[Federal Register Volume 64, Number 151 (Friday, August 6, 1999)]
[Rules and Regulations]
[Pages 42831-42834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19936]


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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

[[Page 42832]]

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

[[Page 42834]]

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]
BILLING CODE 4830-01-P