Exception From Supplemental Annuity Tax on Railroad Employers

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-209769-95]

RIN 1545-AT56

Exception From Supplemental Annuity Tax on Railroad Employers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that provide

guidance to employers covered by the Railroad Retirement Tax Act. The

Railroad Retirement Tax Act imposes a supplemental tax on those

employers, at a rate determined by the Railroad Retirement Board, to

fund the Railroad Retirement Board's supplemental annuity benefit.

These proposed regulations provide rules for applying the exception

from the supplemental tax with respect to employees covered by a

supplemental pension plan established pursuant to a collective

bargaining agreement and for applying a related excise tax with respect

to employees for whom the exception applies. This document also

provides notice of a public hearing on these proposed regulations.

DATES: Comments must be received by December 22, 1998. Requests to

speak and outlines of topics to be discussed at the public hearing

scheduled for January 20, 1999, must be received by December 30, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209769-95), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-209769-95), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at http://www.irs.ustreas.gov/prod/tax__regs/

comments.html. The public hearing will be held in Room 2615, Internal

Revenue Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda S.

F. Marshall, (202) 622-6030; concerning submissions and the hearing,

Michael Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Employment Tax

Regulations (26 CFR Part 31) under section 3221(d). These proposed

regulations provide guidance regarding the section 3221(d) exception

from the tax imposed under section 3221(c) with respect to employees

covered by a supplemental pension plan of the employer established

pursuant to an agreement reached through collective bargaining.

Under the Railroad Retirement Act of 1974, as amended (RRA), an

employee of a railroad employer generally is entitled to receive a

supplemental annuity paid by the Railroad Retirement Board (RRB) at

retirement. An employee is entitled to receive a supplemental annuity

only if the employee has performed at least 25 years of service with

the railroad industry, including service with the railroad industry

before October 1, 1981. The monthly amount of the supplemental annuity

ranges from $23 to $43, based on the employee's number of years of

service. See 45 U.S.C. 231b(e). Under section 2(h)(2) of the RRA, an

employee's supplemental annuity is reduced by the amount of payments

received by the employee from any plan determined by the RRB to be a

supplemental pension plan of the employer, to the extent those payments

are derived from employer contributions.

Section 3221(c) imposes a tax on each railroad employer to fund the

supplemental annuity benefits payable by the Railroad Retirement Board.

The tax imposed under section 3221(c) is

[[Page 50820]]

based on work-hours for which compensation is paid. The rate of tax

under section 3221(c) is established by the RRB quarterly, and is

calculated to generate sufficient tax revenue to fund the RRB's current

supplemental annuity obligations.

Under section 3221(d), the tax imposed by section 3221(c) does not

apply to an employer with respect to employees who are covered by a

supplemental pension plan established pursuant to an agreement reached

through collective bargaining between the employer and employees.

However, if an employee for whom the employer is relieved of any tax

under the section 3221(d) exception becomes entitled to a supplemental

annuity from the RRB, the employer is subject to an excise tax equal to

the amount of the supplemental annuity paid to the employee (plus a

percentage determined by the RRB to be sufficient to cover

administrative costs attributable to those supplemental annuity

payments).

Section 3221(d) was enacted by Pub. L. 91-215, 84 Stat. 70, which

amended the Railroad Retirement Act of 1937 and the Railroad Retirement

Tax Act. The legislative history to Pub. L. 91-215 indicates that the

exception under section 3221(d) from the tax imposed under section

3221(c) was ``directed primarily at the situation existing on certain

short-line railroads which are owned by the steel companies. The

employees of these lines are, for the most part, covered by other

supplemental pension plans established pursuant to collective

bargaining agreements between the steel companies and the unions

representing the majority of their employees. * * * [T]hese railroads

will no longer be required to pay a tax to finance the supplemental

annuity fund, but will be required to reimburse the Railroad Retirement

Board for any supplemental annuities that their employees may be paid

upon retirement.'' S. Rep. 91-650, 91st Cong., 2d Sess. 6 (February 3,

1970).

Summary of Regulations

These proposed regulations provide rules for determining whether a

plan is a supplemental pension plan established pursuant to an

agreement reached through collective bargaining. Under these proposed

regulations, a plan is a supplemental pension plan only if the plan is

a pension plan within the meaning of Sec. 1.401-1(b)(1)(i). Under this

definition, a plan is a pension plan only if the plan is established

and maintained primarily to provide systematically for the payment of

definitely determinable benefits to employees over a period of years,

usually for life, after retirement. Thus, for example, a plan generally

is not a supplemental pension plan if distributions from the plan that

are attributable to employer contributions may be made prior to a

participant's death, disability, or termination of employment. See Rev.

Rul. 74-254 (1974-1 C.B. 90); Rev. Rul. 56-693 (1956-2 C.B. 282).

These proposed regulations also require that the RRB determine that

a plan is a private pension under its regulations in order for the plan

to be a supplemental pension plan under section 3221(d) and these

proposed regulations. This requirement is included because the section

3221(d) exception to the section 3221(c) tax is based on the assumption

that any participant for whom the exception applies will receive a

reduced supplemental annuity because of the supplemental pension plan

on account of which the section 3221(c) tax is eliminated.

The IRS requests comments regarding other appropriate requirements

for a supplemental pension plan within the meaning of section 3221(d).

These proposed regulations also provide rules for determining

whether a plan is established by collective bargaining agreement with

respect to an employer. These rules generally follow the rules

applicable to qualified plans for this purpose.

Section 3221(d) imposes an excise tax equal to the amount of the

supplemental annuity paid to any employee with respect to whom the

employer has been excepted from the section 3221(c) tax under the

section 3221(d) exception. These proposed regulations include rules

applying this excise tax under section 3221(d).

Proposed Effective Date

These proposed regulations are proposed to be effective October 1,

1998.

Special Analyses

It has been determined that this notice of proposed rulemaking 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) does not apply to these regulations and, because these

regulations do not impose a collection of information on small

entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the Internal Revenue Code, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any comments that are submitted timely

(in the manner described under the ADDRESSES caption) to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for January 20, 1999, at 10

a.m. in Room 2615, Internal Revenue Building, 1111 Constitution Avenue

NW., Washington, DC. Because of access restrictions, visitors will not

be admitted beyond the Internal Revenue Building lobby more than 15

minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit comments and an outline of topics to be discussed and the time

to be devoted to each topic (in the manner described under the

ADDRESSES caption of this preamble) by December 30, 1998.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Linda S. F. Marshall,

Office of the Associate Chief Counsel (Employee Benefits and Exempt

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

Department participated in their development.

List of Subjects in 26 CFR Part 31

Employment taxes, Fishing vessels, Gambling, Income taxes,

Penalties, Pensions, Railroad retirement, Reporting and recordkeeping

requirements, Social security, Unemployment compensation.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

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

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

in part as follows:

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

[[Page 50821]]

Par. 2. Section 31.3221-4 is added under the undesignated

centerheading ``Tax on Employers'' to read as follows:

Sec. 31.3221-4 Exception from supplemental tax.

(a) General rule. Section 3221(d) provides an exception from the

excise tax imposed by section 3221(c). Under this exception, the excise

tax imposed by section 3221(c) does not apply to an employer with

respect to employees who are covered by a supplemental pension plan, as

defined in paragraph (b) of this section, that is established pursuant

to an agreement reached through collective bargaining between the

employer and employees, within the meaning of paragraph (c) of this

section.

(b) Definition of supplemental pension plan--(1) In general. A plan

is a supplemental pension plan covered by the section 3221(d) exception

described in paragraph (a) of this section only if it meets the

requirements of paragraphs (b)(2) through (4) of this section.

(2) Pension benefit requirement. A plan is a supplemental pension

plan within the meaning of this paragraph (b) only if the plan is a

pension plan within the meaning of Sec. 1.401-1(b)(1)(i) of this

chapter. Thus, a plan is a supplemental pension plan only if the plan

provides for the payment of definitely determinable benefits to

employees over a period of years, usually for life, after retirement. A

plan need not be funded through a qualified trust that meets the

requirements of section 401(a) or an annuity contract that meets the

requirements of section 403(a) in order to meet the requirements of

this paragraph (b)(2). A plan that is a profit-sharing plan within the

meaning of Sec. 1.401-1(b)(1)(ii) of this chapter or a stock bonus plan

within the meaning of Sec. 1.401-1(b)(1)(iii) of this chapter is not a

supplemental pension plan within the meaning of this paragraph (b).

(3) Railroad Retirement Board determination with respect to the

plan. A plan is a supplemental pension plan within the meaning of this

paragraph (b) with respect to an employee only during any period for

which the Railroad Retirement Board has made a determination under 20

CFR 216.42(d) that the plan is a private pension, the payments from

which will result in a reduction in the employee's supplemental annuity

payable under 45 U.S.C. 231a(b). A plan is not a supplemental pension

plan for any time period before the Railroad Retirement Board has made

such a determination, or after that determination is no longer in

force.

(4) Other requirements. [Reserved]

(c) Collective bargaining agreement. A plan is established pursuant

to a collective bargaining agreement with respect to an employee only

if, in accordance with the rules of Sec. 1.410(b)-6(d)(2) of this

chapter, the employee is included in a unit of employees covered by an

agreement that the Secretary of Labor finds to be a collective

bargaining agreement between employee representatives and one or more

employers, provided that there is evidence that retirement benefits

were the subject of good faith bargaining between employee

representatives and the employer or employers.

(d) Substitute section 3221(d) excise tax. Section 3221(d) imposes

an excise tax on any employer who has been excepted from the excise tax

imposed under section 3221(c) by the application of section 3221(d) and

paragraph (a) of this section with respect to an employee. The excise

tax is equal to the amount of the supplemental annuity paid to that

employee under section 2(b) of the Railroad Retirement Act of 1974 (88

Stat. 1305), plus a percentage thereof determined by the Railroad

Retirement Board to be sufficient to cover the administrative costs

attributable to such payments under section 2(b) of that Act.

(e) Effective date. This section is effective October 1, 1998.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-25341 Filed 9-22-98; 8:45 am]

BILLING CODE 4830-01-U