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 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, 2005-14 I.R.B. 833) 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 §32.1 of the Temporary Employment Tax Regulations to provide guidance that the definition of workers’ compensation law in the final regulations under §31.3121(a)(2)-1 applies for payments on account of sickness or accident disability made on or after December 15, 2005.

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 §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 §1.104-1(b) of the Income tax regulations.

The preamble to the proposed regulations specified that §32.1 of the Temporary Employment Tax Regulations would be amended, if needed. It is necessary to remove the reference to §31.3121(a)(2)-1(a)(2) in the first phrase of §32.1(a) and insert a reference to §31.3121(a)(2)-1(d)(3) in §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 §31.3121(a)(2)-1(d)(3). No other amendments are made to §32.1.

The preamble to the proposed regulations also specified guidance would be provided related to Federal Unemployment Tax Act (FUTA) to the extent necessary. The IRS 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.

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.

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

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

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 redesignated paragraph (a)(1).

5. Redesignating paragraph (d) as (f).

6. Adding new paragraphs (d) and (e)

The revisions and additions are as follows:

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

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

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 §31.3121(a)(2)-1(d)(3) of this chapter for payments made on or after December 15, 2005), or

* * * * *

Approved December 1, 2005.