Supplemental Annuity TaxRailroad Retirement

DEPARTMENT OF THE TREASURY

26 CFR Part 31

[TD 8525]

RIN 1545-AR07

Supplemental Annuity Tax--Railroad Retirement

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning the

supplemental annuity tax under the Railroad Retirement Tax Act (RRTA).

The regulations contain rules for calculating the work-hours subject to

the tax. The regulations also contain a safe harbor that railroad

employers may use to determine the taxable work-hours in lieu of

calculating work-hours separately for each employee. The regulations

provide railroad employers with guidance necessary to comply with the

law and offer a simple safe-harbor calculation that can significantly

reduce the burden on employers. The regulations affect all railroad

employers and employee representatives.

EFFECTIVE DATES: These regulations are effective for calendar years

beginning after December 31, 1992, except that Sec. 31.3221-3(d) is

effective for calendar years beginning after December 31, 1993.

FOR FURTHER INFORMATION CONTACT: Karin Loverud at 202-622-6060 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

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

28371) proposed amendments to the Employment Tax Regulations (26 CFR

part 31) under section 3221(c) of the Internal Revenue Code (Code),

which imposes a supplemental tax on railroad employers for each work-

hour for which compensation is paid by the employer for services

rendered to the employer during a calendar quarter.

Two written comments were received from the public on the proposed

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

consideration of the written comments received and the statements made

at the public hearing, the proposed regulations are adopted by this

Treasury decision.

Explanation of Provisions

Retirement benefits for railroad employees are provided under a

system that currently combines elements similar to those under both the

social security system and the private pension system.

In addition to Tier I benefits (similar to social security

benefits) and Tier II benefits (similar to private pension benefits), a

supplemental retirement annuity was established in 1966 by Public Law

89-699 (1966 Act). The benefit provisions are administered by the

Railroad Retirement Board (Board).

The 1966 Act established a program to be administered by the Board

for the payment of supplemental annuities for career railroad

employees. The program, which was required to be self-financing, was to

be financed separately from the regular railroad retirement program by

imposing on railroad employers an excise tax under section 3221(c) of

the Code. The rate was originally set at 2 cents for each work-hour of

employment. In 1970, Public Law 91-215 replaced the 2-cents rate with a

rate determined quarterly by the Board at a level sufficient to finance

the annuities. The rate is currently 30 cents.

The supplemental tax is imposed on every employer for each work-

hour for which compensation is paid by the employer for services

rendered to the employer during a calendar quarter. Section 3211(b) of

the Code imposes a similar tax on employee representatives. No tax is

imposed on employees to fund the supplemental annuities.

The only guidance previously published with respect to the

supplemental tax is in the instructions for Form CT-1, Employer's

Annual Railroad Retirement and Unemployment Repayment Tax Return. The

instructions today are nearly identical to the instructions 25 years

ago. Nevertheless, in recent years, significant variations in the

interpretation of the statutory language have arisen.

Definition of Work-Hours

The final regulations, like the proposed regulations, do not change

the longstanding interpretation of work-hours that was included in the

instructions for Form CT-1 when the supplemental annuity tax was

enacted. A commentator suggested that the 1970 legislation clarified

that the term is limited to those hours both worked and paid for, and

recommended that the regulations be revised accordingly. This

recommendation has not been adopted for the reasons set forth below.

The definition of work-hours as it appeared in the instructions for

Form CT-1 was not changed following the 1970 legislation, because the

IRS believed that the revised statutory language was not intended to

change the meaning of work-hours, or to clarify its meaning. When the

taxing provision was enacted in 1966, the tax was equal to 2 cents for

each work-hour. The 1970 legislation changed the rate from 2 cents to a

rate to be determined quarterly by the Board, beginning April 1, 1970.

Because the rate would no longer be constant, Congress changed the

statutory language to make it clear that the taxing period is a

calendar quarter and that, for purposes of the tax, the timing of the

services, not the timing of the payment for the services, governed.

With respect to services rendered, the Treasury and the IRS believe

that Congress intended to tax those hours for which the employee was

paid both to perform and not to perform services. If an employee is

guaranteed x hours of work a week and is paid for x hours, this is the

number of hours to be taxed, even if there are less than x hours of

work to be performed. The Treasury and the Service believe that this is

so whether the employee is expected to report to the work site and do

no work, whether the employee is not expected to report when no work is

available, or whether the employee is not expected to report when no

work is available but is expected to be available to be called to work.

The 1970 legislation did not alter the statutory language regarding

employees who receive daily, weekly, or monthly rates of compensation.

The language is clear that the tax applies to the number of hours

comprehended in the rate, plus overtime hours. Thus, if a monthly rate

of compensation comprehends that the employee is entitled to time off

from work for holiday time, vacation time, and sick time, all of those

hours are taxed, not merely the hours during which the employee

actually performed services.

Safe Harbor

The final regulations retain a safe harbor method of calculating

work-hours provided in the proposed regulations. Under the safe harbor,

the employer counts the number of employees who received any

compensation during the month and multiplies that figure by a ``safe

harbor number'' to determine the number of work-hours subject to the

tax. Each individual who is paid compensation is counted, even if the

individual is a part-time, temporary, or seasonal employee. For

purposes of the safe harbor count, it is irrelevant whether an employee

actually performed any services for the employer during the month.

The Treasury and the IRS believe that the safe harbor is an

attractive method of significantly reducing administrative complexity,

because the safe harbor will simplify calculation of the supplemental

annuity tax. The Service has worked with the railroad industry in

establishing a safe harbor number that will fairly and equitably

implement the supplemental annuity tax provisions while providing a

method of computing the liability that reduces the need to make a work-

hour determination on an individual-by-individual basis. The Treasury

and the IRS anticipate that, for most employers, use of the safe harbor

number will result in fewer taxable hours, and the Board will adjust

the tax rate accordingly.

The regulations provide the Commissioner with the authority to

publish the safe harbor number in guidance of general applicability.

Pursuant to this grant of authority, a revenue procedure will be

published to announce the safe harbor number. Commentators on the

proposed regulations, representing both the Class I railroads and the

Class III railroads, suggested a safe harbor number of 164. These

comments have been taken into account in developing the revenue

procedure.

Retroactivity

One commentator suggested that the safe harbor provision be made

retroactive at the election of the taxpayer. Because the number the

safe harbor produces is generally more favorable than work-hours

calculated under the regulations, retroactive application of the safe

harbor would, in many situations, produce taxable work-hours at levels

below those anticipated when prior-period tax rates were set. Also,

retroactive application would be inequitable because some taxpayers

have many open tax years and others do not. For these reasons, the

Treasury and the IRS have rejected any period of retroactivity and,

therefore, this approach is not included in the final regulations.

Thus, the safe harbor provision is effective for calendar years

beginning after December 31, 1993, as proposed.

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 has also 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 Karin Loverud 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 31.3211-3 is added to read as follows:

Sec. 31.3211-3 Employee representative supplemental tax.

See paragraphs (a), (b), and (c) of Sec. 31.3221-3 for rules

applicable to the supplemental tax for each work-hour for which

compensation is paid to an employee representative for services

rendered as an employee representative.

Par. 3. Section 31.3221-3 is added under the heading ``Tax on

Employers'' to read as follows:

Sec. 31.3221-3 Supplemental tax.

(a) Introduction--(1) In general. Section 3221(c) imposes an excise

tax on every employer, as defined in section 3231(a) and

Sec. 31.3231(a)-1, with respect to individuals employed by the

employer. The tax is imposed for each work-hour for which the employer

pays compensation, as defined in section 3231(e) and Sec. 31.3231(e)-1,

for services rendered to the employer during a calendar quarter. This

Sec. 31.3221-3 provides rules for determining the number of taxable

work-hours.

(2) Overview. Paragraph (b) of this section defines work-hours.

Paragraph (c) of this section demonstrates the calculation of work-

hours. Paragraph (d) of this section offers a safe harbor calculation

of work-hours for use by any employer in lieu of calculating the number

of work-hours for each employee.

(b) Definition of work-hours--(1) In general. For purposes of

section 3221(c) and this section, work-hours are hours for which the

employee is compensated, whether or not the employee performs services.

(i) Payments included in work-hours. Work-hours include regular

time worked; overtime; time paid for vacations and holidays; time

allowed for meals; away-from-home terminal time; called and not used,

runaround, and deadheading time; time for attending court,

participating in investigations, and attending claim and safety

meetings; and guaranteed time not worked. Work-hours also include

conversion hours, that is, compensation converted into work-hours.

Conversion hours may be derived from payment by the mile or by the

piece. Work-hours also include time for which the employee is paid for

periods of absence not due to sickness or accident disability, such as

for routine medical and dental examinations or for time lost.

(ii) Payments excluded from work-hours. Certain kinds of payments

are not subject to conversion into work-hours. These include those

payments that are specifically excluded from compensation within the

meaning of section 3231(e), such as certain sick pay payments (section

3231(e)(1)(i)); tips (section 3231(e)(1)(ii)); and amounts paid

specifically (either as an advance, as reimbursement, or allowance) for

traveling expenses (section 3231(e)(1)(iii)). Traveling expenses paid

under a nonaccountable plan are excluded from work-hours even though

they are includible in compensation. See Sec. 31.3231(e)-1(a)(5). Also

excluded from work-hours are amounts representing bonuses, amounts

received pursuant to the exercise of an employee stock option, and all

separation payments or severance allowances.

(2) Hourly compensation. Because the tax under section 3221(c) is

calculated on the basis of work-hours, the number of hours for which an

employee receives compensation is the figure used to determine work-

hours. In the case of an hourly-rated employee, each hour for which the

employee receives compensation is one work-hour.

(3) Daily, weekly, monthly compensation. (i) If an employee is paid

by the day, week, month, or other period of time, the tax is imposed on

the number of hours comprehended in the rate and, if any, the number of

overtime hours for which additional compensation is paid. Thus, in the

case of an office worker who receives an annual salary based on an 8-

hour, 5-day-a-week work schedule that includes paid holidays,

vacations, and sick time, the number of work-hours for one month is 174

(2088 hours/year 12 months).

(ii) The rule in paragraph (b)(3)(i) of this section is illustrated

by the following examples.

Example 1. A, an office worker, receives an annual salary that

is paid monthly. The salary is based on an 8-hour, Monday through

Friday work schedule. A is not paid for overtime hours. A is not

expected to work on holidays, during A's annual vacation, or during

periods that A is ill. The number of work-hours for one month is 174

(2088 hours/year 12 months). This figure remains constant,

even though some months have more workdays than others.

Example 2. B is paid a stated amount for each day B works,

regardless of the number of hours worked. However, if B works more

than 8 hours during any day, B is paid overtime for each additional

hour worked that day. B is not paid for holidays, vacations, or sick

time. During May, B worked 6 hours on 4 days, 7 hours on 6 days, 8

hours on 6 days, and 9 hours on 5 days. Because B is paid a daily

rate for up to 8 hours, 8 hours are comprehended in the daily rate.

Therefore, the number of work-hours for May is 173 (21 days x 8

hours/day+5 overtime hours), even though B actually worked 159

hours.

(4) Conversion hours--(i) Compensation not based on time (hour,

day, month, etc.), such as compensation paid by the mile or by the

piece, must be converted into the number of hours represented by the

compensation paid. Thus, if an employee is paid by the mile, 1 work-

hour equals the number of miles constituting a workday, divided by 8

hours. However, in the case of a collective bargaining agreement that

specifies a number of hours as constituting a workday, the number of

hours specified under the agreement may be used instead of 8.

(ii) The rule in paragraph (b)(4)(i) of this section is illustrated

by the following example.

Example. C's normal workday consists of 2 150-mile round trips

that together take 6 hours. C is paid by the mile. The collective

bargaining agreement does not specify the number of hours in a

workday. Thus, the number of work-hours for each day C works is 8,

or 1 work-hour for each 37.5 miles (300 miles/day 8 hours/

day). If the applicable collective bargaining agreement specifies

that 6 hours constitute a workday, the number of work-hours for each

day C works would be 6.

(c) Calculation of work-hours--(1) An employer may calculate the

work-hours separately for each employee, as described in the examples

in this paragraph. If the employer chooses to calculate work-hours

separately for each employee, the employer must calculate the number of

regular hours, overtime hours, and conversion hours for each employee

for each month. In lieu of separate calculations, the employer may

calculate the work-hours for all the employer's employees using the

safe harbor formula described in paragraph (d) of this section.

(2) The rules in paragraph (c) of this section are illustrated by

the following examples.

Example 1. D worked 8 hours a day, Monday through Friday, during

the months of February and March 1992. D did not work on President's

Day, but was paid for the holiday. D's work-hours for February were

160 (19 days x 8 hours a day + 8 holiday hours). D's work-hours

for March were 176 (22 days x 8 hours a day).

Example 2. E worked 7-hour shifts every Tuesday through Saturday

during the months of February and March 1992. E also worked 7

overtime hours during February and 21 overtime hours during March.

Also, E was paid for 7 hours on President's Day, even though E did

not work on that day. The number of work-hours for February was 161

(21 days x 7 hours a day + 7 overtime hours + 7 holiday hours).

The number of work-hours for March was 168 (21 days x 7 hours a

day + 21 overtime hours). Because E receives an hourly wage and was

paid for the President's Day holiday, the number of hours (7) for

which E was paid are added to the hours E actually worked. If E had

worked on President's Day and had received extra pay for working on

a holiday and holiday pay for 7 hours, the employer would include 14

hours in E's work-hours for that day, the 7 hours E actually worked

and the 7 holiday hours for which E was paid.

Example 3. Employment beginning during month. F began employment

on March 16, a Monday, and worked 8 hours a day, Monday through

Friday. The employer calculates that F's hours for the month were

96, because F worked 12 8-hour days during the month. If March 16

were on a Friday, the employer would calculate 11 days, or 88 hours.

Example 4. Employment ending during month. G's last day of

employment was Friday, March 13. G worked 8 hours a day, Monday

through Friday, except for March 3, when G was ill. G was paid for 8

hours for March 3. The employer calculates that G's work-hours for

March were 80, because G worked 9 8-hour days and was paid for an

additional 8 hours.

(d) Safe harbor--(1) In general. In lieu of calculating work-hours

separately for each employee, an employer may use the safe harbor for

all employees. If the employer elects to use the safe harbor for a

calendar year, the employer must use the safe harbor for all employees

for the entire calendar year. If an employer uses the safe harbor for a

calendar year, the employer need not elect the safe harbor for the

following calendar year. An employer that elects the safe harbor for a

calendar year may not subsequently elect to separately calculate

employee work-hours for that calendar year.

(2) Method of calculation. The safe harbor treats each employee of

the employer as receiving monthly compensation for a number of hours

equal to the safe harbor number. To determine the number of work-hours

for a month, the employer multiplies the safe harbor number by the

number that equals the total number of employees to whom the employer

paid compensation during the month.

(i) Safe harbor number defined. The safe harbor number is the

number established in guidance of general applicability promulgated by

the Commissioner.

(ii) Employee defined. Solely for purposes of this paragraph, an

employee is any individual who is paid compensation, within the meaning

of Sec. 31.3231(e)-1, regardless of the amount, during the month. Thus,

for example, a part-time, temporary, or seasonal employee is counted as

an employee. A terminated employee is counted in the month of

termination (provided the terminated employee received compensation in

the month of termination), but not in any subsequent month in which the

employee does not perform service for the employer as an employee, even

if the terminated employee is paid compensation in a subsequent month.

Thus, for example, an employee who terminates employment during the

month, receives compensation during the month of termination, and

receives a final paycheck the following month is counted as an employee

of the employer for the month of termination but not for the following

month.

(3) Method of election. An employer makes the safe harbor election

for a calendar year on the employment tax return filed for the previous

calendar year.

(4) Additional rules. The Commissioner may, in revenue procedures,

revenue rulings, notices, or other guidance of general applicability,

revise the safe harbor number or provide additional safe harbors that

satisfy section 3221(c).

(e) Effective dates. This Sec. 31.3221-3 is effective for calendar

years beginning after December 31, 1992, except that paragraph (d) is

effective for calendar years beginning after December 31, 1993.

Taxpayers may apply the rules in paragraphs (a), (b), and (c) of this

section before January 1, 1993.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: February 23, 1994.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 94-4675 Filed 2-25-94; 8:54 am]

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