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AGO 1963 No. 61 - October 01, 1963
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John J. O'Connell | 1957-1968 | Attorney General of Washington


SCHOOLS ‑- DISTRICTS ‑- TEACHERS ‑- EARNABLE COMPENSATION ‑- TEACHERS' RETIREMENT SYSTEM ‑- TAX-DEFERRED ANNUITIES ‑- GROUP HOSPITAL AND MEDICAL INSURANCE.

Payments made by a school district for the purchase of tax-deferred annuities for its employees under § 10, chapter 21, Laws of 1963, Ex. Sess., constitute a form of "earnable compensation" under RCW 41.32.010 both as amended by § 1, chapter 14, Laws of 1963, Ex. Sess., and as presently defined, but payments which may be made by a school district for group hospitalization and medical insurance for its employees under chapter 75, Laws of 1963, do not.

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                                                                 October 1, 1963

Honorable E. B. Rogel
Secretary-Manager
Teachers' Retirement System
P.O. Box 778
Olympia, Washington

                                                                                                                Cite as:  AGO 63-64 No. 61

Dear Sir:

            By letters previously acknowledged, you have requested an opinion of this office on the following questions:

            (1) "Will payments made by school districts for the purchase of tax-deferred annuities for their employees under Section 10, Chapter 21, Laws of 1963 Extraordinary Session, constitute a form of 'earnable compensation' under RCW 41.32.010 (11) [(a)] as amended by Section 1, Chapter 14, Laws of 1963 Extraordinary Session [or (b) as presently defined]?"

            (2) Shall payments made by school districts for group hospitalization and medical insurance for their employees under chapter 75, Laws of 1963 constitute a form of "earnable compensation" under the above noted statutes?

            We answer your first question in the affirmative and your second question in the negative for the reasons set forth in our analysis.

             [[Orig. Op. Page 2]]

                                                                     ANALYSIS

            QUESTION (1):

            In AGO 61-62 No. 123 dated April 24, 1962, to state superintendent of public instruction Louis Bruno, we advised that:

            "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."

            After stating this conclusion, we made the following remarks:

            "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 apparent response to this opinion, the state legislature, as a part of its omnibus appropriations bill for the 1963-64 biennium, provided as follows:

            "The regents, trustees or board of directors of any of the state educational institutions or school districts are authorized to use funds appropriated by this act to provide and pay for tax deferred annuities for their respective employeesin lieu of a portion of salary or wages as authorized under the provisions of 26 U.S.C. section 403 (b) as amended by Public Law 87-370, 75 Stat. 796, as now or hereafter amended."  (Emphasis supplied.) Section 10, chapter 21, Laws of 1963, Ex. Sess.

            Against this background, your first question is whether payments made by school districts for the purchase of tax-deferred annuities, as thus provided for, will constitute a form of "earnable compensation" under RCW 41.32.010 (11) as amended by § 1, chapter 14, Laws of 1963, Ex. Sess.

             [[Orig. Op. Page 3]]

            "Earnable compensation," as defined in this 1963 amendatory act, means,

            ". . .all salaries and wages paid by an employer to an employee member of the retirement system for personal services rendered during a fiscal year, except that any part of salaries and wages in excess of ten thousand dollars per annum shall be excluded in determining the earnable compensation of a member.  In all cases where compensation includes maintenance the board of trustees shall fix the value of that part of the compensation not paid in money."  (Emphasis supplied.)

            Of course, chapter 14, Laws of 1963, Ex. Sess. will not become effective until July 1, 1964 (see § 26 thereof).  In the meantime, earnable compensation will continue to be as defined in § 1, chapter 274, Laws of 1955, as follows:

            ". . . the full rate of compensation that would be paid to a member if he worked the full normal working time during the school year, except that any part of any salary in excess of forty-five hundred dollars per annum shall be excluded in determining the earnable compensation of a member.  In all cases where compensation includes maintenance the board of trustees shall fix the value of that part of the compensation not paid in money."  (Emphasis supplied.)

            Under present law, "earnable compensation" is a factor in determining the amount of a member's contribution to the teachers' retirement fund. RCW 41.32.350.  When chapter 14, Laws of 1961, Ex. Sess., becomes effective, "earnable compensation" (as redefined therein) will also be a factor in determining the amount of a member's retirement pension.  See § 16.

            Without question the payments made by a school district (from funds appropriated by chapter 21, Laws of 1963, Ex. Sess.) to provide tax deferred annuities for their employees must be considered a form of compensation.  Article VIII, § 7, of the Washington Constitution; cf., Bakenhus v. Seattle, 48 Wn.2d 695, 296 P.2d 536 (1956).  However, at first blush, there exist two obstacles to characterizing the payments as "earnable compensation" under § 1, chapter 14, Laws of 1963, Ex. Sess., supra.

            (1) "Earnable compensation" is there defined to mean ". . . allsalaries and wages paid by an employer . . ." whereas the payments to  [[Orig. Op. Page 4]] provide tax-deferred annuities are stated by § 10, chapter 21, Laws of 1963, Ex. Sess., supra, to be ". . . in lieu of a portion of salary or wages . . ."

            (2) "Earnable compensation" is, in the case of the 1963 amendatory act ". . . all salaries and wages," and in the case of § 1, chapter 274, Laws of 1955,supra, presently in effect ". . . the full rate of compensation" paid"to" an employee member of the retirement system; whereas, payments for tax-deferred annuities cannot be currently received by the member, either actually or constructively, or they will not be eligible for tax deferral.  Llewellyn v. C. I. R., 295 F.2d 649 (1961).

            However, we are not persuaded that either of these technical obstacles (and of course only the second exists as to § 1, chapter 274, Laws of 1955,supra) is a real barrier to an affirmative answer to your first question.

            It seems clear that our state legislature, in enacting § 10, chapter 21, Laws of 1963, Ex. Sess.,supra, intended that the annuities to be purchased by school districts, et al., as provided for therein should qualify for federal income tax deferral pursuant to 26 U.S.C. § 403(b).  To thus qualify the annuities must be purchased by the school district (employer) out of its own funds and not out of a portion of the employee's salary or wages which is merely deducted and withheld by the employer at the request of the employee.  Llewellyn v. C. I. R., supra; Zeltzerman v. C. I. R., 34 T.C. 73 (1960).  Our legislature may be presumed to have known this.  Therefore, its use of the phrase "in lieu of a portion of salary or wages" may be taken as simply for the purpose of emphasizing its intent that the annuities purchased meet this requirement.

            In other words, the legislature's use of the phrase "in lieu of a portion of salary or wages" in § 10, chapter 21, Laws of 1963, Ex. Sess., supra, is not to be taken as evidencing legislative intent that a school district's payments for tax-deferred annuities for its employees should be excluded from the employees' "earnable compensation" under the pertinent provisions of the teachers' retirement law.

            Nor is the fact that the annuity purchase payments are not currently received by ("paid to") the employee member determinative of your question.  Though the payments are not made to the employee member, the annuity is purchased (by the employer) for him and its benefits are ultimately received by him for the annuity must be "nonforfeitable" in order to qualify for federal tax deferral.

             [[Orig. Op. Page 5]]

            Thus it follows that if an employer-purchased annuity can be considered a form of "compensation" (under the current definition of "earnable compensation") or of "salaries and wages" (under the amended definition), the employer's payments for its purchase may be included as part of the employee member's "earnable compensation."

            Obviously, for the constitutional reasons heretofore noted, the employer's annuity purchase payments are a form of "compensation."  As for being a form of "salaries and wages," it is of course basic that in the absence of a contrary expression of legislative intent (and none here appears) words used in a statute are to be given their usual and ordinary meaning.  Crown Zellerbach Corp. v. State, 53 Wn.2d 813, 328 P.2d 884 (1958).

            The word "salary" is defined in Webster's Third New International Dictionary (1963 ed.) as:

            "a fixed payment at regular intervals for services."

            Black's Law Dictionary, quoted with approval in Maes v. City of New Orleans, (La.) 97 So.2d 856 (1957), defines "salary" simply as:

            "A reward or recompense for services performed."

            Accordingly, it is our opinion that employer's annuity purchase payments, as authorized by § 10, chapter 10, Laws of 1963, Ex. Sess., supra, should be taken to constitute a form of "earnable compensation" under present (§ 1, chapter 274, Laws of 1955) law, and as well under the statute (§ 1, chapter 14, Laws of 1963, Ex. Sess.) which will become effective on July 1, 1964.

            QUESTION (2):

            With regard to payments made by a school district for group hospitalization and medical insurance under chapter 75, Laws of 1963, however, we believe that a contrary conclusion to that stated above is in order.

            Chapter 75, Laws of 1963, provides:

            "Any department, division, or separate agency of the state government, and any county, municipality or other political subdivision of the state acting through its principal supervising official or governing body may, whenever funds shall be available for that purpose, provide for all or a part of hospitalization and medical aid for its employees and their dependents through contracts with regularly  [[Orig. Op. Page 6]] constituted insurance carriers or with health care service contractors as defined in chapter 48.44 RCW, for group hospitalization and medical aid policies or plans:  PROVIDED, That the contributions of any department, division or separate agency of the state government and school districts shall be limited to not to exceed fifty percent of any premium therefor, or five dollars per month per employee covered, whichever is less except that such limitation shall not apply to employees employed under chapter 47.64 RCW.

            "The cost of any such group policy or plan to any such public agency or body shall be deemed additional compensation to the employees covered thereby for services rendered, and any officer authorized to disburse such funds may pay in whole or in part to any such insurance carrier or health care service contractor the amount of the premiums due pursuant to any such contract."

            However, notwithstanding that the employer's cost is declared to be "additional compensation to the employees covered thereby for services rendered," in this case (unlike the matter of employer purchases of tax-deferred annuities) there is in no sense anything "paid to" the employee.  Whereas an employer's payments for the purchase of an annuity will provide for certain (though deferred) nonforfeitable benefits for the employee, no benefit will ever be received by the employee from group insurance coverage unless he incurs illness or injury covered by the insurance.

            This distinction, we believe, is vital and compels a negative answer to your second question.

            We trust that the foregoing will be of assistance to you.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

PHILIP H. AUSTIN
Assistant Attorney General

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