Final RRTA Regs

 [4830-01-u]

 AGENCY: Internal Revenue Service (IRS), Treasury.

 ACTION: Final regulations

 SUMMARY: This document contains final regulations relating to the Railroad Retirement Tax Act (RRTA). These regulations update the existing RRTA regulations by removing obsolete provisions and adding new provisions to reflect the statutory changes that have occurred since the publication in 1964 of the existing RRTA regulations. In addition, because Tier 1 of the RRTA mirrors the Federal Insurance Contributions Act (FICA), these regulations generally cross-reference the definition of compensation under the RRTA to the definition of wages under the FICA. The regulations provide both railroad employers and IRS personnel with the guidance necessary to comply with the law.

 DATES: These regulations are effective [December 23, 1994].

 These regulations apply for calendar years beginning after December 31, 1992.

 FOR FURTHER INFORMATION CONTACT: Jean Whalen Casey at (202) 622-6040.

 SUPPLEMENTARY INFORMATION:

BACKGROUND

On May 13, 1993, the IRS published in the Federal Register (58 FR 28366) proposed amendments to the Employment Tax Regulations (26 CFR part 31) under sections 3201 through 3231 of the Internal Revenue Code (Code).

 Written comments were received from the public on the proposed regulations, and a public hearing was held on August 30, 1993. After consideration of all of the written comments received and the statements made at the public hearing, the proposed regulations are adopted as revised by this Treasury decision.

EXPLANATION OF REVISIONS AND SUMMARY OF COMMENTS

 The comments received focused on the definition of "employer" in section 31.3231(a)-1 and the definition of compensation in section 31.3231(e)-1.

 Proposed Regulation section 31.3231(a)-1(c) describes the term "casual" as used in the phrase "casual service and the casual operation of equipment or facilities." Under the proposed regulations, the term "casual" applies, in part, whenever such service or operation is insubstantial. One commentator suggested the IRS adopt a bright line test in defining insubstantial. Specifically, the commentator suggested that service or operation of equipment or facilities in connection with the transportation of passengers or property by railroad be presumed to be insubstantial whenever less than 10% of any company's revenues, work force, or payroll are derived from, devoted to, or provided to the carrier or carriers affiliated with the company. Situations can arise where one of the factors is less than 10% while the remaining factors are greater than 10%. It is not clear that the service or operation of equipment or facilities would be insubstantial in those situations. Therefore, this suggestion was not adopted.

 The proposed regulations define "compensation" under the RRTA by referencing the definition of "wages" under the FICA. One commentator suggested that this reference be deleted because the statutory language of the two statutes differs. This suggestion was not adopted. The definition of wages under the FICA refers to "all remuneration for employment" while the definition of compensation under the RRTA refers to "any money remuneration paid to an individual." The commentator stated that Congress had the opportunity to conform the language of the two definitions and has not done so. While there are historical differences between the two statutes, there are significant similarities between the RRTA and the FICA. Legislation enacted since the adoption of the existing regulations has made the RRTA Tier 1 tax identical to the FICA tax as well as conforming the Tier 1 wage ceiling to the FICA wage ceiling. Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under the RRTA, with few exceptions, mirror the exclusions from the definition of wages under the FICA. These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under section 119 of the Internal Revenue Code, and employer-paid life insurance premiums for group-term life insurance under $50,000. In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA. Congress has added references to FICA provisions in the RRTA definition of successor employer (section 3231(e)(2)(C)) and the rules for nonqualified deferred compensation (section 3231(e)(8)). In addition, Tier 1 benefits are designed to be equivalent to social security benefits and are subject to federal income taxation in the same manner as social security benefits. Because the two statutes are not completely identical, the language of the regulation indicates that the term compensation has the same meaning as the term wages, EXCEPT AS SPECIFICALLY LIMITED BY THE RAILROAD RETIREMENT TAX ACT.

 One commentator suggested that the presumption in section 31.3231(e)-1(a)(2) that payments made to an individual through the employer's payroll are compensation should be deleted. This is based on the removal of this language from the Internal Revenue Code in 1983. The commentator also suggested that section 31.3231(e)-1(a)(4) providing that compensation includes payments for time lost should be deleted. These provisions are included in the existing regulations. The Railroad Retirement Solvency Act of 1983 significantly amended the definition of compensation, changing the inclusion of items to a "paid basis" from an "earned basis" and providing the present two tiered structure. Prior to the 1983 Act, statutory language specifically provided for the presumption and the inclusion of payments for time lost. In amending the definition of compensation, the 1983 Act did not reenact the statutory language. The legislative history does not indicate that Congress intended to exclude payments for time lost from compensation or negate the presumption that payments made through an employer's payroll are compensation. Therefore, these suggestions were not adopted.

 A suggestion was also made to delete the reference to "earned" in proposed section 31.3231(e)-1(a)(3). Because section 3231 was amended to shift the focus from when compensation was earned to when compensation was paid, this suggestion has been adopted.

 Finally, one commentator suggested adding a reference that compensation does not include supplemental unemployment compensation benefits (SUB-pay). There is no specific statutory exception from compensation for SUB-pay. Rather, a series of revenue rulings provides a limited exception from the definition of wages for purposes of FICA and FUTA for certain payments made upon an employee's involuntary separation from the employer's service, but only if the payments are designed to supplement the receipt of unemployment compensation. Rev. Rul. 56-249, 1956-1 C.B. 488, the first of many rulings in this area, summarized eight features of a SUB-pay plan whose payments qualified for exclusion from wage treatment. Rev. Rul. 90-72, 1990-2 C.B. 211, specifically provides that because the definition of compensation for RRTA purposes is similar to the definition of wages for FICA purposes, the same conclusions with respect to SUB-pay plans applies to RRTA. Rev. Rul. 90-72 revoked in part an earlier revenue ruling which held that SUB- pay does not have to be tied to state unemployment benefits in order to be excluded from treatment as wages. Because payments from a SUB- pay plan are not automatically excluded from the definition of compensation this suggestion was not adopted.

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 also has 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 Jean Whalen Casey 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 31.3121(a)-1 is amended as follows:

1. Paragraph (a) is redesignated as (a)(1).

2. Paragraph (a)(2) is added to read as follows:

SECTION 31.3121(a)-1 WAGES.

(a) * * *

(2) The term COMPENSATION as used in section 3231(e) of the Internal Revenue Code has the same meaning as the term wages as used in this section, determined without regard to section 3121(b)(9), except as specifically limited by the Railroad Retirement Tax Act (chapter 22 of the Internal Revenue Code) or regulation. The Commissioner may provide any additional guidance that may be necessary or appropriate in applying the definitions of sections 3121(a) and 3231(e).

* * * * *

Par. 3. Sections 31.3201-1 and 31.3201-2 are revised to read as follows:

SECTION 31.3201-1 MEASURE OF EMPLOYEE TAX.

The employee tax is measured by the amount of compensation received for services rendered as an employee. For provisions relating to compensation, see section 31.3231(e)-1. For provisions relating to the circumstances under which certain compensation is to be disregarded for the purpose of determining the employee tax, see paragraphs (b)(1) and (2) of section 31.3231(e)-1.

SECTION 31.3201-2 RATES AND COMPUTATION OF EMPLOYEE TAX.

(a) RATES -- (1)(i) TIER 1 TAX. The Tier 1 employee tax rate equals the sum of the tax rates in effect under section 3101(a) relating to old-age, survivors, and disability insurance, and section 3101(b), relating to hospital insurance. The Tier 1 employee tax rate is applied to compensation up to the contribution base described in section 3231(e)(2)(B)(i). The contribution base is determined under section 230 of the Social Security Act and is identical to the old- age, survivors, and disability insurance wage base and the hospital insurance wage base, respectively, under the Federal Insurance Contributions Act.

(ii) EXAMPLE. The rule in paragraph (a)(1)(i) of this section is illustrated by the following example.

EXAMPLE. A received compensation of $60,000 in 1992. The section 3101(a) rate of 6.2 percent would be applied to A's compensation up to $55,500, the applicable contribution base for 1992. The section 3101(b) rate of 1.45 percent would be applied to the entire $60,000 of A's compensation because the applicable contribution base for 1992 is $130,200.

(2)(i) TIER 2 TAX. The Tier 2 employee tax rate equals the percentage set forth in section 3201(b) of the Code. This rate is applied to compensation up to the contribution base described in section 3231(e)(2)(B)(ii).

(ii) EXAMPLE. The rule in paragraph (a)(2)(i) of this section is illustrated by the following example.

EXAMPLE. A received compensation of $60,000 in 1992. The section 3201(b) rate of 4.90 percent would be applied to A's compensation up to $41,400, the applicable contribution base for 1992.

(b)(1) COMPUTATION. The employee tax is computed by multiplying the amount of the employee's compensation with respect to which the employee tax is imposed by the rate applicable to such compensation, as determined under paragraph (a) of this section. The applicable rate is the rate in effect when the compensation is received by the employee. For rules relating to the time of receipt, see section 31.3121(a)-2(a) and (b).

(2) EXAMPLE. The rule in paragraph (b)(1) of this section is illustrated by the following example.

EXAMPLE. In 1990, employee A received compensation of $1,000 as remuneration for services performed for employer R in 1989. The employee tax is payable at the rate of 12.55 percent (7.65 percent plus 4.90 percent) in effect for 1990 (the year the compensation was received), and not the 12.41 percent rate (7.51 percent plus 4.90 percent) in effect for 1989 (the year the services were performed).

Par. 4. Section 31.3202-1 is amended by revising paragraphs (b) and (f) to read as follows:

SECTION 31.3202-1 COLLECTION OF, AND LIABILITY FOR, EMPLOYEE TAX.

* * * * *

(b) COLLECTION; PAYMENTS BY TWO OR MORE EMPLOYERS IN EXCESS OF ANNUAL COMPENSATION LIMITATION. For rules relating to payments by two or more employers in excess of the annual compensation limitation see section 31.3121(a)(1)-1.

* * * * *

(f) CONCURRENT EMPLOYMENT. If two or more related corporations who are rail employers concurrently employ the same individual and compensate that individual through a common paymaster, which is one of the related corporations employing the individual, see section 31.3121(s)-1.

Par. 5. Sections 31.3211-1 and 31.3211-2 are revised to read as follows:

SECTION 31.3211-1 MEASURE OF EMPLOYEE REPRESENTATIVE TAX.

The employee representative tax is measured by the amount of compensation received for services rendered as an employee representative. For provisions relating to compensation, see section 31.3231(e)-1.

SECTION 31.3211-2 RATES AND COMPUTATION OF EMPLOYEE REPRESENTATIVE TAX.

(a) RATES -- (1)(i) TIER 1 TAX. The Tier 1 employee representative tax rate equals the sum of the tax rates in effect under sections 3101(a) and 3111(a), relating to the employee and the employer tax for old-age, survivors, and disability insurance, and sections 3101(b) and 3111(b), relating to the employee and the employer tax for hospital insurance. The Tier 1 employee representative tax rate is applied to compensation up to the contribution base described in section 3231(e)(2)(B)(i). The contribution base is determined under section 230 of the Social Security Act, and is identical to the old-age, survivors, and disability insurance wage base and the hospital insurance wage base, respectively, under the Federal Insurance Contributions Act.

(ii) EXAMPLE. The rule in paragraph (a)(1)(i) of this section is illustrated by the following example.

EXAMPLE. B, an employee representative received compensation of $60,000 in 1992. The sections 3101(a) and 3111(a) rates of 12.4 percent (6.2 percent plus 6.2 percent) would be applied to B's compensation up to $55,500, the applicable contribution base for 1992. The sections 3101(b) and 3111(b) rates of 2.9 percent (1.45 percent plus 1.45 percent) would be applied to the entire $60,000 of B's compensation because the applicable contribution base for 1992 is $130,200.

(2)(i) TIER 2 TAX. The Tier 2 employee representative tax rate equals the percentage set forth in section 3211(a)(2) of the Code. This rate is applied up to the contribution base described in section 3231(e)(2)(B)(ii).

(ii) EXAMPLE. The rule in paragraph (a)(2)(i) of this section is illustrated by the following example.

EXAMPLE. B received compensation of $60,000 in 1992. The section 3211(a)(2) rate of 14.75 percent would be applied to B's compensation up to $41,400, the applicable contribution base for 1992.

(3) SUPPLEMENTAL ANNUITY TAX. The supplemental annuity tax for each work-hour for which compensation is paid to an employee representative for services rendered as an employee representative is imposed at the same rate as the excise tax imposed on every employer under section 3221(c). See also section 31.3211-3.

(b)(1) COMPUTATION. The employee representative tax is computed by multiplying the amount of the employee representative's compensation with respect to which the employee representative tax is imposed by the rate applicable to such compensation, as determined under paragraph (a) of this section. The applicable rate is the rate in effect when the compensation is received by the employee representative. For rules relating to the time of receipt, see section 31.3121(a)-2(a) and (b).

(2) EXAMPLE. The rule in paragraph (b)(1) of this section is illustrated by the following example.

EXAMPLE. In 1990, employee representative B received $1,000 as remuneration for services performed for employer R in 1989. The employee representative tax is payable at the rate of 30.05 percent (15.30 percent plus 14.75 percent) in effect for 1990 (the year the compensation was received), and not the 29.77 percent rate (15.02 percent plus 14.75 percent) in effect for 1989 (the year the services were performed).

(c)(1) RULE WHERE COMPENSATION IS RECEIVED BOTH AS AN EMPLOYEE REPRESENTATIVE AND EMPLOYEE. The following rule applies to an individual who renders service both as an employee representative and as an employee. The employee representative tax is imposed on compensation received as an employee representative under the rules described in section 31.3211-2. The employee tax is imposed on compensation received as an employee under the rules described in section 31.3201-2. However, if the total compensation received is greater than the applicable contribution base, the employee representative tax is imposed on the amount equal to the contribution base less the amount received for services rendered as an employee.

(2) EXAMPLE. The rule in paragraph (c)(1) of this section is illustrated by the following example.

EXAMPLE. C performed services both as an employee and an employee representative in 1992. C received compensation of $40,000 as an employee and $20,000 as an employee representative. C's entire compensation of $40,000 is subject to tax under the rules described in section 31.3201-2. The amount of employee representative compensation subject to the section 3101(a) and the section 3111(a) rate is $15,500 ($55,500 - $40,000). The entire $20,000 is subject to the sections 3101(b) and 3111(b) rates since the combined compensation is less than $130,200, the applicable contribution base for 1992. The amount of the employee representative compensation subject to the section 3211(a)(2) rate is $1,400 ($41,400 - $40,000).

Par. 6. Section 31.3221-1 is amended as follows:

1. Paragraphs (a) and (b) are revised.

2. Paragraph (d) is removed.

3. The revisions read as follows:

SECTION 31.3221-1 MEASURE OF EMPLOYER TAX.

(a) GENERAL RULE -- The employer tax is measured by the amount of compensation paid by an employer to its employees. For provisions relating to compensation, see section 31.3231(e)-1. For provisions relating to the circumstances under which certain compensation is to be disregarded for purposes of determining the employer tax, see paragraphs (b)(1) and (2) of section 31.3231(e)-1.

(b) PAYMENTS BY TWO OR MORE EMPLOYERS IN EXCESS OF ANNUAL COMPENSATION LIMITATION. For rules relating to payments by two or more employers in excess of the annual compensation limitation, see section 31.3121(a)(1)-1.

* * * * *

Par. 7. Section 31.3221-2 is revised to read as follows:

SECTION 31.3221-2 RATES AND COMPUTATION OF EMPLOYER TAX.

(a) RATES -- (1)(i) TIER 1 TAX. The Tier 1 employer tax rate equals the sum of the tax rates in effect under section 3111(a), relating to old-age, survivors, and disability insurance, and section 3111(b) relating to hospital insurance. The Tier 1 employer tax rate is applied to compensation up to the contribution base described in section 3231(e)(2)(B)(i). The contribution base is determined under section 230 of the Social Security Act and is identical to the old- age, survivors, and disability insurance wage base and the hospital insurance wage base, respectively, under the Federal Insurance Contributions Act.

(ii) EXAMPLE. The rule in paragraph (a)(1)(i) of this section is illustrated by the following example.

EXAMPLE. R's employee, A, received compensation of $60,000 in 1992. The section 3111(a) rate of 6.2 percent would be applied to A's compensation up to $55,500, the applicable contribution base for 1992. The section 3111(b) rate of 1.45 percent would be applied to the entire $60,000 of A's compensation because the applicable contribution base for 1992 is $130,200.

(2)(i) TIER 2 TAX. The Tier 2 employer tax rate equals the percentage set forth in section 3221(b) of the Internal Revenue Code. This rate is applied up to the contribution base described in section 3231(e)(2)(B)(ii).

(ii) EXAMPLE. The rule in paragraph (a)(2)(i) of this section is illustrated by the following example.

EXAMPLE. R's employee, A, received compensation of $60,000 in 1992. The section 3221(b) rate of 16.10 percent would be applied to A's compensation up to $41,400, the applicable contribution base for 1992.

(3) SUPPLEMENTAL ANNUITY TAX. The supplemental annuity tax for each work-hour for which compensation is paid by an employer for services rendered during any calendar quarter by employees is imposed at the tax rate determined each calendar quarter by the Railroad Retirement Board. See also section 31.3221-3.

(b)(1) COMPUTATION. The employer tax is computed by multiplying the amount of the compensation with respect to which the employer tax is imposed by the rate applicable to such compensation, as determined under paragraph (a) of this section. The applicable rate is the rate in effect at the time the compensation is paid. For rules relating to the time of payment, see section 31.3121(a)-2(a) and (b).

(2) EXAMPLE. The rule in paragraph (b)(1) of this section is illustrated by the following example.

EXAMPLE. In 1990, R's employee A received $1,000 as remuneration for services performed for R in 1989. The employer tax is payable at the rate of 23.75 percent (7.65 percent plus 16.10 percent) in effect for 1990 (the year the compensation was received) and not the 23.61 percent rate (7.51 percent plus 16.10 percent) in effect for 1989 (the year the services were performed).

Par. 8. Section 31.3231(a)-1 is amended as follows:

1. Paragraph (a)(1) is revised.

2. Paragraphs (c) and (d) are redesignated as (d) and (e).

3. Paragraphs (c) and (f) are added.

4. The revisions and additions read as follows:

SECTION 31.3231(a)-1 WHO ARE EMPLOYERS.

(a) * * *

(1) Any carrier, that is, any express carrier, sleeping car carrier, or rail carrier providing transportation subject to subchapter I of chapter 105 of title 49;

* * * * *

(c) As used in paragraph (a)(2) of this section, the term CASUAL applies when the service rendered or the operation of equipment or facilities by a controlled company or person in connection with the transportation of passengers or property by railroad is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial.

* * * * *

(f) Any company that is described in paragraph (a)(2) of this section is an employer under section 3231. In certain cases, based on all the facts and circumstances, it may be appropriate to segregate those businesses engaged in rail services and therefore subject to the Railroad Retirement Tax Act from those businesses engaged exclusively in nonrail services and therefore not subject to the Railroad Retirement Tax Act. The factors considered are set forth in guidance published by the Internal Revenue Service.

Par. 9. Section 31.3231(e)-1 is revised to read as follows:

SECTION 31.3231(e)-1 COMPENSATION.

(a) DEFINITION -- (1) The term COMPENSATION has the same meaning as the term WAGES in section 3121(a), determined without regard to section 3121(b)(9), except as specifically limited by the Railroad Retirement Tax Act (chapter 22 of the Internal Revenue Code) or regulation. The Commissioner may provide any additional guidance that may be necessary or appropriate in applying the definitions of sections 3121(a) and 3231(e).

(2) A payment made by an employer to an individual through the employer's payroll is presumed, in the absence of evidence to the contrary, to be compensation for services rendered as an employee of the employer. Likewise, a payment made by an employee organization to an employee representative through the organization's payroll is presumed, in the absence of evidence to the contrary, to be compensation for services rendered by the employee representative as such. For rules regarding the treatment of deductions by an employer from remuneration of an employee, see section 31.3123-1.

(3) The term COMPENSATION is not confined to amounts paid for active service, but includes amounts paid for an identifiable period during which the employee is absent from the active service of the employer and, in the case of an employee representative, amounts paid for an identifiable period during which the employee representative is absent from the active service of the employee organization.

(4) Compensation includes amounts paid to an employee for loss of earnings during an identifiable period as the result of the displacement of the employee to a less remunerative position or occupation as well as pay for time lost.

(5) For rules regarding the treatment of reimbursement and other expense allowance amounts, see section 31.3121(a)-3. For rules regarding the inclusion of fringe benefits in compensation, see section 31.3121(a)-1T.

(b) SPECIAL RULES. (1) If the amount of compensation earned in any calendar month by an individual as an employee in the service of a local lodge or division of a railway-labor-organization employer is less than $25, the amount is disregarded for purposes of determining the employee tax under section 3201 and the employer tax under section 3221.

(2) Compensation for service as a delegate to a national or international convention of a railway-labor-organization employer is disregarded for purposes of determining the employee tax under section 3201 and the employer tax under section 3221 if the individual rendering the service has not previously rendered service, other than as a delegate, which may be included in the individual's years of service for purposes of the Railroad Retirement Act.

(3) For special provisions relating to the compensation of certain general chairs or assistant general chairs of a general committee of a railway-labor-organization employer, see paragraph (c)(3) of section 31.3231(b)-1.

Par. 10. Section 31.3231(e)-2 is added to read as follows:

SECTION 31.3231(e)-2 CONTRIBUTION BASE.

The term compensation does not include any remuneration paid during any calendar year by an employer to an employee for services rendered in excess of the applicable contribution base. For rules applying this provision, see section 31.3121(a)(1)-1.

Par. 11. Sections 31.3231(e)-2T and 31.3231(e)-3 are [Removed].