Sickness or Accident Disability Payments, 12164-12166 [05-4382]
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12164
Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Proposed Rules
26 CFR Part 31
amendment to the regulations provides
that for purposes of section
3121(a)(2)(A) a workers’ compensation
law includes a statute in the nature of
a workers’ compensation act.
[REG–160315–03]
Explanation of Provisions
RIN 1545–BC89
Current Law
Section 3121(a) defines wages for
FICA purposes as all remuneration for
employment unless specifically
excepted. Section 3121(a)(2)(A) excepts
from wages the amount of any payment
(including any amount paid by an
employer for insurance or annuities, or
into a fund, to provide for any such
payment) made to or on behalf of, an
employee or any of his dependents
under a plan or system established by
an employer which makes provision for
his employees generally (or for his
employees generally and their
dependents) or for a class or classes of
his employees (or for a class or classes
of his employees and their dependents),
on account of sickness or accident
disability, but only if the employee
receives the payments 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.
Prior to its amendment by section
3(b)(1) of Public Law 97–123, (95 Stat.
1659 1982–6 I.R.B. 7)) (the 1981 Act),
section 3121(a)(2)(B), the predecessor to
section 3121(a)(2)(A), excluded from
wages any payments made under a plan
or system established by an employer on
account of sickness or accident
disability. There was no requirement
that payments be made under a workers’
compensation law. Thus, the 1981 Act
narrowed the sick pay exclusion by
limiting the exclusion from FICA to
payments made under a worker’s
compensation law. Section 3(e) of the
1981 Act did not amend the Code, but
specifies for purposes of section 3121(a)
of the Code that a payment under a
workers’ compensation law does not
include a payment made pursuant to a
State temporary disability insurance
law.
On July 6, 1982, the IRS issued
Temporary regulations (TD 7823, 47 FR
29225, July 6, 1982). Section 32.1(a)(1)
of the Temporary Employment Tax
DEPARTMENT OF THE TREASURY
Internal Revenue Service
Sickness or Accident Disability
Payments
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
SUMMARY: This document contains
proposed regulations that provide
guidance regarding the treatment of
payments made on account of sickness
or accident disability under a workers’
compensation law for purposes of the
Federal Insurance Contributions Act
(FICA).
Written and electronic comments
must be received by June 9, 2005.
ADDRESSES: Send submissions to: CC:
PA:LPD: PR (REG–160315–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–160315–03),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively,
taxpayer may submit comments
electronically, via the IRS Internet site
at https://www.irs.gov/regs or via Federal
Rulemaking Portal at https://
www.regulations.gov (IRS and REG–
160315–03).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
David Ford of the Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities), (202)
622–6040; concerning submissions of
comments, the hearing and/or to be
placed on the building access list to
attend the hearing, LaNita M. VanDyke,
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
DATES:
Background
This document contains proposed
amendments to 26 CFR part 31 under
section 3121 of the Internal Revenue
Code (the Code.) 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 ‘‘workmen’s
compensation law’’, hereinafter referred
to as a workers’’ compensation law. The
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Regulations follows the amendments
made by the 1981 Act providing that
payments on account of sickness or
accident disability are excluded from
wages for FICA purposes only if paid
under a workers’ compensation law.
Section 32.1(a)(1). Further, Section
32.1(c) provides that a payment under a
workers’ compensation law does not
include a payment made pursuant to a
State temporary disability insurance
law. Thus, such payments are wages for
FICA purposes. The temporary
regulations do not address the FICA tax
treatment of payments made under a
statute in the nature of a workers’
compensation act.1
For income tax purposes, section
104(a)(1) provides that gross income
does not include amounts received
under workers’ compensation acts as
compensation for personal injuries or
sickness. Section 1.104–1(b) of the
Income Tax Regulations states that
section 104(a)(1) of the Code excludes
from gross income amounts received by
an employee under a workers’
compensation act or under a statute in
the nature of a workers’ compensation
act that provides compensation to the
employee for personal injury or sickness
incurred in the course of employment.
The IRS takes the position that gross
income for income tax purposes is a
separate concept from wages for
purposes of FICA. Furthermore,
exclusions from wages for FICA
purposes are to be construed narrowly.
Thus, amounts that are excluded from
gross income, in the absence of a
specific statutory or regulatory
exclusion from wages, constitute wages
for FICA.
Pursuant to the income tax
regulations, payments made under a
statute in the nature of a workers’
compensation act are excluded from
gross income under section 104.
However, there is no regulation at
present addressing whether such
payments are excluded from wages for
FICA purposes.
Through 1989, the IRS issued several
private letter rulings concluding that
payments made under a statute in the
nature of a workers’ compensation act
were excluded from gross income and
exempt from FICA. In 1990, based on
the Service’s position that the exclusion
from gross income did not necessarily
1 To provide guidance relating to changes made
by the Act the IRS published Revenue Procedure
82–20 (1982–1 C.B. 466), which provided in Q&A
1 that payments under a statute in the nature of a
workers’ compensation act were excluded from
FICA. Rev. Proc 82–20 was obsoleted by Revenue
Procedure 95–43 (1995–2 C.B. 412), which provides
that the temporary regulations generally restate the
guidance in Q&A–1 through Q&A–9 of Rev. Proc.
82–20.
E:\FR\FM\11MRP1.SGM
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Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Proposed Rules
result in an exclusion from wages, and
the absence of a regulation on point, the
IRS reversed its ruling position with
respect to FICA, holding that payments
made under a statute in the nature of a
workers’ compensation act are included
in wages, until the employee has been
absent from work in excess of six
months; once the employee has been
absent from work for more than six
months, the payments are excluded
from FICA by section 3121(a)(4).
Questions have arisen concerning the
FICA tax treatment of payments made
under a statute in the nature of a
workers’ compensation act to employees
of States and local governments who are
not eligible to receive payments under
a workers’ compensation law.
Accordingly, the IRS and Treasury are
seeking to provide rules to clarify the
treatment of such payments during the
first six months the employee is out of
work.
Under the proposed regulations,
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, will be excluded from wages
for FICA purposes. Thus, the regulations
adopt the same position that was
published in Rev. Proc. 82–20, the most
contemporaneous guidance to the
legislation that created the current
statutory scheme. The proposed
regulations thus align the interpretation
of what constitutes payments received
under a workers’ compensation law for
purposes of section 3121(a)(2)(A) with
the interpretation of amounts received
under a workers’ compensation law for
purposes of section 104(a)(1).
These proposed regulations are
intended to address only the treatment
of payments under a statute in the
nature of a workers’ compensation act
for FICA purposes. The existing
temporary regulations under section
31.1 which address the FICA treatment
of payments under a workers’
compensation law also provide
guidance to third parties making
payments on account of sickness or
accident disability. Treasury and the
IRS are not proposing any changes to
the regulations with respect to the FICA
treatment of third-party sick pay. To the
extent it is necessary to modify the
temporary regulations to harmonize
them with these proposed regulations,
the third-party sick pay provisions will
be preserved. To the extent necessary,
future guidance will also address the
treatment of payments on account of
sickness or accident disability for
Federal Unemployment Tax Act and
Railroad Retirement Tax Act purposes.
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Proposed Effective Date
It is proposed that these regulations
apply to payments made on or after the
date the proposed regulation is
published as Final in the Federal
Register.
12165
PART 31—EMPLOYMENT TAXES AND
COLLECTION OF INCOME TAX AT THE
SOURCE
Paragraph 1. The authority section for
part 31 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *.
Special Analyses
It has been determined that this notice
of proposed rulemaking is 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, this notice
of proposed rulemaking will be
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on the
impact on small business.
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 designated
paragraph (a)(1).
5. Redesignating paragraph (d) as
paragraph (f).
6. Adding new paragraphs (d) and (e).
The revisions and additions are as
follows:
§ 31.3121(a)(2)–1 Payments on account of
sickness or accident disability, medical or
hospitalization expenses, or death.
Proposed Amendments to the
Regulations
(a) * * *
(1) Sickness or accident disability of
an employee or any of his dependents,
only if payment is received under a
workers’ compensation law;
*
*
*
*
*
(d) Workers’ compensation law. (1)
For purposes of paragraph (a)(1) of this
section, a payment made under a
workers’ compensation law includes a
payment made pursuant to a statute in
the nature of a workers’ compensation
act.
(2) For purposes of paragraph (a)(1) of
this section, a payment made under a
workers’ compensation law does not
include a payment made pursuant to a
State temporary disability insurance
law.
(3) If an employee receives a payment
on account of sickness or accident
disability that is not made under a
workers’ compensation law or a statute
in the nature of a workers’
compensation act, the payment is not
excluded from wages as defined by
section 3121(a)(2)(A) even if the
payment must be repaid if the employee
receives a workers’ compensation award
or an award under a statute in the
nature of a workers’ compensation act
with respect to the same period of
absence from work.
(4) If an employee receives a payment
on account of non-occupational injury
sickness or accident disability such
payment is not excluded from wages, as
defined by section 3121(a)(2)(A).
(e) Examples. The following examples
illustrate the principles of paragraph (d)
of this section:
Accordingly, 26 CFR part 31 is
proposed to be amended as follows:
Example 1. A local government employee
is injured while performing work-related
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written or electronic comments that are
submitted timely to the IRS. The IRS
and Treasury Department request
comments on all aspects of the proposed
regulations and how they can be made
easier to understand. All comments will
be available for public inspection and
copying. A public hearing may be
scheduled if requested in writing by any
person that timely submits written
comments. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be
published in the Federal Register.
Drafting Information
The principal author of these
regulations is David Ford of the Office
of Division Counsel/Associate Chief
Counsel (Tax Exempt/Government
Entities). However, other personnel
from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 31
Employment taxes and collection of
income at the source.
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12166
Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Proposed Rules
activities. The employee is not covered by
the State workers’ compensation law, but is
covered by a local government ordinance that
requires the local government to pay the
employee’s full salary when the employee is
out of work as a result of an injury incurred
while performing services for the local
government. The ordinance does not limit or
otherwise affect the local government’s
liability to the employee for the work-related
injury. The local ordinance is not a workers’
compensation law, but it is in the nature of
a workers’ compensation act. Therefore, the
salary the employee receives while out of
work as a result of the work-related injury is
excluded from wages under section
3121(a)(2)(A).
Example 2. The facts are the same as in
Example 1 except that the local ordinance
requires the employer to continue to pay the
employee’s full salary while the employee is
unable to work due to an injury whether or
not the injury is work-related. Thus, the local
ordinance does not limit benefits to instances
of work-related disability. A benefit paid
under an ordinance that does not limit
benefits to instances of work-related injuries
is not a statute in the nature of a workers’
compensation act. Therefore, the salary the
injured employee receives from the employer
while out of work is wages subject to FICA
even though the employee’s injury is workrelated.
Example 3. The facts are the same as in
Example 1 except that the local ordinance
includes a rebuttable presumption that
certain injuries, including any heart attack
incurred by a firefighter or other law
enforcement personnel is work-related. The
presumption in the ordinance does not
eliminate the requirement that the injury be
work-related in order to entitle the injured
worker to full salary. Therefore, the
ordinance is a statute in the nature of a
workers’ compensation act, and the salary the
injured employee receives pursuant to the
ordinance is excluded from wages under
section 3121(a)(2)(A).
*
*
*
*
*
Mark E. Matthews,
Deputy Commissioner of Services and
Enforcement.
[FR Doc. 05–4382 Filed 3–10–05; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG–147195–04]
RIN 1545–BE08
Disclosure of Return Information to the
Bureau of the Census
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.
AGENCY:
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16:22 Mar 10, 2005
Jkt 205001
SUMMARY: In the Rules and Regulations
section of this issue of Federal Register,
the IRS is issuing temporary regulations
relating to additions to, and deletions
from, the list of items of return
information disclosed to the Bureau of
the Census (Bureau) for use in
producing demographic statistics
programs, including the Bureau’s Small
Area Income and Poverty Estimates
(SAIPE). These temporary regulations
provide guidance to IRS personnel
responsible for disclosing the
information. The text of these temporary
regulations published in the Rules and
Regulation section of this issue of the
Federal Register serves as the text of the
proposed regulations.
DATES: Written and electronic comments
and requests for a public hearing must
be received by June 9, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–147195–04), room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered between the
hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG–148864–03),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC or sent
electronically, via the IRS Internet site
at: https://www.irs.gov/regs or via the
Federal eRulemaking Portal at https://
www.regulations.gov (IRS and REG–
148864–03).
FOR FURTHER INFORMATION CONTACT:
Concerning submission of comments,
Treena Garrett, (202) 622–7180 (not a
toll-free number); concerning the
temporary regulations, James O’Leary,
(202) 622–4580 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 6103(j)(1), upon written
request from the Secretary of Commerce,
the Secretary of the Treasury is to
furnish to the Bureau of the Census
(Bureau) return information that is
prescribed by Treasury regulations for
the purpose of, but only to the extent
necessary in, structuring censuses and
national economic accounts and
conducting related statistical activities
authorized by law. Section
301.6103(j)(1)–1 of the regulations
provides an itemized description of the
return information authorized to be
disclosed for this purpose. Periodically,
the disclosure regulations are amended
to reflect the changing needs of the
Bureau for data for its statutorily
authorized statistical activities.
This document contains proposed
regulations authorizing IRS personnel to
disclose additional items of return
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information that have been requested by
the Secretary of Commerce, and to
remove certain items of return
information that are enumerated in the
existing regulations but that the
Secretary of Commerce has indicated
are no longer needed.
Temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register amend the
Procedure and Administration
Regulations (26 CFR part 301) relating to
Internal Revenue Code (Code) section
6103(j). The temporary regulations
contain rules relating to the disclosure
of return information reflected on
returns to officers and employees of the
Department of Commerce for structuring
censuses and national economic
accounts and conducting related
statistical activities authorized by law.
The text of the temporary regulations
also serves as the text of these proposed
regulations. The preamble to the
temporary regulations explains the
proposed regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 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 the
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 Code, these
proposed regulations will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on their impact on small
business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
electronic and written comments (a
signed original and eight (8) copies) that
are submitted timely to the IRS. The IRS
and Treasury Department specifically
request comments on the clarity of the
proposed regulations and how they can
be made easier to understand. All
comments will be available for public
inspection and copying. A public
hearing may be scheduled if requested
in writing by a person that timely
submits comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published
in the Federal Register.
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]]>Agencies
[Federal Register Volume 70, Number 47 (Friday, March 11, 2005)]
[Proposed Rules]
[Pages 12164-12166]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-4382]
[[Page 12164]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-160315-03]
RIN 1545-BC89
Sickness or Accident Disability Payments
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations that provide
guidance regarding the treatment of payments made on account of
sickness or accident disability under a workers' compensation law for
purposes of the Federal Insurance Contributions Act (FICA).
DATES: Written and electronic comments must be received by June 9,
2005.
ADDRESSES: Send submissions to: CC: PA:LPD: PR (REG-160315-03), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
160315-03), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayer may submit
comments electronically, via the IRS Internet site at https://
www.irs.gov/regs or via Federal Rulemaking Portal at https://
www.regulations.gov (IRS and REG-160315-03).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
David Ford of the Office of Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities), (202) 622-6040; concerning
submissions of comments, the hearing and/or to be placed on the
building access list to attend the hearing, LaNita M. VanDyke, (202)
622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 31 under
section 3121 of the Internal Revenue Code (the Code.) 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
``workmen's compensation law'', hereinafter referred to as a workers''
compensation law. The amendment to the regulations provides that for
purposes of section 3121(a)(2)(A) a workers' compensation law includes
a statute in the nature of a workers' compensation act.
Explanation of Provisions
Current Law
Section 3121(a) defines wages for FICA purposes as all remuneration
for employment unless specifically excepted. Section 3121(a)(2)(A)
excepts from wages the amount of any payment (including any amount paid
by an employer for insurance or annuities, or into a fund, to provide
for any such payment) made to or on behalf of, an employee or any of
his dependents under a plan or system established by an employer which
makes provision for his employees generally (or for his employees
generally and their dependents) or for a class or classes of his
employees (or for a class or classes of his employees and their
dependents), on account of sickness or accident disability, but only if
the employee receives the payments 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.
Prior to its amendment by section 3(b)(1) of Public Law 97-123, (95
Stat. 1659 1982-6 I.R.B. 7)) (the 1981 Act), section 3121(a)(2)(B), the
predecessor to section 3121(a)(2)(A), excluded from wages any payments
made under a plan or system established by an employer on account of
sickness or accident disability. There was no requirement that payments
be made under a workers' compensation law. Thus, the 1981 Act narrowed
the sick pay exclusion by limiting the exclusion from FICA to payments
made under a worker's compensation law. Section 3(e) of the 1981 Act
did not amend the Code, but specifies for purposes of section 3121(a)
of the Code that a payment under a workers' compensation law does not
include a payment made pursuant to a State temporary disability
insurance law.
On July 6, 1982, the IRS issued Temporary regulations (TD 7823, 47
FR 29225, July 6, 1982). Section 32.1(a)(1) of the Temporary Employment
Tax Regulations follows the amendments made by the 1981 Act providing
that payments on account of sickness or accident disability are
excluded from wages for FICA purposes only if paid under a workers'
compensation law. Section 32.1(a)(1). Further, Section 32.1(c) provides
that a payment under a workers' compensation law does not include a
payment made pursuant to a State temporary disability insurance law.
Thus, such payments are wages for FICA purposes. The temporary
regulations do not address the FICA tax treatment of payments made
under a statute in the nature of a workers' compensation act.\1\
---------------------------------------------------------------------------
\1\ To provide guidance relating to changes made by the Act the
IRS published Revenue Procedure 82-20 (1982-1 C.B. 466), which
provided in Q&A 1 that payments under a statute in the nature of a
workers' compensation act were excluded from FICA. Rev. Proc 82-20
was obsoleted by Revenue Procedure 95-43 (1995-2 C.B. 412), which
provides that the temporary regulations generally restate the
guidance in Q&A-1 through Q&A-9 of Rev. Proc. 82-20.
---------------------------------------------------------------------------
For income tax purposes, section 104(a)(1) provides that gross
income does not include amounts received under workers' compensation
acts as compensation for personal injuries or sickness. Section 1.104-
1(b) of the Income Tax Regulations states that section 104(a)(1) of the
Code excludes from gross income amounts received by an employee under a
workers' compensation act or under a statute in the nature of a
workers' compensation act that provides compensation to the employee
for personal injury or sickness incurred in the course of employment.
The IRS takes the position that gross income for income tax
purposes is a separate concept from wages for purposes of FICA.
Furthermore, exclusions from wages for FICA purposes are to be
construed narrowly. Thus, amounts that are excluded from gross income,
in the absence of a specific statutory or regulatory exclusion from
wages, constitute wages for FICA.
Pursuant to the income tax regulations, payments made under a
statute in the nature of a workers' compensation act are excluded from
gross income under section 104. However, there is no regulation at
present addressing whether such payments are excluded from wages for
FICA purposes.
Through 1989, the IRS issued several private letter rulings
concluding that payments made under a statute in the nature of a
workers' compensation act were excluded from gross income and exempt
from FICA. In 1990, based on the Service's position that the exclusion
from gross income did not necessarily
[[Page 12165]]
result in an exclusion from wages, and the absence of a regulation on
point, the IRS reversed its ruling position with respect to FICA,
holding that payments made under a statute in the nature of a workers'
compensation act are included in wages, until the employee has been
absent from work in excess of six months; once the employee has been
absent from work for more than six months, the payments are excluded
from FICA by section 3121(a)(4).
Questions have arisen concerning the FICA tax treatment of payments
made under a statute in the nature of a workers' compensation act to
employees of States and local governments who are not eligible to
receive payments under a workers' compensation law. Accordingly, the
IRS and Treasury are seeking to provide rules to clarify the treatment
of such payments during the first six months the employee is out of
work.
Under the proposed regulations, 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, will be
excluded from wages for FICA purposes. Thus, the regulations adopt the
same position that was published in Rev. Proc. 82-20, the most
contemporaneous guidance to the legislation that created the current
statutory scheme. The proposed regulations thus align the
interpretation of what constitutes payments received under a workers'
compensation law for purposes of section 3121(a)(2)(A) with the
interpretation of amounts received under a workers' compensation law
for purposes of section 104(a)(1).
These proposed regulations are intended to address only the
treatment of payments under a statute in the nature of a workers'
compensation act for FICA purposes. The existing temporary regulations
under section 31.1 which address the FICA treatment of payments under a
workers' compensation law also provide guidance to third parties making
payments on account of sickness or accident disability. Treasury and
the IRS are not proposing any changes to the regulations with respect
to the FICA treatment of third-party sick pay. To the extent it is
necessary to modify the temporary regulations to harmonize them with
these proposed regulations, the third-party sick pay provisions will be
preserved. To the extent necessary, future guidance will also address
the treatment of payments on account of sickness or accident disability
for Federal Unemployment Tax Act and Railroad Retirement Tax Act
purposes.
Proposed Effective Date
It is proposed that these regulations apply to payments made on or
after the date the proposed regulation is published as Final in the
Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
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, this notice of
proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on the impact on small
business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written or electronic comments that
are submitted timely to the IRS. The IRS and Treasury Department
request comments on all aspects of the proposed regulations and how
they can be made easier to understand. All comments will be available
for public inspection and copying. A public hearing may be scheduled if
requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place for the public hearing will be published in the Federal
Register.
Drafting Information
The principal author of these regulations is David Ford of the
Office of Division Counsel/Associate Chief Counsel (Tax Exempt/
Government Entities). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 31
Employment taxes and collection of income at the source.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 31 is proposed to be amended as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE
SOURCE
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 designated paragraph (a)(1).
5. Redesignating paragraph (d) as paragraph (f).
6. Adding new paragraphs (d) and (e).
The revisions and additions are as follows:
Sec. 31.3121(a)(2)-1 Payments on account of sickness or accident
disability, medical or hospitalization expenses, or death.
(a) * * *
(1) Sickness or accident disability of an employee or any of his
dependents, only if payment is received under a workers' compensation
law;
* * * * *
(d) Workers' compensation law. (1) For purposes of paragraph (a)(1)
of this section, a payment made under a workers' compensation law
includes a payment made pursuant to a statute in the nature of a
workers' compensation act.
(2) For purposes of paragraph (a)(1) of this section, a payment
made under a workers' compensation law does not include a payment made
pursuant to a State temporary disability insurance law.
(3) If an employee receives a payment on account of sickness or
accident disability that is not made under a workers' compensation law
or a statute in the nature of a workers' compensation act, the payment
is not excluded from wages as defined by section 3121(a)(2)(A) even if
the payment must be repaid if the employee receives a workers'
compensation award or an award under a statute in the nature of a
workers' compensation act with respect to the same period of absence
from work.
(4) If an employee receives a payment on account of non-
occupational injury sickness or accident disability such payment is not
excluded from wages, as defined by section 3121(a)(2)(A).
(e) Examples. The following examples illustrate the principles of
paragraph (d) of this section:
Example 1. A local government employee is injured while
performing work-related
[[Page 12166]]
activities. The employee is not covered by the State workers'
compensation law, but is covered by a local government ordinance
that requires the local government to pay the employee's full salary
when the employee is out of work as a result of an injury incurred
while performing services for the local government. The ordinance
does not limit or otherwise affect the local government's liability
to the employee for the work-related injury. The local ordinance is
not a workers' compensation law, but it is in the nature of a
workers' compensation act. Therefore, the salary the employee
receives while out of work as a result of the work-related injury is
excluded from wages under section 3121(a)(2)(A).
Example 2. The facts are the same as in Example 1 except that
the local ordinance requires the employer to continue to pay the
employee's full salary while the employee is unable to work due to
an injury whether or not the injury is work-related. Thus, the local
ordinance does not limit benefits to instances of work-related
disability. A benefit paid under an ordinance that does not limit
benefits to instances of work-related injuries is not a statute in
the nature of a workers' compensation act. Therefore, the salary the
injured employee receives from the employer while out of work is
wages subject to FICA even though the employee's injury is work-
related.
Example 3. The facts are the same as in Example 1 except that
the local ordinance includes a rebuttable presumption that certain
injuries, including any heart attack incurred by a firefighter or
other law enforcement personnel is work-related. The presumption in
the ordinance does not eliminate the requirement that the injury be
work-related in order to entitle the injured worker to full salary.
Therefore, the ordinance is a statute in the nature of a workers'
compensation act, and the salary the injured employee receives
pursuant to the ordinance is excluded from wages under section
3121(a)(2)(A).
* * * * *
Mark E. Matthews,
Deputy Commissioner of Services and Enforcement.
[FR Doc. 05-4382 Filed 3-10-05; 8:45 am]
BILLING CODE 4830-01-P
