Exception From Supplemental Annuity Tax on Railroad Employers

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[TD 8832]

RIN 1545-AT56

Exception From Supplemental Annuity Tax on Railroad Employers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final 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 regulations

provide rules for applying the exception from the supplemental annuity

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.

DATES: Effective Date: These regulations are effective August 6, 1999.

Applicability Date: These regulations generally apply beginning on

October 1, 1998, except as provided in Sec. 31.3221-4(e)(2).

FOR FURTHER INFORMATION CONTACT: Linda S. F. Marshall, (202) 622-6030

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Employment Tax Regulations

(26 CFR part 31) under section 3221(d). On September 23, 1998, a notice

of proposed rulemaking was published in the Federal Register (63 FR

50819) under section 3221(d). The proposed

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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. Two

written comments were received on the proposed regulations. A public

hearing was held on the proposed regulations on January 20, 1999. After

consideration of the comments, the proposed regulations under section

3221(d) are adopted as revised by this Treasury decision.

Under the Railroad Retirement Act of 1974, as amended, codified at

45 U.S.C. 231 et seq., if an employee has performed at least 25 years

of covered service with the railroad industry, including service with

the railroad industry before October 1, 1981, the Railroad Retirement

Board (RRB) will pay the employee a supplemental annuity at retirement.

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 45 U.S.C. 231a(h)(2), the 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 RRB. The tax imposed under

section 3221(c) is based on work-hours for which compensation is paid.

The RRB establishes the rate of tax under section 3221(c) quarterly,

and calculates the rate 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 Public Law 91-215, 84 Stat. 70,

which amended the Railroad Retirement Act of 1937 and the Railroad

Retirement Tax Act. The legislative history to Public Law 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).

Explanation of Provisions

These regulations retain the rules set forth in the proposed

regulations for determining whether a plan is a supplemental pension

plan established pursuant to an agreement reached through collective

bargaining. Under these 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). A pension plan that is tax-

qualified under section 401(a) is subject to special rules with respect

to joint and survivor benefits under sections 401(a)(11) and 417.

One commentator requested clarification that these regulations do

not preclude a plan from being a supplemental pension plan merely

because the plan provides for a single sum distribution form (in

addition to providing for periodic payments as described above). A plan

is not precluded from being a pension plan within the meaning of

Sec. 1.401-1(b)(1)(i) merely because it provides for a single sum

distribution form in addition to providing for the required periodic

payment forms. See section 417(e)(1) and (2). Thus, the availability of

a single sum distribution form (offered in addition to the periodic

payment form or forms described above) does not preclude a plan from

being a supplemental pension plan under these regulations.

Another commentator requested clarification that a plan in which

the employer contribution is discretionary or conditioned on

contributions made at the election of employees pursuant to a qualified

cash or deferred arrangement described in section 401(k)(2) could not

qualify as a supplemental pension plan under section 3221(d) and the

regulations. A plan that provides for discretionary employer

contributions cannot be a pension plan under Sec. 1.401(b)-1(b)(1)(i)

because it does not provide for the payment of definitely determinable

benefits. Under section 401(k)(1), a qualified cash or deferred

arrangement under section 401(k) must be part of a profit-sharing or

stock bonus plan, a pre-ERISA money purchase plan, or a rural

cooperative plan. Thus, a plan that provides for a section 401(k)

qualified cash or deferred arrangement with employer matching

contributions cannot be a pension plan under Sec. 1.401(b)-1(b)(1)(i)

(unless the plan is a pre-ERISA money purchase plan or a rural

cooperative plan). Thus, apart from these narrow exceptions for certain

pre-ERISA and rural cooperative plans, neither of the types of plans

noted by the commentator could qualify as supplemental pension plans

under section 3221(d) and these regulations.

As provided in the proposed regulations, these 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 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.

These regulations also retain the rules set forth in the proposed

regulations for determining whether a plan is established pursuant to a

collective bargaining agreement with respect to an employee. These

rules generally follow the rules applicable to qualified plans for this

purpose. Under these regulations, a plan is established pursuant to a

collective bargaining agreement with respect to an employee

[[Page 42833]]

only if the employee is included in the collective bargaining unit

covered by the collective bargaining agreement.

One commentator maintained that employers should also be exempted

from supplemental annuity tax with respect to nonbargaining unit

employees covered by a plan that is the subject of collective

bargaining. The IRS and Treasury Department have determined that it is

inappropriate to extend the exception to nonbargaining unit employees.

This determination is consistent with the RRB's administrative rulings.

As noted below, the final regulations include a delayed effective date

for this requirement.

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) excise tax under

the section 3221(d) exception. These regulations retain the rules set

forth in the proposed regulations for applying this excise tax under

section 3221(d).

Effective Date

These regulations generally apply beginning on October 1, 1998, as

provided in the proposed regulations. However, the IRS and Treasury

have determined that it is appropriate to provide a delayed

applicability date with respect to the portion of the final regulations

clarifying what constitutes a plan established pursuant to a collective

bargaining agreement with respect to an employee for purposes of

section 3221(d). Accordingly, the final regulations provide that the

definition in Sec. 31.3221-4(c) applies beginning on January 1, 2000.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in Executive Order 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

regulation does 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, the

notice of proposed rulemaking preceding these regulations was submitted

to the Small Business Administration for comment on its impact on small

businesses.

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 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.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 31 is 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 * * *

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

heading ``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 (b)(4) of this section.

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

plan within the meaning of this section 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 45 U.S.C. 231a(b), plus a percentage thereof determined

by the Railroad Retirement Board to be sufficient to cover the

administrative costs attributable to such payments under 45 U.S.C.

231a(b).

(e) Effective date--(1) In general. Except as provided in paragraph

(e)(2) of this section, this section applies beginning on October 1,

1998.

(2) Delayed effective date for collective bargaining agreement

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provisions. Paragraph (c) of this section applies beginning on January

1, 2000.

John M. Dalrymple,

Acting Deputy Commissioner of Internal Revenue.

Approved: July 9, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 99-19936 Filed 8-5-99; 8:45 am]

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