[Federal Register Volume 59, Number 40 (Tuesday, March 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4675]
[[Page Unknown]]
[Federal Register: March 1, 1994]
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DEPARTMENT OF THE TREASURY
26 CFR Part 31
[TD 8525]
RIN 1545-AR07
Supplemental Annuity Tax--Railroad Retirement
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations concerning the
supplemental annuity tax under the Railroad Retirement Tax Act (RRTA).
The regulations contain rules for calculating the work-hours subject to
the tax. The regulations also contain a safe harbor that railroad
employers may use to determine the taxable work-hours in lieu of
calculating work-hours separately for each employee. The regulations
provide railroad employers with guidance necessary to comply with the
law and offer a simple safe-harbor calculation that can significantly
reduce the burden on employers. The regulations affect all railroad
employers and employee representatives.
EFFECTIVE DATES: These regulations are effective for calendar years
beginning after December 31, 1992, except that Sec. 31.3221-3(d) is
effective for calendar years beginning after December 31, 1993.
FOR FURTHER INFORMATION CONTACT: Karin Loverud at 202-622-6060 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On May 13, 1993, the IRS published in the Federal Register (58 FR
28371) proposed amendments to the Employment Tax Regulations (26 CFR
part 31) under section 3221(c) of the Internal Revenue Code (Code),
which imposes a supplemental tax on railroad employers for each work-
hour for which compensation is paid by the employer for services
rendered to the employer during a calendar quarter.
Two written comments were received from the public on the proposed
regulations, and a public hearing was held on August 30, 1993. After
consideration of the written comments received and the statements made
at the public hearing, the proposed regulations are adopted by this
Treasury decision.
Explanation of Provisions
Retirement benefits for railroad employees are provided under a
system that currently combines elements similar to those under both the
social security system and the private pension system.
In addition to Tier I benefits (similar to social security
benefits) and Tier II benefits (similar to private pension benefits), a
supplemental retirement annuity was established in 1966 by Public Law
89-699 (1966 Act). The benefit provisions are administered by the
Railroad Retirement Board (Board).
The 1966 Act established a program to be administered by the Board
for the payment of supplemental annuities for career railroad
employees. The program, which was required to be self-financing, was to
be financed separately from the regular railroad retirement program by
imposing on railroad employers an excise tax under section 3221(c) of
the Code. The rate was originally set at 2 cents for each work-hour of
employment. In 1970, Public Law 91-215 replaced the 2-cents rate with a
rate determined quarterly by the Board at a level sufficient to finance
the annuities. The rate is currently 30 cents.
The supplemental tax is imposed on every employer for each work-
hour for which compensation is paid by the employer for services
rendered to the employer during a calendar quarter. Section 3211(b) of
the Code imposes a similar tax on employee representatives. No tax is
imposed on employees to fund the supplemental annuities.
The only guidance previously published with respect to the
supplemental tax is in the instructions for Form CT-1, Employer's
Annual Railroad Retirement and Unemployment Repayment Tax Return. The
instructions today are nearly identical to the instructions 25 years
ago. Nevertheless, in recent years, significant variations in the
interpretation of the statutory language have arisen.
Definition of Work-Hours
The final regulations, like the proposed regulations, do not change
the longstanding interpretation of work-hours that was included in the
instructions for Form CT-1 when the supplemental annuity tax was
enacted. A commentator suggested that the 1970 legislation clarified
that the term is limited to those hours both worked and paid for, and
recommended that the regulations be revised accordingly. This
recommendation has not been adopted for the reasons set forth below.
The definition of work-hours as it appeared in the instructions for
Form CT-1 was not changed following the 1970 legislation, because the
IRS believed that the revised statutory language was not intended to
change the meaning of work-hours, or to clarify its meaning. When the
taxing provision was enacted in 1966, the tax was equal to 2 cents for
each work-hour. The 1970 legislation changed the rate from 2 cents to a
rate to be determined quarterly by the Board, beginning April 1, 1970.
Because the rate would no longer be constant, Congress changed the
statutory language to make it clear that the taxing period is a
calendar quarter and that, for purposes of the tax, the timing of the
services, not the timing of the payment for the services, governed.
With respect to services rendered, the Treasury and the IRS believe
that Congress intended to tax those hours for which the employee was
paid both to perform and not to perform services. If an employee is
guaranteed x hours of work a week and is paid for x hours, this is the
number of hours to be taxed, even if there are less than x hours of
work to be performed. The Treasury and the Service believe that this is
so whether the employee is expected to report to the work site and do
no work, whether the employee is not expected to report when no work is
available, or whether the employee is not expected to report when no
work is available but is expected to be available to be called to work.
The 1970 legislation did not alter the statutory language regarding
employees who receive daily, weekly, or monthly rates of compensation.
The language is clear that the tax applies to the number of hours
comprehended in the rate, plus overtime hours. Thus, if a monthly rate
of compensation comprehends that the employee is entitled to time off
from work for holiday time, vacation time, and sick time, all of those
hours are taxed, not merely the hours during which the employee
actually performed services.
Safe Harbor
The final regulations retain a safe harbor method of calculating
work-hours provided in the proposed regulations. Under the safe harbor,
the employer counts the number of employees who received any
compensation during the month and multiplies that figure by a ``safe
harbor number'' to determine the number of work-hours subject to the
tax. Each individual who is paid compensation is counted, even if the
individual is a part-time, temporary, or seasonal employee. For
purposes of the safe harbor count, it is irrelevant whether an employee
actually performed any services for the employer during the month.
The Treasury and the IRS believe that the safe harbor is an
attractive method of significantly reducing administrative complexity,
because the safe harbor will simplify calculation of the supplemental
annuity tax. The Service has worked with the railroad industry in
establishing a safe harbor number that will fairly and equitably
implement the supplemental annuity tax provisions while providing a
method of computing the liability that reduces the need to make a work-
hour determination on an individual-by-individual basis. The Treasury
and the IRS anticipate that, for most employers, use of the safe harbor
number will result in fewer taxable hours, and the Board will adjust
the tax rate accordingly.
The regulations provide the Commissioner with the authority to
publish the safe harbor number in guidance of general applicability.
Pursuant to this grant of authority, a revenue procedure will be
published to announce the safe harbor number. Commentators on the
proposed regulations, representing both the Class I railroads and the
Class III railroads, suggested a safe harbor number of 164. These
comments have been taken into account in developing the revenue
procedure.
Retroactivity
One commentator suggested that the safe harbor provision be made
retroactive at the election of the taxpayer. Because the number the
safe harbor produces is generally more favorable than work-hours
calculated under the regulations, retroactive application of the safe
harbor would, in many situations, produce taxable work-hours at levels
below those anticipated when prior-period tax rates were set. Also,
retroactive application would be inequitable because some taxpayers
have many open tax years and others do not. For these reasons, the
Treasury and the IRS have rejected any period of retroactivity and,
therefore, this approach is not included in the final regulations.
Thus, the safe harbor provision is effective for calendar years
beginning after December 31, 1993, as proposed.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 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)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations and, therefore, a Regulatory Flexibility Analysis is
not required. 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 business.
Drafting Information
The principal author of these regulations is Karin Loverud of the
Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 31
Employment taxes, 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 TAX 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 31.3211-3 is added to read as follows:
Sec. 31.3211-3 Employee representative supplemental tax.
See paragraphs (a), (b), and (c) of Sec. 31.3221-3 for rules
applicable to the supplemental tax for each work-hour for which
compensation is paid to an employee representative for services
rendered as an employee representative.
Par. 3. Section 31.3221-3 is added under the heading ``Tax on
Employers'' to read as follows:
Sec. 31.3221-3 Supplemental tax.
(a) Introduction--(1) In general. Section 3221(c) imposes an excise
tax on every employer, as defined in section 3231(a) and
Sec. 31.3231(a)-1, with respect to individuals employed by the
employer. The tax is imposed for each work-hour for which the employer
pays compensation, as defined in section 3231(e) and Sec. 31.3231(e)-1,
for services rendered to the employer during a calendar quarter. This
Sec. 31.3221-3 provides rules for determining the number of taxable
work-hours.
(2) Overview. Paragraph (b) of this section defines work-hours.
Paragraph (c) of this section demonstrates the calculation of work-
hours. Paragraph (d) of this section offers a safe harbor calculation
of work-hours for use by any employer in lieu of calculating the number
of work-hours for each employee.
(b) Definition of work-hours--(1) In general. For purposes of
section 3221(c) and this section, work-hours are hours for which the
employee is compensated, whether or not the employee performs services.
(i) Payments included in work-hours. Work-hours include regular
time worked; overtime; time paid for vacations and holidays; time
allowed for meals; away-from-home terminal time; called and not used,
runaround, and deadheading time; time for attending court,
participating in investigations, and attending claim and safety
meetings; and guaranteed time not worked. Work-hours also include
conversion hours, that is, compensation converted into work-hours.
Conversion hours may be derived from payment by the mile or by the
piece. Work-hours also include time for which the employee is paid for
periods of absence not due to sickness or accident disability, such as
for routine medical and dental examinations or for time lost.
(ii) Payments excluded from work-hours. Certain kinds of payments
are not subject to conversion into work-hours. These include those
payments that are specifically excluded from compensation within the
meaning of section 3231(e), such as certain sick pay payments (section
3231(e)(1)(i)); tips (section 3231(e)(1)(ii)); and amounts paid
specifically (either as an advance, as reimbursement, or allowance) for
traveling expenses (section 3231(e)(1)(iii)). Traveling expenses paid
under a nonaccountable plan are excluded from work-hours even though
they are includible in compensation. See Sec. 31.3231(e)-1(a)(5). Also
excluded from work-hours are amounts representing bonuses, amounts
received pursuant to the exercise of an employee stock option, and all
separation payments or severance allowances.
(2) Hourly compensation. Because the tax under section 3221(c) is
calculated on the basis of work-hours, the number of hours for which an
employee receives compensation is the figure used to determine work-
hours. In the case of an hourly-rated employee, each hour for which the
employee receives compensation is one work-hour.
(3) Daily, weekly, monthly compensation. (i) If an employee is paid
by the day, week, month, or other period of time, the tax is imposed on
the number of hours comprehended in the rate and, if any, the number of
overtime hours for which additional compensation is paid. Thus, in the
case of an office worker who receives an annual salary based on an 8-
hour, 5-day-a-week work schedule that includes paid holidays,
vacations, and sick time, the number of work-hours for one month is 174
(2088 hours/year 12 months).
(ii) The rule in paragraph (b)(3)(i) of this section is illustrated
by the following examples.
Example 1. A, an office worker, receives an annual salary that
is paid monthly. The salary is based on an 8-hour, Monday through
Friday work schedule. A is not paid for overtime hours. A is not
expected to work on holidays, during A's annual vacation, or during
periods that A is ill. The number of work-hours for one month is 174
(2088 hours/year 12 months). This figure remains constant,
even though some months have more workdays than others.
Example 2. B is paid a stated amount for each day B works,
regardless of the number of hours worked. However, if B works more
than 8 hours during any day, B is paid overtime for each additional
hour worked that day. B is not paid for holidays, vacations, or sick
time. During May, B worked 6 hours on 4 days, 7 hours on 6 days, 8
hours on 6 days, and 9 hours on 5 days. Because B is paid a daily
rate for up to 8 hours, 8 hours are comprehended in the daily rate.
Therefore, the number of work-hours for May is 173 (21 days x 8
hours/day+5 overtime hours), even though B actually worked 159
hours.
(4) Conversion hours--(i) Compensation not based on time (hour,
day, month, etc.), such as compensation paid by the mile or by the
piece, must be converted into the number of hours represented by the
compensation paid. Thus, if an employee is paid by the mile, 1 work-
hour equals the number of miles constituting a workday, divided by 8
hours. However, in the case of a collective bargaining agreement that
specifies a number of hours as constituting a workday, the number of
hours specified under the agreement may be used instead of 8.
(ii) The rule in paragraph (b)(4)(i) of this section is illustrated
by the following example.
Example. C's normal workday consists of 2 150-mile round trips
that together take 6 hours. C is paid by the mile. The collective
bargaining agreement does not specify the number of hours in a
workday. Thus, the number of work-hours for each day C works is 8,
or 1 work-hour for each 37.5 miles (300 miles/day 8 hours/
day). If the applicable collective bargaining agreement specifies
that 6 hours constitute a workday, the number of work-hours for each
day C works would be 6.
(c) Calculation of work-hours--(1) An employer may calculate the
work-hours separately for each employee, as described in the examples
in this paragraph. If the employer chooses to calculate work-hours
separately for each employee, the employer must calculate the number of
regular hours, overtime hours, and conversion hours for each employee
for each month. In lieu of separate calculations, the employer may
calculate the work-hours for all the employer's employees using the
safe harbor formula described in paragraph (d) of this section.
(2) The rules in paragraph (c) of this section are illustrated by
the following examples.
Example 1. D worked 8 hours a day, Monday through Friday, during
the months of February and March 1992. D did not work on President's
Day, but was paid for the holiday. D's work-hours for February were
160 (19 days x 8 hours a day + 8 holiday hours). D's work-hours
for March were 176 (22 days x 8 hours a day).
Example 2. E worked 7-hour shifts every Tuesday through Saturday
during the months of February and March 1992. E also worked 7
overtime hours during February and 21 overtime hours during March.
Also, E was paid for 7 hours on President's Day, even though E did
not work on that day. The number of work-hours for February was 161
(21 days x 7 hours a day + 7 overtime hours + 7 holiday hours).
The number of work-hours for March was 168 (21 days x 7 hours a
day + 21 overtime hours). Because E receives an hourly wage and was
paid for the President's Day holiday, the number of hours (7) for
which E was paid are added to the hours E actually worked. If E had
worked on President's Day and had received extra pay for working on
a holiday and holiday pay for 7 hours, the employer would include 14
hours in E's work-hours for that day, the 7 hours E actually worked
and the 7 holiday hours for which E was paid.
Example 3. Employment beginning during month. F began employment
on March 16, a Monday, and worked 8 hours a day, Monday through
Friday. The employer calculates that F's hours for the month were
96, because F worked 12 8-hour days during the month. If March 16
were on a Friday, the employer would calculate 11 days, or 88 hours.
Example 4. Employment ending during month. G's last day of
employment was Friday, March 13. G worked 8 hours a day, Monday
through Friday, except for March 3, when G was ill. G was paid for 8
hours for March 3. The employer calculates that G's work-hours for
March were 80, because G worked 9 8-hour days and was paid for an
additional 8 hours.
(d) Safe harbor--(1) In general. In lieu of calculating work-hours
separately for each employee, an employer may use the safe harbor for
all employees. If the employer elects to use the safe harbor for a
calendar year, the employer must use the safe harbor for all employees
for the entire calendar year. If an employer uses the safe harbor for a
calendar year, the employer need not elect the safe harbor for the
following calendar year. An employer that elects the safe harbor for a
calendar year may not subsequently elect to separately calculate
employee work-hours for that calendar year.
(2) Method of calculation. The safe harbor treats each employee of
the employer as receiving monthly compensation for a number of hours
equal to the safe harbor number. To determine the number of work-hours
for a month, the employer multiplies the safe harbor number by the
number that equals the total number of employees to whom the employer
paid compensation during the month.
(i) Safe harbor number defined. The safe harbor number is the
number established in guidance of general applicability promulgated by
the Commissioner.
(ii) Employee defined. Solely for purposes of this paragraph, an
employee is any individual who is paid compensation, within the meaning
of Sec. 31.3231(e)-1, regardless of the amount, during the month. Thus,
for example, a part-time, temporary, or seasonal employee is counted as
an employee. A terminated employee is counted in the month of
termination (provided the terminated employee received compensation in
the month of termination), but not in any subsequent month in which the
employee does not perform service for the employer as an employee, even
if the terminated employee is paid compensation in a subsequent month.
Thus, for example, an employee who terminates employment during the
month, receives compensation during the month of termination, and
receives a final paycheck the following month is counted as an employee
of the employer for the month of termination but not for the following
month.
(3) Method of election. An employer makes the safe harbor election
for a calendar year on the employment tax return filed for the previous
calendar year.
(4) Additional rules. The Commissioner may, in revenue procedures,
revenue rulings, notices, or other guidance of general applicability,
revise the safe harbor number or provide additional safe harbors that
satisfy section 3221(c).
(e) Effective dates. This Sec. 31.3221-3 is effective for calendar
years beginning after December 31, 1992, except that paragraph (d) is
effective for calendar years beginning after December 31, 1993.
Taxpayers may apply the rules in paragraphs (a), (b), and (c) of this
section before January 1, 1993.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: February 23, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-4675 Filed 2-25-94; 8:54 am]
BILLING CODE 4830-01-U
