Exception From Supplemental Annuity Tax on
Railroad Employers

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 31 [TD 8832] RIN 1545-AT56

TITLE: Exception From Supplemental Annuity Tax on Railroad Employers

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Final regulations.

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 §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 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, 91 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 §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 §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 §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 §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 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
§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:

§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 §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 §1.401- 1(b)(1)(ii) of this
chapter or a stock bonus plan within the meaning of §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 §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
provisions.

Paragraph (c) of this section applies beginning on January 1, 2000.

John M. Dalrymple Acting Deputy Commissioner of Internal Revenue
Approved July 27, 1999: Donald C. Lubick Assistant Secretary of the
Treasury

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