For Tax Professionals  
REG-209769-95 September 24, 1998

Exception From Supplemental Annuity Tax on
Railroad Employers

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 31 [REG-209769-95] RIN 1545-
AT56

TITLE: Exception From Supplemental Annuity Tax on Railroad Employers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed 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 proposed regulations provide rules for applying the exception
from the supplemental 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.

This document also provides notice of a public hearing on these
proposed regulations.

DATES: Comments must be received by December 22, 1998. Requests to
speak and outlines of topics to be discussed at the public hearing
scheduled for January 20, 1999, must be received by December 30,
1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209769-95), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044.

Submissions may be hand delivered between the hours of 8 a.m. and 5
p.m. to CC:DOM:CORP:R (REG-209769-95), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html. The public
hearing will be held in Room 2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Linda
S. F.

Marshall, (202) 622-6030; concerning submissions and the hearing,
Michael Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Employment Tax
Regulations (26 CFR Part 31) under section 3221(d). These 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.

Under the Railroad Retirement Act of 1974, as amended (RRA), an
employee of a railroad employer generally is entitled to receive a
supplemental annuity paid by the Railroad Retirement Board (RRB) at
retirement. An employee is entitled to receive a supplemental
annuity only if the employee has performed at least 25 years of
service with the railroad industry, including service with the
railroad industry before October 1, 1981. 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 section
2(h)(2) of the RRA, an 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 Railroad Retirement
Board. The tax imposed under section 3221(c) is based on work-hours
for which compensation is paid.

The rate of tax under section 3221(c) is established by the RRB
quarterly, and is calculated 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, 91st Cong., 2d Sess. 6 (February 3, 1970).

Summary of Regulations These proposed regulations provide rules for
determining whether a plan is a supplemental pension plan
established pursuant to an agreement reached through collective
bargaining. Under these proposed 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).

These proposed 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 proposed 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.

The IRS requests comments regarding other appropriate requirements
for a supplemental pension plan within the meaning of section
3221(d).

These proposed regulations also provide rules for determining
whether a plan is established by collective bargaining agreement
with respect to an employer. These rules generally follow the rules
applicable to qualified plans for this purpose.

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) tax under the
section 3221(d) exception. These proposed regulations include rules
applying this excise tax under section 3221(d).

Proposed Effective Date

These proposed regulations are proposed to be effective October 1,
1998. Special Analyses It has been determined that this notice of
proposed rulemaking 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) does not apply to
these regulations and, because these regulations do 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, this notice of
proposed rulemaking will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its
impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted
timely (in the manner described under the ADDRESSES caption) to the
IRS. All comments will be available for public inspection and
copying.

A public hearing has been scheduled for January 20, 1999, at 10 a.m.
in Room 2615, Internal Revenue Building, 1111 Constitution Avenue
NW., Washington, DC.

Because of access restrictions, visitors will not be admitted beyond
the Internal Revenue Building lobby more than 15 minutes before the
hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must
submit comments and an outline of topics to be discussed and the
time to be devoted to each topic (in the manner described under the
ADDRESSES caption of this preamble) by December 30, 1998.

A period of 10 minutes will be allotted to each person for making
comments.

An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.

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 the
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 proposed to be 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 (4) of this
section.

(2) Pension benefit requirement. A plan is a supplemental pension
plan within the meaning of this paragraph (b) 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 section 2(b) of the Railroad
Retirement Act of 1974 (88 Stat. 1305), plus a percentage thereof
determined by the Railroad Retirement Board to be sufficient to
cover the administrative costs attributable to such payments under
section 2(b) of that Act.

(e) Effective date. This section is effective October 1, 1998.

Michael P. Dolan
Deputy Commissioner of Internal Revenue


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