state purchase for certified employees, tax sheltered annuities in lieu of salaries, as defined in 26 U.S.C.A. (I.R.C. 1954) § 403 (b), as amended by Public Law 87-370, 75 Stat. 796?
We answer your question in the negative.
A school district is a municipal corporation and, as such, has only those powers expressly granted by the legislature, those necessarily or fairly implied in or incident to the powers granted, and those essential to the declared objects and purposes of the municipal corporation. Seattle High School Ch. No. 200 v. Sharples, 159 Wash. 424, 293 Pac. 994 (1930);Juntila v. Everett School District No. 24, 178 Wash. 637, 35 P. (2d) 78 (1934). The governing body of the district, empowered to exercise the foregoing powers, is, of course, the elected board of directors. (RCW 28.58.080). State ex rel. Griffiths v. Superior Court, 177 Wash. 619, 33 P. (2d) 94 (1934). See, also, AGO 59-60 No. 13 [[to Department of Labor and Industries on February 18, 1959]]and AGO 59-60 No. 25 [[to Prosecuting Attorney, Spokane County on March 25, 1959]].
Authorization for school districts to provide liability, life, health and accident insurance for employees is contained in RCW 28.76.410 which reads as follows:
[[Orig. Op. Page 2]]
"The regents, trustees or board of directors of any of the state's educational institutions or school districts may provide liability, life, health and accident insurance or any one of, or a combination of the enumerated types of insurance for the regents, trustees, members of boards of directors, students and employees of the institution or school district. The premiums due on such liability insurance shall be borne by the university, college or school district. The premiums due on such life or health and accident insurance shall be borne by the assenting regent, trustee, member of board of directors, student or employee: Provided, That nothing contained herein shall be construed to prevent the extension of the coverage provided in the insurance plan adopted to include dependents of the assenting regents, trustees, members of boards of directors, students or employees so long as the additional cost thereof is borne by the insured regent, trustee, member of board of directors, student or employee." (Emphasis supplied.)
RCW 48.11.020 which defines life insurance includes within said definition "annuities":
"'Life insurance' is insurance on human lives and insurances appertaining thereto or connected therewith. For the purposes of this code the transacting of life insurance includes the granting of annuities and endowment benefits; additional benefits in event of death by accident; additional benefits in event of the total and permanent disability of the insured; and optional modes of settlement of proceeds." (Emphasis supplied.)
It is important to note that RCW 28.76.410, supra, provides that premiums for life insurance which include annuities by definition, shall be borne by the employees andnot the school district, and this fact appears to conclusively prevent a school district from purchasing that type of annuity which is the subject of the question under consideration. Our court has stated that where the means are provided by law, there is no room for implied power. See,State ex rel. Eastvold v. Maybury, 49 Wn. (2d) 533, 304 P. (2d) 663 (1956). It is likewise [[Orig. Op. Page 3]] well established that public funds can be expended only "to the extent and in the manner prescribed by legislative authority." AGO written to the Honorable Leslie M. Carroll, Acting Prosecuting Attorney, Spokane County, dated July 23, 1945 [[to Prosecuting Attorney, Spokane County on July 23, 1945]]. See, also, AGO 59-60 No. 121 [[to Prosecuting Attorney, Klickitat County on June 2, 1960]].
The so-called tax sheltered annuity is provided for by 26 U.S.C.A. (I.R.C. 1954) § 403 (b) as amended, particularly by the technical amendments of 1958. Public Law 87-370, 75 Stat. 796, passed by the First Session of the Eighty-seventh Congress, has made it possible for all school districts to qualify as exempt organizations as defined in the Internal Revenue Code, allowing the school districts to make these annuities available to their employees. The advantage of this type of annuity is derived from the fact that the amount paid for the annuity may be deducted from the employee's gross income for the current tax year. The tax on the annuity is then not paid until the annuity itself is actually received, which is at the time of the employee's retirement, when presumably income would be lower, exemptions increased, and less tax would be payable.
In response to an inquiry from this office directed to the Commissioner of Internal Revenue, for clarification of Public Law 87-370, supra, we were advised that no deduction for federal income tax purposes is provided for employee's contributions for the purchase of an annuity contract.
Technical Information Release No. 372, dated March 22, 1962, issued by the Public Information Division of the Internal Revenue Service, forwarded in response to our inquiry, states in part as follows:
"IRS said P.L. 87-370 merely extends to employees of public educational institutions the benefits of section 403 (b) of the Internal Revenue Code. This section provides, under certain conditions, for a limited exclusion from an employee's gross income, of amounts contributed by his employer for the purchase of annuity contracts.
"Prior to enactment of this public law, the exclusion allowance under section 403 (b) applied only to employees of organizations described in section 501 (c) (3) and exempt under section 501 (a) of the Code. Under the new law, the exclusion is made applicable to employees of educational institutions of the type described in section 151 (e) (4) of the Code, where the employer is a State or political subdivision of a State, or an agency or [[Orig. Op. Page 4]] instrumentality of a State or political subdivision. The Service said the exclusion applies only to amounts contributed by the employer for the purchase of annuity contracts under which the employee's rights are nonforfeitable, except for failure to pay future premiums, and then only where not pursuant to a plan which is qualified under section 401 (a) of the Code. . . . Neither is it applicable to employee contributions regardless of whether they are used for the purchase of annuity contracts, paid into a retirement fund, or otherwise used to provide retirement benefits."
See, also,Morris Zeltzerman & Pearle C. Zeltzerman v. Commissioner of Internal Revenue, 34 T.C. 73.
From the foregoing, we conclude that school districts of this state cannot purchase tax sheltered annuities for their certificated employees (1) because of the limitations contained in RCW 28.76.410, supra, which provide that life insurance (including annuities) shall be paid for by the employee; and (2) because, according to the advice of the Internal Revenue Service, tax sheltered annuities may be purchasedonly by contributions from employers.
While we do not comment on the desirability or merits of this type of annuity, as it might apply either to school districts or to certificated employees, it appears that legislative action would be necessary to remove the current limitations noted above with particular reference to RCW 28.76.410,supra. In that connection we refer to the language contained in AGO 61-62 No. 18 [[to Prosecuting Attorney, Yakima County on March 21, 1961]], in part:
". . . We are here dealing with a particular type of municipal activity (i.e., the providing of various types of 'fringe benefits' for employees or others rendering services) with regard to which we believe the legislature has established a policy of spelling out clearly and expressly its intention to authorize such activity in those areas where such is in fact its intent. That is to say, an examination of statutes relating to certain types or classes of municipal corporations, other than fire protection districts, reveals [[Orig. Op. Page 5]] a general course of legislative policy to grant the power to pay or provide fringe benefits, over and above normal and basic compensation,only by clear and express language evidencing such intent. . . ." (Emphasis supplied.)
We trust that the foregoing will be of assistance to you.
Very truly yours,
JOHN J. O'CONNELL
JOSEPH B. LOONAM
Assistant Attorney General