[Federal Register Volume 70, Number 240 (Thursday, December 15, 2005)]
[Rules and Regulations]
[Pages 74198-74200]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-23945]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31 and 32

[TD 9233]
RIN 1545-BC89


Sickness or Accident Disability Payments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance 
regarding the treatment of payments made on account of sickness or 
accident disability under a workers' compensation law for purposes of 
the Federal Insurance Contributions Act (FICA).

DATES: Effective Date: These regulations are effective December 15, 
2005.
    Applicability Date: These regulations apply to payments on account 
of sickness or accident disability payments made on or after December 
15, 2005.

FOR FURTHER INFORMATION CONTACT: David Ford (202) 622-6040 (not toll-
free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR parts 31 and 32 under 
section 3121(a)(2) of the Internal Revenue Code (Code). This section 
excepts from wages for Federal Insurance Contributions Act (FICA) 
purposes payments made on account of sickness or accident disability 
that are received under a ``workmen's compensation law,'' hereinafter 
referred to as a workers' compensation law.
    Proposed regulations (Reg-160315-03) under section 3121(a)(2) were 
published in the Federal Register (70 FR 12164) on March 11, 2005. No 
written comments responding to the notice of proposed rulemaking were 
received and a public hearing was not requested or held. Accordingly, 
the proposed regulations are adopted as final regulations. In addition, 
this document contains amendments to Sec.  32.1 of the Temporary 
Employment Tax Regulations to provide guidance that the definition of 
workers' compensation law in the final regulations under Sec.  
31.3121(a)(2)-1 applies for payments on account of sickness or accident 
disability made on or after December 15, 2005.

Explanation of Provisions

    Section 3121(a)(2)(A) of the Code excepts from ``wages'' for FICA 
tax purposes payments to an employee or any of his dependents on 
account of sickness or accident disability only if the payments are 
received under a workers' compensation law.
    Section 3121(a)(4) provides that wages does not include any payment 
on account of sickness or accident disability made by an employer to or 
on behalf of an employee after the expiration of 6 calendar months 
following the last calendar month in which the employee worked for the 
employer. Thus, unless made under a workers' compensation law, payments 
received on account of sickness or accident disability are wages 
subject to FICA during the first 6 months the employee is out of work.
    These final regulations amend Sec.  31.3121(a)(2)-1 to provide that 
payments made under a statute in the nature of a workers' compensation 
act will be treated as having been made under a workers' compensation 
law and, therefore excluded from wages for FICA purposes. For income 
tax purposes, section 104(a)(1) excludes from gross income certain 
amounts received under ``workmen's compensation acts.'' Section 1.104-
1(b) of the Income Tax Regulations, provides that amounts received 
under section 104(a)(1) include amounts received by an employee under a 
statute in the nature of a workers' compensation act. Thus, the final 
regulations align the interpretation of what constitutes payments 
received under a workers' compensation law for FICA purposes with Sec.  
1.104-1(b) of the Income tax regulations.
    The preamble to the proposed regulations specified that Sec.  32.1 
of the Temporary Employment Tax Regulations would be amended, if 
needed. It is necessary to remove the reference to Sec.  31.3121(a)(2)-
1(a)(2) in the first phrase of Sec.  32.1(a) and insert a reference to 
Sec.  31.3121(a)(2)-1(d)(3) in Sec.  32.1(a)(1) to specify that the 
definition of workers' compensation law applicable to payments on 
account of sickness or accident disability made on or after December 
15, 2005, is now in final regulation Sec.  31.3121(a)(2)-1(d)(3). No 
other amendments are made to Sec.  32.1.
    The preamble to the proposed regulations also specified that 
guidance

[[Page 74199]]

would be provided related to Federal Unemployment Tax Act (FUTA) to the 
extent necessary. The Service has concluded that no additional guidance 
is necessary for FUTA since these payments are made to employees of 
states and local governments and FUTA does not apply to services 
performed by state or local government employees.

Special Analyses

    It has been determined that these regulations are not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations. In addition, because no collection 
of information is imposed on small entities, the provisions of the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply, and, 
therefore, a Regulatory Flexibility Analysis is not required. Pursuant 
to section 7805(f) of the Code, these regulations have been submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on the impact on small business.

Drafting Information

    The principal author of these regulations is David Ford of the 
Office of Division Counsel/Associate Chief Counsel (Tax Exempt/
Government Entities). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 31

    Employment taxes; Fishing vessels; Gambling; Income taxes; 
Penalties; Pensions; Railroad retirement; Reporting and recordkeeping 
requirements; Social security; Unemployment compensation.

26 CFR Part 32

    Employment taxes; Railroad retirement; Reporting and recordkeeping 
requirements; Social security.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 31 and 32 are amended as follows:

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

0
Paragraph 1. The authority section for part 31 continues to read, in 
part, as follows:

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

0
Par. 2. Section 31.3121(a)(2)-1 is amended by:
    1. Revising the section heading.
    2. Removing paragraph (a)(1).
    3. Redesignating paragraphs (a)(2) through (a)(4) as (a)(1) through 
(a)(3), respectively.
    4. Revising newly designated paragraph (a)(1).
    5. Redesignating paragraph (d) as (f).
    6. Adding new paragraphs (d) and (e).
    The revisions and additions are as follows:


Sec.  31.3121(a)(2)-1  Payments on account of sickness or accident 
disability, medical or hospitalization expenses, or death.

    (a) * * *
    (1) Sickness or accident disability of an employee or any of his 
dependents, only if payment is received under a workers' compensation 
law;
* * * * *
    (d) Workers' compensation law. (1) For purposes of paragraph (a)(1) 
of this section, a payment made under a workers' compensation law 
includes a payment made pursuant to a statute in the nature of a 
workers' compensation act.
    (2) For purposes of paragraph (a)(1) of this section, a payment 
made under a workers' compensation law does not include a payment made 
pursuant to a State temporary disability insurance law.
    (3) If an employee receives a payment on account of sickness or 
accident disability that is not made under a workers' compensation law 
or a statute in the nature of a workers' compensation act, the payment 
is not excluded from wages as defined by section 3121(a)(2)(A) even if 
the payment must be repaid if the employee receives a workers' 
compensation award or an award under a statute in the nature of a 
workers' compensation act with respect to the same period of absence 
from work.
    (4) If an employee receives a payment on account of non-
occupational injury sickness or accident disability such payment is not 
excluded from wages, as defined by section 3121(a)(2)(A).
    (e) Examples. The following examples illustrate the principles of 
paragraph (d) of this section:
    Example 1. A local government employee is injured while 
performing work-related activities. The employee is not covered by 
the State workers' compensation law, but is covered by a local 
government ordinance that requires the local government to pay the 
employee's full salary when the employee is out of work as a result 
of an injury incurred while performing services for the local 
government. The ordinance does not limit or otherwise affect the 
local government's liability to the employee for the work-related 
injury. The local ordinance is not a workers' compensation law, but 
it is in the nature of a workers' compensation act. Therefore, the 
salary the employee receives while out of work as a result of the 
work-related injury is excluded from wages under section 
3121(a)(2)(A).
    Example 2. The facts are the same as in Example 1 except that 
the local ordinance requires the employer to continue to pay the 
employee's full salary while the employee is unable to work due to 
an injury whether or not the injury is work-related. Thus, the local 
ordinance does not limit benefits to instances of work-related 
disability. A benefit paid under an ordinance that does not limit 
benefits to instances of work-related injuries is not a statute in 
the nature of a workers' compensation act. Therefore, the salary the 
injured employee receives from the employer while out of work is 
wages subject to FICA even though the employee's injury is work-
related.
    Example 3. The facts are the same as in Example 1 except that 
the local ordinance includes a rebuttable presumption that certain 
injuries, including any heart attack incurred by a firefighter or 
other law enforcement personnel is work-related. The presumption in 
the ordinance does not eliminate the requirement that the injury be 
work-related in order to entitle the injured worker to full salary. 
Therefore, the ordinance is a statute in the nature of a workers' 
compensation act, and the salary the injured employee receives 
pursuant to the ordinance is excluded from wages under section 
3121(a)(2)(A).

* * * * *

PART 32--TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE ACT OF 
DECEMBER 29, 1981 (PUB. L. 97-123)

0
Par 3. The authority section for part 32 continues to read, in part, as 
follows:

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

0
Par. 4. Section 32.1 is amended by:
    1. Revising paragraph (a) introductory text.
    2. Revising paragraph (a)(1).
    The revisions and additions are as follows:
* * * * *
    (a) General rule. The amount of any payment on or after January 1, 
1982, made to, or on behalf of, an employee or any of his dependents on 
account of sickness or accident disability is not excluded from the 
term wages as defined in section 3121(a)(2)(A) unless such payment is--
    (1) Received under a workmen's compensation law (as defined in

[[Page 74200]]

Sec.  31.3121(a)(2)-1(d)(3) for payments made on or after December 15, 
2005), or
* * * * *

Mark E. Matthews,
Deputy Commissioner of Services and Enforcement.
    Approved: December 1, 2005.
Eric Solomon,
Acting Deputy Assistant of the Treasury (Tax Policy).
[FR Doc. 05-23945 Filed 12-14-05; 8:45 am]
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