REVENUE RULE 90-72
1990-2 C.B. 211, 1990-36 I.R.B. 13.
Internal Revenue Service
Revenue Ruling
TAX TREATMENT OF SUPPLEMENTAL UNEMPLOYMENT COMPENSATION BENEFITS
Published: September 4, 1990
Section 3401. - Definitions, 26 CFR 31.3401(a)-1: Wages.
(Also Sections 501, 3121, 3201, 3231, 3306, 3402, 7805; 1.501(c)(17)-1,
31.3201-1, 31.3402(o)-1, 301.7805-1.)
Tax treatment of supplemental unemployment compensation benefits. This
revenue ruling provides that supplemental unemployment compensation
benefits (SUB pay) must be linked to the receipt of state unemployment
compensation and must not be received in a lump sum in order to be
excludable from the definition of wages for Federal Unemployment Tax Act
purposes. SUB pay must also meet the same criteria in order to be
excludable from the definition of compensation for Railroad Retirement Tax
Act purposes. Rev. Rul. 65-251 amplified and Rev. Rul. 77-347 revoked in
part.
ISSUES
Are payments made to employees under Plans (1), (3), and (5) described
below wages for purposes of the Federal Insurance Contributions Act (FICA),
the Federal Unemployment Tax Act (FUTA), and federal income tax
withholding? Are payments to railroad employees under Plans (2), (4), and
(6) described below compensation for purposes of the Railroad Retirement
Tax Act (RRTA)?
FACTS
PLAN (1). Company X established a trust to fund its obligations under a
plan (Plan (1)). The trust qualifies for exemption from federal income tax
as a supplemental unemployment compensation benefit (SUB) trust described
in section 501(c)(17) of the Internal Revenue Code. Plan (1) provides
weekly benefits to former employees involuntarily separated from the
service of Company X due to a plant closing, layoff, or reduction in force.
Benefits paid under the plan are designed to supplement the receipt of
state unemployment compensation and are not payable in the form of a lump
sum.
Eligibility for benefits under Plan (1) depends upon a former employee
meeting certain prescribed conditions following temporary or permanent
separation from employment with Company X. Under the terms of the plan, a
worker on layoff or former employee must be unemployed and must meet the
requirements necessary to receive state unemployment compensation benefits,
except in three limited situations. The former employee may still receive
benefits under the plan if: (1) the employee is ineligible for state
unemployment compensation benefits because the employee has insufficient
wage credits under the state law, (2) the employee has exhausted the
duration of benefits under the state law, or (3) the employee has not met
the waiting period required under state law. Even in these three
situations, in order to receive benefits under the plan, the employee must
be otherwise eligible for state unemployment compensation.
In addition, under Plan (1), the duration of benefits depends in part on
the fund level and the employee's seniority; benefits are not attributable
to the rendering of any particular services; and no employee has any right,
title, or interest in the fund until such employee is qualified and
eligible to receive benefits.
PLAN (2). Company X also established a plan (Plan (2)) and trust identical
to those described in Plan (1), except that the benefits paid under the
plan are paid to railroad employees and are designed to supplement the
receipt of benefits under the Railroad Unemployment Insurance Act (RUIA).
PLAN (3). Company Y established a plan (Plan (3)) and trust identical to
those described in Plan (1), except that the benefits paid under the plan
are paid in a lump sum, rather than in the form of periodic payments.
PLAN (4). Company Y also established a plan (Plan (4)) and trust identical
to those described in Plan (3), except that the benefits paid under the
plan are paid to railroad employees and are designed to supplement the
receipt of benefits under the Railroad Unemployment Insurance Act (RUIA).
PLAN (5). Company Z established a trust to fund its obligations under a
plan (Plan (5)). The trust qualifies for exemption from federal income tax
as a SUB trust described in section 501(c)(17) of the Code. The plan
provides benefits to former employees involuntarily separated from the
service of Company Z. Other than requiring an involuntary separation from
employment with Company Z, the plan places no conditions on the former
employees' eligibility to receive benefits under the plan.
PLAN (6). Company Z also established a plan (Plan (6)) and trust identical
to those described in Plan (5), except that the benefits paid under the
plan are paid to railroad employees.
LAW AND ANALYSIS
Sections 3121(a) and 3306(b) of the Code define the term 'wages' for FICA
and FUTA purposes, respectively, as all remuneration for employment, with
certain limited exceptions. Section 3401(a) of the Code, relating to
federal income tax withholding, contains a similar definition.
Section 3402(o) of the Code extends income tax withholding to any
supplemental unemployment compensation benefit paid to an individual,
regardless of whether it would otherwise be considered wages. Section
3402(o)(2)(A) defines supplemental unemployment compensation benefits as
amounts paid to an employee pursuant to a plan to which the employer is a
party, because of an employee's involuntary separation from employment
(whether or not such separation is temporary) resulting directly from a
reduction in force, the discontinuance of a plant or operations, or other
similar conditions, but only to the extent such benefits are includible in
the employee's gross income. The definition of SUB pay under section
3402(o) is not applicable for FICA or FUTA purposes. For FICA and FUTA
purposes, SUB pay is defined solely through a series of administrative
pronouncements published by the Service.
Section 3231(e)(1) of the Code defines the term 'compensation' for RRTA
purposes as any form of money remuneration paid to an individual for
services rendered as an employee to one or more employers, also with
certain limited exceptions.
Sections 31.3121(a)-1(b), 31.3306(b)-1(b), and 31.3401(a)-1(a)(1) of the
Employment Tax Regulations provide that the term 'wages' means all
remuneration for employment unless specifically excepted. Sections
31.3121(a)-1(i), 31.3306(b)-1(i), and 31.3401(a)-1(a)(5) of the regulations
further provide that remuneration for employment, unless specifically
excepted, constitutes wages even though at the time paid the individual is
no longer an employee.
Section 3201(a) and (b) of the Code (the tier 1 and tier 2 taxes,
respectively) impose on the income of each railroad employee a tax equal to
a specified percentage of the compensation received during any calendar
year by such employee for services rendered by such employee.
Section 31.3401(a)-1(b)(4) of the regulations specifically provides that
for purposes of federal income tax withholding, any payments made by an
employer to an employee on account of dismissal (i.e., involuntary
separation from the service of the employer) constitute wages regardless of
whether the employer is legally bound by contract, statute, or otherwise to
make such payments. Although there are no similar provisions in the
regulations relating to FICA and FUTA, the same conclusion generally
applies. H.R. Rep. No. 1300, 81st Cong., 1st. Sess. 124 (1949), 1950-2 C.B.
255, 277, & 300.
Rev. Rul. 56-249, 1956-1 C.B. 488, provides a limited exception from the
definition of wages for FICA, FUTA, and federal income tax withholding
purposes for certain payments made upon the involuntary separation of an
employee from the service of the employer, but only if the payments are
designed to supplement the receipt of state unemployment compensation.
Rev. Rul. 56-249 holds that benefits paid to individuals by trustees of a
trust created pursuant to the provisions of a SUB plan are not wages for
FICA, FUTA, or federal income tax withholding purposes. The ruling
summarizes the following eight features of the plan: (1) benefits are paid
only to unemployed former employees who are laid off by the employer; (2)
eligibility for benefits depends upon meeting prescribed conditions after
terminating employment with the employer; (3) benefits are paid by trustees
of independent trusts; (4) the amount of weekly benefits payable is based
upon state unemployment benefits, other compensation allowable under state
laws, and the amount of straight-time weekly pay; (5) the duration of the
benefits is affected by the fund level and the employee's seniority; (6)
the right to benefits does not accrue until a prescribed period after
termination of employment; (7) the benefits are not attributable to the
rendering of particular services; and (8) no employee has any right, title,
or interest in the fund until such employee is qualified and eligible to
receive benefits.
Subsequent revenue rulings have broadened the scope of Rev. Rul. 56-249.
Rev. Rul. 58-128, 1958-1 C.B. 89, concludes that the wage conclusions in
Rev. Rul. 56-249 would be the same if the plan had been unilaterally
instituted by the employer. Rev. Rul. 60-330, 1960-2 C.B. 46, further
concludes that the fact that benefits are not paid from a trust does not
alter the conclusion of Rev. Rul. 56-249.
Rev. Rul. 71-408, 1971-2 C.B. 340, holds that payments to employees
pursuant to an agreement with a union upon the termination of their
employment due to the discontinuance of the company's operations constitute
wages for FICA, FUTA, and federal income tax withholding purposes. The
payments described in Rev. Rul. 71-408 do not meet the eligibility factors
described in Rev. Rul. 56-249 and are not designed to provide a supplement
to unemployment compensation.
Rev. Rul. 77-347, 1977-2 C.B. 362, amplifies and modifies Rev. Ruls. 56-249
and 58-128. Rev. Rul. 77-347 provides that benefits under a plan do not
have to be tied to state unemployment compensation benefits in order for
the benefits to constitute SUB pay for FICA, FUTA, and federal income tax
withholding purposes.
Rev. Rul. 65-251, 1965-2 C.B. 395, holds that certain lump sum separation
and severance allowances paid to laid-off employees in the railroad
industry constitute compensation for RRTA purposes and wages for income tax
withholding purposes.
HOLDINGS
The portion of Rev. Rul. 77-347 concluding that benefits do not have to be
linked to state unemployment compensation in order to be excluded from the
definition of wages for FICA and FUTA tax purposes is inconsistent with the
underlying premises for the exclusion and is therefore hereby revoked. This
action restores the distinction between SUB pay and dismissal pay by re-
establishing the link between SUB pay and state unemployment compensation
set forth in Rev. Rul. 56-249. Since the receipt of supplemental
unemployment benefits in the form of a lump sum rather than periodic
payments allows the same amount of benefits to be received regardless of
how long an individual remains unemployed, benefits provided in the form of
a lump sum are not considered linked to state unemployment compensation for
this purpose, and are therefore not excludable from wages as SUB pay.
The definition of compensation for RRTA purposes is similar to the
definition of wages for FICA purposes. Therefore, the same conclusions
apply for RRTA purposes.
In view of the foregoing, benefits provided under the plans described above
are treated as follows:
PLAN (1). Benefits paid under Plan (1) are designed to supplement the
receipt of state unemployment compensation and are not wages for purposes
of the FICA and FUTA taxes. Under section 3402(o), benefits paid under Plan
(1) are treated as wages for purposes of federal income tax withholding.
PLAN (2). Benefits paid under Plan (2) are designed to supplement the
receipt of unemployment compensation under the RUIA and are not
compensation for purposes of the RRTA.
PLANs (3) and (5). Benefits paid under Plans (3) and (5) are wages for
FICA, FUTA, and federal income tax withholding purposes.
PLANs (4) and (6). Benefits paid under Plans (4) and (6) are compensation
for RRTA purposes.
These holdings also apply to plans similar in all material respects to
Plans (1), (2), (3), (4), (5), and (6) that are not funded by trusts or are
maintained pursuant to a collective bargaining agreement.
EFFECT ON OTHER REVENUE RULINGS
The portion of Rev. Rul. 77-347 that concludes that SUB pay does not have
to be tied to state unemployment benefits in order to receive nonwage
treatment for purposes of the FICA and FUTA taxes is revoked. Also, Rev.
Rul. 65-251, 1965-2 C.B. 395 is amplified.
PROSPECTIVE APPLICATION
Under the authority of section 7805(b) of the Code, this revenue ruling
applies to benefits paid on or after January 1, 1991, pursuant to a plan
described above. For such plans maintained pursuant to a collective
bargaining agreement in effect on September 4, 1990, this revenue ruling
applies to all benefits paid after the later of January 1, 1991, or the
date on which the particular collective bargaining agreement expires.
DRAFTING INFORMATION
The principal author of this revenue ruling is Janet S. Lloyd of the Office
of the Assistant Chief Counsel (Employee Benefits and Exempt
Organizations). For further information regarding this revenue ruling
contact Richard Pavel on (202) 566-4747 (not a toll-free call).
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Rev. Rul. 90-72, 1990-2 C.B. 211, 1990-36 I.R.B. 13.
