Update of Railroad Retirement Tax Act Regulations

DEPARTMENT OF THE TREASURY

26 CFR Part 31

[TD 8582]

RIN 1545-AR08

Update of Railroad Retirement Tax Act Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the

Railroad Retirement Tax Act (RRTA). These regulations update the

existing RRTA regulations by removing obsolete provisions and adding

new provisions to reflect the statutory changes that have occurred

since the publication in 1964 of the existing RRTA regulations. In

addition, because Tier 1 of the RRTA mirrors the Federal Insurance

Contributions Act (FICA), these regulations generally cross-reference

the definition of compensation under the RRTA to the definition of

wages under the FICA. The regulations provide both railroad employers

and IRS personnel with the guidance necessary to comply with the law.

DATES: These regulations are effective December 23, 1994. These

regulations apply for calendar years beginning after December 31, 1992.

FOR FURTHER INFORMATION CONTACT: Jean Whalen Casey at (202) 622-6040.

SUPPLEMENTARY INFORMATION:

Background

On May 13, 1993, the IRS published in the Federal Register (58 FR

28366) proposed amendments to the Employment Tax Regulations (26 CFR

part 31) under sections 3201 through 3231 of the Internal Revenue Code

(Code).

Written comments were received from the public on the proposed

regulations, and a public hearing was held on August 30, 1993. After

consideration of all of the written comments received and the

statements made at the public hearing, the proposed regulations are

adopted as revised by this Treasury decision.

Explanation of Revisions and Summary of Comments

The comments received focused on the definition of ``employer'' in

Sec. 31.3231(a)-1 and the definition of compensation in

Sec. 31.3231(e)-1.

Proposed Regulation Sec. 31.3231(a)-1(c) describes the term

``casual'' as used in the phrase ``casual service and the casual

operation of equipment or facilities.'' Under the proposed regulations,

the term ``casual'' applies, in part, whenever such service or

operation is insubstantial. One commentator suggested the IRS adopt a

bright line test in defining insubstantial. Specifically, the

commentator suggested that service or operation of equipment or

facilities in connection with the transportation of passengers or

property by railroad be presumed to be insubstantial whenever less than

10% of any company's revenues, work force, or payroll are derived from,

devoted to, or provided to the carrier or carriers affiliated with the

company. Situations can arise where one of the factors is less than 10%

while the remaining factors are greater than 10%. It is not clear that

the service or operation of equipment or facilities would be

insubstantial in those situations. Therefore, this suggestion was not

adopted.

The proposed regulations define ``compensation'' under the RRTA by

referencing the definition of ``wages'' under the FICA. One commentator

suggested that this reference be deleted because the statutory language

of the two statutes differs. This suggestion was not adopted. The

definition of wages under the FICA refers to ``all remuneration for

employment'' while the definition of compensation under the RRTA refers

to ``any money remuneration paid to an individual.'' The commentator

stated that Congress had the opportunity to conform the language of the

two definitions and has not done so. While there are historical

differences between the two statutes, there are significant

similarities between the RRTA and the FICA. Legislation enacted since

the adoption of the existing regulations has made the RRTA Tier 1 tax

identical to the FICA tax as well as conforming the Tier 1 wage ceiling

to the FICA wage ceiling. Along with conforming the structure of the

RRTA to parallel that of the FICA, the exclusions from the definition

of compensation under the RRTA, with few exceptions, mirror the

exclusions from the definition of wages under the FICA. These

exclusions from compensation include non-monetary benefits such as

fringe benefits, meals and lodging excludable under section 119 of the

Internal Revenue Code, and employer-paid life insurance premiums for

group-term life insurance under $50,000. In amending RRTA, Congress

often indicated the purpose was to provide conformity to FICA. Congress

has added references to FICA provisions in the RRTA definition of

successor employer (section 3231(e)(2)(C)) and the rules for

nonqualified deferred compensation (section 3231(e)(8)). In addition,

Tier 1 benefits are designed to be equivalent to social security

benefits and are subject to federal income taxation in the same manner

as social security benefits. Because the two statutes are not

completely identical, the language of the regulation indicates that the

term compensation has the same meaning as the term wages, except as

specifically limited by the Railroad Retirement Tax Act.

One commentator suggested that the presumption in Sec. 31.3231(e)-

1(a)(2) that payments made to an individual through the employer's

payroll are compensation should be deleted. This is based on the

removal of this language from the Internal Revenue Code in 1983. The

commentator also suggested that Sec. 31.3231(e)-1(a)(4) providing that

compensation includes payments for time lost should be deleted. These

provisions are included in the existing regulations. The Railroad

Retirement Solvency Act of 1983 significantly amended the definition of

compensation, changing the inclusion of items to a ``paid basis'' from

an ``earned basis'' and providing the present two tiered structure.

Prior to the 1983 Act, statutory language specifically provided for the

presumption and the inclusion of payments for time lost. In amending

the definition of compensation, the 1983 Act did not reenact the

statutory language. The legislative history does not indicate that

Congress intended to exclude payments for time lost from compensation

or negate the presumption that payments made through an employer's

payroll are compensation. Therefore, these suggestions were not

adopted.

A suggestion was also made to delete the reference to ``earned'' in

proposed Sec. 31.3231(e)-1(a)(3). Because section 3231 was amended to

shift the focus from when compensation was earned to when compensation

was paid, this suggestion has been adopted.

Finally, one commentator suggested adding a reference that

compensation does not include supplemental unemployment compensation

benefits (SUB-pay). There is no specific statutory exception from

compensation for SUB-pay. Rather, a series of revenue rulings provides

a limited exception from the definition of wages for purposes of FICA

and FUTA for certain payments made upon an employee's involuntary

separation from the employer's service, but only if the payments are

designed to supplement the receipt of unemployment compensation. Rev.

Rul. 56-249, 1956-1 C.B. 488, the first of many rulings in this area,

summarized eight features of a SUB-pay plan whose payments qualified

for exclusion from wage treatment. Rev. Rul. 90-72, 1990-2 C.B. 211,

specifically provides that because the definition of compensation for

RRTA purposes is similar to the definition of wages for FICA purposes,

the same conclusions with respect to SUB-pay plans applies to RRTA.

Rev. Rul. 90-72 revoked in part an earlier revenue ruling which held

that SUB-pay does not have to be tied to state unemployment benefits in

order to be excluded from treatment as wages. Because payments from a

SUB-pay plan are not automatically excluded from the definition of

compensation this suggestion was not adopted.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking preceding these regulations was

submitted to the Small Business Administration for comment on its

impact on small business.

Drafting Information

The principal author of these regulations is Jean Whalen Casey of

the Office of the Associate Chief Counsel (Employee Benefits and Exempt

Organizations), IRS. However, other personnel from the IRS and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social security,

Unemployment compensation.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 31 is amended as follows:

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 31.3121(a)-1 is amended as follows:

1. Paragraph (a) is redesignated as (a)(1).

2. Paragraph (a)(2) is added to read as follows:

Sec. 31.3121(a)-1 Wages.

(a) * * *

(2) The term compensation as used in section 3231(e) of the

Internal Revenue Code has the same meaning as the term wages as used in

this section, determined without regard to section 3121(b)(9), except

as specifically limited by the Railroad Retirement Tax Act (chapter 22

of the Internal Revenue Code) or regulation. The Commissioner may

provide any additional guidance that may be necessary or appropriate in

applying the definitions of sections 3121(a) and 3231(e).

* * * * *

Par. 3. Sections 31.3201-1 and 31.3201-2 are revised to read as

follows:

Sec. 31.3201-1 Measure of employee tax.

The employee tax is measured by the amount of compensation received

for services rendered as an employee. For provisions relating to

compensation, see Sec. 31.3231(e)-1. For provisions relating to the

circumstances under which certain compensation is to be disregarded for

the purpose of determining the employee tax, see paragraphs (b)(1) and

(2) of Sec. 31.3231(e)-1.

Sec. 31.3201-2 Rates and computation of employee tax.

(a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee tax rate equals

the sum of the tax rates in effect under section 3101(a) relating to

old-age, survivors, and disability insurance, and section 3101(b),

relating to hospital insurance. The Tier 1 employee tax rate is applied

to compensation up to the contribution base described in section

3231(e)(2)(B)(i). The contribution base is determined under section 230

of the Social Security Act and is identical to the old-age, survivors,

and disability insurance wage base and the hospital insurance wage

base, respectively, under the Federal Insurance Contributions Act.

(ii) Example. The rule in paragraph (a)(1)(i) of this section is

illustrated by the following example.

Example. A received compensation of $60,000 in 1992. The section

3101(a) rate of 6.2 percent would be applied to A's compensation up

to $55,500, the applicable contribution base for 1992. The section

3101(b) rate of 1.45 percent would be applied to the entire $60,000

of A's compensation because the applicable contribution base for

1992 is $130,200.

(2)(i) Tier 2 tax. The Tier 2 employee tax rate equals the

percentage set forth in section 3201(b) of the Code. This rate is

applied to compensation up to the contribution base described in

section 3231(e)(2)(B)(ii).

(ii) Example. The rule in paragraph (a)(2)(i) of this section is

illustrated by the following example.

Example. A received compensation of $60,000 in 1992. The section

3201(b) rate of 4.90 percent would be applied to A's compensation up

to $41,400, the applicable contribution base for 1992.

(b)(1) Computation. The employee tax is computed by multiplying the

amount of the employee's compensation with respect to which the

employee tax is imposed by the rate applicable to such compensation, as

determined under paragraph (a) of this section. The applicable rate is

the rate in effect when the compensation is received by the employee.

For rules relating to the time of receipt, see Sec. 31.3121(a)-2 (a)

and (b).

(2) Example. The rule in paragraph (b)(1) of this section is

illustrated by the following example.

Example. In 1990, employee A received compensation of $1,000 as

remuneration for services performed for employer R in 1989. The

employee tax is payable at the rate of 12.55 percent (7.65 percent

plus 4.90 percent) in effect for 1990 (the year the compensation was

received), and not the 12.41 percent rate (7.51 percent plus 4.90

percent) in effect for 1989 (the year the services were performed).

Par. 4. Section 31.3202-1 is amended by revising paragraphs (b) and

(f) to read as follows:

Sec. 31.3202-1 Collection of, and liability for, employee tax.

* * * * *

(b) Collection; payments by two or more employers in excess of

annual compensation limitation. For rules relating to payments by two

or more employers in excess of the annual compensation limitation see

Sec. 31.3121(a)(1)-1.

* * * * *

(f) Concurrent employment. If two or more related corporations who

are rail employers concurrently employ the same individual and

compensate that individual through a common paymaster, which is one of

the related corporations employing the individual, see Sec. 31.3121(s)-

1.

Par. 5. Sections 31.3211-1 and 31.3211-2 are revised to read as

follows:

Sec. 31.3211-1 Measure of employee representative tax.

The employee representative tax is measured by the amount of

compensation received for services rendered as an employee

representative. For provisions relating to compensation, see

Sec. 31.3231(e)-1.

Sec. 31.3211-2 Rates and computation of employee representative tax.

(a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee representative

tax rate equals the sum of the tax rates in effect under sections

3101(a) and 3111(a), relating to the employee and the employer tax for

old-age, survivors, and disability insurance, and sections 3101(b) and

3111(b), relating to the employee and the employer tax for hospital

insurance. The Tier 1 employee representative tax rate is applied to

compensation up to the contribution base described in section

3231(e)(2)(B)(i). The contribution base is determined under section 230

of the Social Security Act, and is identical to the old-age, survivors,

and disability insurance wage base and the hospital insurance wage

base, respectively, under the Federal Insurance Contributions Act.

(ii) Example. The rule in paragraph (a)(1)(i) of this section is

illustrated by the following example.

Example. B, an employee representative received compensation of

$60,000 in 1992. The sections 3101(a) and 3111(a) rates of 12.4

percent (6.2 percent plus 6.2 percent) would be applied to B's

compensation up to $55,500, the applicable contribution base for

1992. The sections 3101(b) and 3111(b) rates of 2.9 percent (1.45

percent plus 1.45 percent) would be applied to the entire $60,000 of

B's compensation because the applicable contribution base for 1992

is $130,200.

(2) (i) Tier 2 tax. The Tier 2 employee representative tax rate

equals the percentage set forth in section 3211(a)(2) of the Code. This

rate is applied up to the contribution base described in section

3231(e)(2)(B)(ii).

(ii) Example. The rule in paragraph (a)(2)(i) of this section is

illustrated by the following example.

Example. B received compensation of $60,000 in 1992. The section

3211(a)(2) rate of 14.75 percent would be applied to B's

compensation up to $41,400, the applicable contribution base for

1992.

(3) Supplemental Annuity Tax. The supplemental annuity tax for each

work-hour for which compensation is paid to an employee representative

for services rendered as an employee representative is imposed at the

same rate as the excise tax imposed on every employer under section

3221(c). See also Sec. 31.3211-3.

(b) (1) Computation. The employee representative tax is computed by

multiplying the amount of the employee representative's compensation

with respect to which the employee representative tax is imposed by the

rate applicable to such compensation, as determined under paragraph (a)

of this section. The applicable rate is the rate in effect when the

compensation is received by the employee representative. For rules

relating to the time of receipt, see Sec. 31.3121(a)-2 (a) and (b).

(2) Example. The rule in paragraph (b)(1) of this section is

illustrated by the following example.

Example. In 1990, employee representative B received $1,000 as

remuneration for services performed for employer R in 1989. The

employee representative tax is payable at the rate of 30.05 percent

(15.30 percent plus 14.75 percent) in effect for 1990 (the year the

compensation was received), and not the 29.77 percent rate (15.02

percent plus 14.75 percent) in effect for 1989 (the year the

services were performed).

(c) (1) Rule where compensation is received both as an employee

representative and employee. The following rule applies to an

individual who renders service both as an employee representative and

as an employee. The employee representative tax is imposed on

compensation received as an employee representative under the rules

described in Sec. 31.3211-2. The employee tax is imposed on

compensation received as an employee under the rules described in

Sec. 31.3201-2. However, if the total compensation received is greater

than the applicable contribution base, the employee representative tax

is imposed on the amount equal to the contribution base less the amount

received for services rendered as an employee.

(2) Example. The rule in paragraph (c)(1) of this section is

illustrated by the following example.

Example. C performed services both as an employee and an

employee representative in 1992. C received compensation of $40,000

as an employee and $20,000 as an employee representative. C's entire

compensation of $40,000 is subject to tax under the rules described

in Sec. 31.3201-2. The amount of employee representative

compensation subject to the section 3101(a) and the section 3111(a)

rate is $15,500 ($55,500-$40,000). The entire $20,000 is subject to

the sections 3101(b) and 3111(b) rates since the combined

compensation is less than $130,200, the applicable contribution base

for 1992. The amount of the employee representative compensation

subject to the section 3211(a)(2) rate is $1,400 ($41,400-$40,000).

Par. 6. Section 31.3221-1 is amended as follows:

1. Paragraphs (a) and (b) are revised.

2. Paragraph (d) is removed.

3. The revisions read as follows:

Sec. 31.3221-1 Measure of employer tax.

(a) General Rule--The employer tax is measured by the amount of

compensation paid by an employer to its employees. For provisions

relating to compensation, see Sec. 31.3231(e)-1. For provisions

relating to the circumstances under which certain compensation is to be

disregarded for purposes of determining the employer tax, see

paragraphs (b) (1) and (2) of Sec. 31.3231(e)-1.

(b) Payments by two or more employers in excess of annual

compensation limitation. For rules relating to payments by two or more

employers in excess of the annual compensation limitation, see

Sec. 31.3121(a)(1)-1.

* * * * *

Par. 7. Section 31.3221-2 is revised to read as follows:

Sec. 31.3221-2 Rates and computation of employer tax.

(a) Rates--(1)(i) Tier 1 tax. The Tier 1 employer tax rate equals

the sum of the tax rates in effect under section 3111(a), relating to

old-age, survivors, and disability insurance, and section 3111(b)

relating to hospital insurance. The Tier 1 employer tax rate is applied

to compensation up to the contribution base described in section

3231(e)(2)(B)(i). The contribution base is determined under section 230

of the Social Security Act and is identical to the old-age, survivors,

and disability insurance wage base and the hospital insurance wage

base, respectively, under the Federal Insurance Contributions Act.

(ii) Example. The rule in paragraph (a)(1)(i) of this section is

illustrated by the following example.

Example. R's employee, A, received compensation of $60,000 in

1992. The section 3111(a) rate of 6.2 percent would be applied to

A's compensation up to $55,500, the applicable contribution base for

1992. The section 3111(b) rate of 1.45 percent would be applied to

the entire $60,000 of A's compensation because the applicable

contribution base for 1992 is $130,200.

(2)(i) Tier 2 tax. The Tier 2 employer tax rate equals the

percentage set forth in section 3221(b) of the Internal Revenue Code.

This rate is applied up to the contribution base described in section

3231(e)(2)(B)(ii).

(ii) Example. The rule in paragraph (a)(2)(i) of this section is

illustrated by the following example.

Example. R's employee, A, received compensation of $60,000 in

1992. The section 3221(b) rate of 16.10 percent would be applied to

A's compensation up to $41,400, the applicable contribution base for

1992.

(3) Supplemental Annuity Tax. The supplemental annuity tax for each

work-hour for which compensation is paid by an employer for services

rendered during any calendar quarter by employees is imposed at the tax

rate determined each calendar quarter by the Railroad Retirement Board.

See also Sec. 31.3221-3.

(b)(1) Computation. The employer tax is computed by multiplying the

amount of the compensation with respect to which the employer tax is

imposed by the rate applicable to such compensation, as determined

under paragraph (a) of this section. The applicable rate is the rate in

effect at the time the compensation is paid. For rules relating to the

time of payment, see Sec. 31.3121(a)-2(a) and (b).

(2) Example. The rule in paragraph (b)(1) of this section is

illustrated by the following example.

Example. In 1990, R's employee A received $1,000 as remuneration

for services performed for R in 1989. The employer tax is payable at

the rate of 23.75 percent (7.65 percent plus 16.10 percent) in

effect for 1990 (the year the compensation was received) and not the

23.61 percent rate (7.51 percent plus 16.10 percent) in effect for

1989 (the year the services were performed).

Par. 8. Section 31.3231(a)-1 is amended as follows:

1. Paragraph (a)(1) is revised.

2. Paragraphs (c) and (d) are redesignated as (d) and (e).

3. Paragraphs (c) and (f) are added.

4. The revisions and additions read as follows:

Sec. 31.3231(a)-1 Who are employers.

(a) * * *

(1) Any carrier, that is, any express carrier, sleeping car

carrier, or rail carrier providing transportation subject to subchapter

I of chapter 105 of title 49;

* * * * *

(c) As used in paragraph (a)(2) of this section, the term casual

applies when the service rendered or the operation of equipment or

facilities by a controlled company or person in connection with the

transportation of passengers or property by railroad is so irregular or

infrequent as to afford no substantial basis for an inference that such

service or operation will be repeated, or whenever such service or

operation is insubstantial.

* * * * *

(f) Any company that is described in paragraph (a)(2) of this

section is an employer under section 3231. In certain cases, based on

all the facts and circumstances, it may be appropriate to segregate

those businesses engaged in rail services and therefore subject to the

Railroad Retirement Tax Act from those businesses engaged exclusively

in nonrail services and therefore not subject to the Railroad

Retirement Tax Act. The factors considered are set forth in guidance

published by the Internal Revenue Service.

Par. 9. Section 31.3231(e)-1 is revised to read as follows:

Sec. 31.3231(e)-1 Compensation.

(a) Definition--(1) The term compensation has the same meaning as

the term wages in section 3121(a), determined without regard to section

3121(b)(9), except as specifically limited by the Railroad Retirement

Tax Act (chapter 22 of the Internal Revenue Code) or regulation. The

Commissioner may provide any additional guidance that may be necessary

or appropriate in applying the definitions of sections 3121(a) and

3231(e).

(2) A payment made by an employer to an individual through the

employer's payroll is presumed, in the absence of evidence to the

contrary, to be compensation for services rendered as an employee of

the employer. Likewise, a payment made by an employee organization to

an employee representative through the organization's payroll is

presumed, in the absence of evidence to the contrary, to be

compensation for services rendered by the employee representative as

such. For rules regarding the treatment of deductions by an employer

from remuneration of an employee, see Sec. 31.3123-1.

(3) The term compensation is not confined to amounts paid for

active service, but includes amounts paid for an identifiable period

during which the employee is absent from the active service of the

employer and, in the case of an employee representative, amounts paid

for an identifiable period during which the employee representative is

absent from the active service of the employee organization.

(4) Compensation includes amounts paid to an employee for loss of

earnings during an identifiable period as the result of the

displacement of the employee to a less remunerative position or

occupation as well as pay for time lost.

(5) For rules regarding the treatment of reimbursement and other

expense allowance amounts, see Sec. 31.3121(a)-3. For rules regarding

the inclusion of fringe benefits in compensation, see Sec. 31.3121(a)-

1T.

(b) Special Rules. (1) If the amount of compensation earned in any

calendar month by an individual as an employee in the service of a

local lodge or division of a railway-labor-organization employer is

less than $25, the amount is disregarded for purposes of determining

the employee tax under section 3201 and the employer tax under section

3221.

(2) Compensation for service as a delegate to a national or

international convention of a railway-labor-organization employer is

disregarded for purposes of determining the employee tax under section

3201 and the employer tax under section 3221 if the individual

rendering the service has not previously rendered service, other than

as a delegate, which may be included in the individual's years of

service for purposes of the Railroad Retirement Act.

(3) For special provisions relating to the compensation of certain

general chairs or assistant general chairs of a general committee of a

railway-labor-organization employer, see paragraph (c)(3) of

Sec. 31.3231(b)-1.

Par. 10. Section 31.3231(e)-2 is added to read as follows:

Sec. 31.3231(e)-2 Contribution base.

The term compensation does not include any remuneration paid during

any calendar year by an employer to an employee for services rendered

in excess of the applicable contribution base. For rules applying this

provision, see Sec. 31.3121(a)(1)-1.

Secs. 31.3231(e)-2T and 31.3231(e)-3 [Removed]

Par. 11. Sections 31.3231(e)-2T and 31.3231(e)-3 are [Removed].

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: November 28, 1994

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 94-31426 Filed 12-22-94; 8:45 am]

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