[Federal Register Volume 68, Number 60 (Friday, March 28, 2003)]
[Notices]
[Pages 15241-15243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7450]


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DEPARTMENT OF LABOR

Employment and Training Administration


Workforce Security Programs: Unemployment Insurance Program 
Letter Interpreting Federal Law

    The Employment and Training Administration interprets federal law 
requirements pertaining to unemployment compensation (UC) and public 
employment services (ES). These interpretations are issued in 
Unemployment Insurance Program Letters (UIPLs) to the State Workforce 
Agencies. The UIPL described below is

[[Page 15242]]

published in the Federal Register in order to inform the public.

UIPL 22-87, Change 2

    UIPL 22-87. change 2, using a Q and A format, advises states of the 
Department of Labor's interpretation of federal law relating to the 
treatment of retirement pay for unemployment compensation (UC) 
purposes. Specific information regarding the effect of employee 
contributions to retirement plans and receipt of Social Security is 
also addressed.

    Dated: March 20, 2003.
Emily Stover DeRocco,
Assistant Secretary of Labor.

Employment and Training Administration Advisory System U.S. Department 
of Labor Washington, D.C. 20210

Classification--Retirement Pay
Correspondence Symbol--OWS/DL
DATE--February 3, 2003

    Advisory: Unemployment Insurance Program Letter No. 22-87 Change 
2.
    To: All State Workforce Agencies.
    From: Cheryl Atkinson /s/ Administrator, Office of Workforce 
Security.
    Subject: Treatment of Retirement Pay--Employee Contributions.
    1. Purpose. To answer questions related to the treatment of 
retirement pay for unemployment compensation (UC) purposes, 
particularly regarding the effect of employee contributions to 
retirement plans.
    2. References. The Internal Revenue Code of 1986 (IRC), 
including Section 3304(a)(15) of the Federal Unemployment Tax Act 
(FUTA); and Unemployment Insurance Program Letter (UIPL) No. 22-87 
(52 Fed. Reg. 22,546 (1987)), and Change 1 (60 Fed. Reg. 55,604, 
55,606 (1995)).
    3. Background. Section 3304(a)(15), FUTA, requires, as a 
condition for employers in a state to receive credit against the 
federal unemployment tax, that the amount of UC payable to an 
individual be reduced for any week ``which begins in a period with 
respect to which such individual is receiving a governmental or 
other pension, retirement or retired pay, annuity, or any other 
similar periodic payment which is based on the previous work of such 
individual * * * .'' Two subparagraphs go on to provide the 
following qualifications to this requirement:
    [sbull] Under subparagraph (A), states must reduce UC due to 
receipt of retirement payments only when (i) a base period or 
chargeable employer maintained or contributed to the plan and (ii) 
the services performed for that employer affected eligibility for, 
or increased the amount of, the retirement payment. Subparagraph 
(A)(ii) does not apply to payments ``made under the Social Security 
Act or the Railroad Retirement Act * * *.''

Rescissions--None
Expiration Date--Continuing

    [sbull] Under subparagraph (B), states may ``take into account'' 
contributions made ``by the individual for the pension, retirement 
or retired pay, annuity, or other similar periodic payment'' to 
provide limits on any such reduction. This exception applies to all 
retirement plans to which the employee has made contributions.
    The entire text of Section 3304(a)(15), FUTA, is provided in the 
Attachment. UIPL 22-87 provides the Department's interpretation of 
this Section. This Change 2 is issued to respond to questions from 
states, particularly those related to Subparagraph B.
    4. Questions and Answers:
    Question 1: How much latitude does a state have in ``taking into 
account'' an employee's contributions to set limits on the amount of 
any reduction in UC?
    Answer: Since subparagraph (B) does not specify the degree of 
offset, states have broad latitude in how an employee's 
contributions are ``taken into account.'' As a result, a state may 
disregard part or all of a retirement payment in determining the 
amount of UC payable ``regardless of the relative proportions of 
employee and employer contributions.'' Therefore, a state may 
disregard up to 100 percent of a retirement payment as long as the 
employee contributed some amount to the retirement plan, and any 
reduction in the amount of UC payable need not be proportionate to 
the amount of the employee contribution.
    If an employee at one time paid contributions to a plan that was 
later converted to one in which the employer paid 100% of the 
contributions, then the employee has made contributions to the plan. 
Therefore, the state has the option of ``taking into account'' the 
employee's contributions before the conversion.
    Question 2: Must Social Security retirement benefits be deducted 
from UC?
    Answer: No. As explained in the preceding Question and Answer, 
states may ``take into account'' contributions made ``by an 
individual for the pension, retirement or retired pay, annuity, or 
other similar periodic payment.'' Since employees make contributions 
to Social Security, the state may ``take into account'' the 
employee's contributions to Social Security.
    Confusion apparently exists concerning the treatment of Social 
Security payments because, as noted in the Background section, the 
qualification found in subparagraph (A)(ii) does not apply to Social 
Security. However, there is no similar limitation in the ``take into 
account'' provision in subparagraph (B).
    Question 3: UIPL 22-87 says that, if a state chooses to exercise 
the ``take into account'' option, the state's UC law must clearly 
indicate that the retirement payments are not deducted from UC 
because of the employee's contribution. (Page 6 of UIPL 22-87.) If a 
state chooses to exercise the ``take into account'' option solely 
for Social Security payments, must the state's law explicitly state 
that it is ``taking into account'' the employee's contributions?
    Answer: No. The Social Security contribution scheme is governed 
entirely by federal law, which by its terms provides for employee 
contributions to the Social Security trust fund based on the 
employee's work. Because it is clear from a reading of the relevant 
provisions of the federal law, that a state may exclude these 
payments from pension offset, there is no need for the state law to 
explain how it is doing so.
    There also is no need for the state law to explain that it is 
``taking into account'' the employee's contribution with regard to 
other retirement plans with employee contributions that are governed 
entirely by federal law, such as Railroad Retirement or Civil 
Service retirement payments. For retirement plans that the state law 
singles out that are not governed entirely by federal law, the 
state's law must, to guarantee conformity with federal law, 
explicitly state that it is ``taking into account'' the employee's 
contribution.
    Question 4: During a collective bargaining process, employees 
may give up pay raises or cost of living adjustments in return for 
an increased employer contribution to the pension plan. May states 
consider these employer payments to be ``contributions made by the 
individual?''
    Answer: No. The controlling factor is whether the individual 
actually made any direct contributions to the plan. A direct 
contribution is one made by payroll deduction or otherwise from an 
employee's personal funds. A wage agreement that results in 
increased employer contributions to a retirement plan in exchange 
for a surrender in wages does not constitute a direct contribution 
to the pension plan by the employees.
    This is consistent with other provisions of federal law. The 
Department of Labor's Pension, Welfare and Benefits Administration 
(PWBA) considers contributions made by an employer to a pension fund 
in these cases to be employer contributions for purposes of laws 
administered by PWBA. (Indeed, the Form 5500, Annual Return/Report 
of Employment Benefit Plan, filed by the employer, should reflect 
this.) Also, payments made by an employer to a retirement plan are 
not considered part of an employee's wages for federal income tax 
purposes under Section 3401 et seq., of the Internal Revenue Code 
(IRC). It would be inconsistent to attribute these contributions to 
employees for purposes of Section 3304(a)(15), FUTA (which is itself 
part of the IRC), when other provisions of the IRC do not consider 
them employee contributions.
    Question 5: The federal legislative language is very complex. 
Could you give a simple statement of what retirement payments must 
cause a reduction in UC?
    Answer: UC must be reduced only due to receipt of retirement pay 
that is--
    [sbull] For a week of unemployment beginning during a period for 
which the individual is receiving retirement pay;
    [sbull] Reasonably attributable to such week;
    [sbull] Based on the previous work of the individual;
    [sbull] 100% financed by a base period or chargeable employer; 
AND
    [sbull] Based on work affecting eligibility for, or increasing 
the amount of, the retirement payment.
    See UIPL 22-87, page 4, for a discussion of the various types of 
payments that fall under the term ``retirement pay'' and a more 
detailed discussion of these criteria.
    5. Action. State administrators should distribute this advisory 
to appropriate staff.

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    6. Inquiries. Questions should be addressed to your Regional 
Office.
    7. Attachment. \1\

    \1\ ATTACHMENT I is available in the www.ows.doleta.gov Web site 
under Laws.

[FR Doc. 03-7450 Filed 3-27-03; 8:45 am]
BILLING CODE 4510-30-P