Federal Unemployment Tax Act (FUTA) Taxation of Amounts Under Employee Benefit Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[TD 8815]

RIN 1545-AT99

Federal Unemployment Tax Act (FUTA) Taxation of Amounts Under

Employee Benefit Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section

3306(r)(2) of the Internal Revenue Code (Code), that provide guidance

as to when amounts deferred under or paid from a nonqualified deferred

compensation plan are taken into account as wages for purposes of the

employment taxes imposed by the Federal Unemployment Tax Act (FUTA).

Section 3306(r)(2), relating to treatment of certain nonqualified

deferred compensation, was added to the Code by section 324 of the

Social Security Amendments of 1983. These regulations provide guidance

to employers who maintain nonqualified deferred compensation plans.

DATES: Effective Date: These regulations are effective January 29,

1999.

Applicability Date: These regulations are applicable on and after

January 1, 2000. In addition, these regulations provide certain

transition rules for amounts deferred and benefits paid before January

1, 2000, including allowing employers to use a reasonable, good faith

interpretation of section 3306(r)(2).

FOR FURTHER INFORMATION CONTACT: Janine Cook, Linda E. Alsalihi, or

Margaret A. Owens, (202) 622-6040 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

These final regulations amend the Employment Tax Regulations (26

CFR

[[Page 4541]]

part 31) under section 3306(r)(2). Section 3306(r)(2) was added to the

Internal Revenue Code (Code) by section 324 of the Social Security

Amendments of 1983 (1983 Amendments). Section 2662(f)(2) of the Deficit

Reduction Act of 1984 (DEFRA) amended section 324 of the 1983

Amendments.

Notice 94-96 (1994-2 C.B. 564) provides that until final

regulations are issued, the IRS will not challenge an employer's

determination of FUTA tax liability with respect to a nonqualified

deferred compensation plan for periods before the effective date of any

final regulations if the determination is based on a reasonable, good

faith interpretation of section 3306(r)(2). On January 25, 1996, a

notice of proposed rulemaking (EE-55-95), under section 3306(r)(2) was

published in the Federal Register (61 FR 2214), providing guidance

related to the FUTA tax treatment of amounts deferred under or paid

from certain nonqualified deferred compensation plans. On December 24,

1997, a notice of proposed rulemaking (REG-209484-87 and REG-209807-

95), under section 3306(r)(2), extending the proposed general effective

date of the regulations to January 1, 1998, was published in the

Federal Register (62 FR 67304).

Comments regarding the proposed regulations were received from the

public, and on June 24, 1996, the IRS held a public hearing concerning

the proposed amendments. After consideration of the public comments

received and the statements made at the public hearing, the proposed

regulations are adopted as revised by this Treasury decision.

Explanation of Provisions

These final regulations provide guidance under section 3306(r)(2),

relating to when amounts deferred under or paid from nonqualified

deferred compensation plans are taken into account as wages for FUTA

purposes. These rules are substantially similar to the rules applicable

to the FICA (Federal Insurance Contributions Act) tax treatment of such

amounts deferred under section 3121(v)(2). Thus, these final

regulations cross-reference the final regulations under section

3121(v)(2) (FICA tax treatment of nonqualified deferred compensation),

published elsewhere in this issue of the Federal Register.

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)

does not apply to these regulations, and because the notice of proposed

rulemaking was issued prior to March 29, 1996, the Regulatory

Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue Code, the notice of proposed

rulemaking preceding these regulations was submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment

on their impact on small business.

Drafting Information

The principal authors of these regulations are Janine Cook, Linda

E. Alsalihi, and Margaret A. Owens, Office of the Associate Chief

Counsel (Employee Benefits and Exempt Organizations). 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 31.3306(r)(2)-1 is added to read as follows:

Sec. 31.3306(r)(2)-1 Treatment of amounts deferred under certain

nonqualified deferred compensation plans.

(a) In general. Section 3306(r)(2) provides a special timing rule

for the tax imposed by section 3301 with respect to any amount deferred

under a nonqualified deferred compensation plan. Section 31.3121(v)(2)-

1 contains rules relating to when amounts deferred under certain

nonqualified deferred compensation plans are wages for purposes of

sections 3121(v)(2), 3101, and 3111. The rules in Sec. 31.3121(v)(2)-1

also apply to the special timing rule of section 3306(r)(2). For

purposes of applying the rules in Sec. 31.3121(v)(2)-1 to section

3306(r)(2) and this paragraph (a), references to the Federal Insurance

Contributions Act are considered references to the Federal Unemployment

Tax Act (26 U.S.C. 3301 et seq.), references to FICA are considered

references to FUTA, references to section 3101 or 3111 are considered

references to section 3301, references to section 3121(v)(2) are

considered references to section 3306(r)(2), references to section

3121(a), (a)(5), and (a)(13) are considered references to section

3306(b), (b)(5), and (b)(10), respectively, and references to

Sec. 31.3121(a)-2(a) are considered references to Sec. 31.3301-4.

(b) Effective dates and transition rules. Except as otherwise

provided, section 3306(r)(2) applies to remuneration paid after

December 31, 1984. Section 31.3121(v)(2)-2 contains effective date

rules for certain remuneration paid after December 31, 1983, for

purposes of section 3121(v)(2). The rules in Sec. 31.3121(v)(2)-2 also

apply to section 3306(r)(2). For purposes of applying the rules in

Sec. 31.3121(v)(2)-2 to section 3306(r)(2) and this paragraph (b),

references to section 3121(v)(2) are considered references to section

3306(r)(2), and references to section 3121(a)(2), (a)(3), or (a)(13)

are considered references to section 3306(b)(2), (b)(3), or (b)(10),

respectively. In addition, references to Sec. 31.3121(v)(2)-1 are

considered references to paragraph (a) of this section. For purposes of

applying the rules of Sec. 31.3121(v)(2)-2 to this paragraph (b)--

(1) References to ``December 31, 1983'' are considered references

to ``December 31, 1984'';

(2) References to ``before 1984'' are considered references to

``before 1985'';

(3) References to ``Federal Insurance Contributions Act'' are

considered references to ``Federal Unemployment Tax Act''; and

(4) References to ``FICA'' are considered references to ``FUTA''.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: December 23, 1998.

Donald C. Lubick,

Assistant Secretary of the Treasury (Tax Policy).

[FR Doc. 99-1664 Filed 1-28-99; 8:45 am]

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