Federal Unemployment Tax Act (FUTA) Taxation of
Amounts Under Employee Benefit Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 31 [TD 8815] RIN 1545-AT99

TITLE: Federal Unemployment Tax Act (FUTA) Taxation of Amounts Under
Employee Benefit Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under section
3306(r)(2) of the Internal Revenue Code (Code), that provide
guidance as to when amounts deferred under or paid from a
nonqualified deferred compensation plan are taken into account as
wages for purposes of the employment taxes imposed by the Federal
Unemployment Tax Act (FUTA). Section 3306(r)(2), relating to
treatment of certain nonqualified deferred compensation, was added
to the Code by section 324 of the Social Security Amendments of
1983. These regulations provide guidance to employers who maintain
nonqualified deferred compensation plans.

DATES: Effective Date: These regulations are effective January 29,
1999.

Applicability Date: These regulations are applicable on and after
January 1, 2000. In addition, these regulations provide certain
transition rules for amounts deferred and benefits paid before
January 1, 2000, including allowing employers to use a reasonable,
good faith interpretation of section 3306(r)(2). FOR FURTHER
INFORMATION CONTACT: Janine Cook, Linda E. Alsalihi, or Margaret A.
Owens, (202) 622-6040 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

These final regulations amend the Employment Tax Regulations (26 CFR
part 31) under section 3306(r)(2). Section 3306(r)(2) was added to
the Internal Revenue Code (Code) by section 324 of the Social
Security Amendments of 1983 (1983 Amendments). Section 2662(f)(2) of
the Deficit Reduction Act of 1984 (DEFRA) amended section 324 of the
1983 Amendments.

Notice 94-96 (1994-2 C.B. 564) provides that until final regulations
are issued, the IRS will not challenge an employer's determination
of FUTA tax liability with respect to a nonqualified deferred
compensation plan for periods before the effective date of any final
regulations if the determination is based on a reasonable, good
faith interpretation of section 3306(r)(2). On January 25, 1996, a
notice of proposed rulemaking (EE-55-95), under section 3306(r)(2)
was published in the Federal Register (61 FR 2214), providing
guidance related to the FUTA tax treatment of amounts deferred under
or paid from certain nonqualified deferred compensation plans.

On December 24, 1997, a notice of proposed rulemaking (REG-209484-87
and REG-209807- 95), under section 3306(r)(2), extending the
proposed general effective date of the regulations to January 1,
1998, was published in the Federal Register (62 FR 67304). Comments
regarding the proposed regulations were received from the public,
and on June 24, 1996, the IRS held a public hearing concerning the
proposed amendments. After consideration of the public comments
received and the statements made at the public hearing, the proposed
regulations are adopted as revised by this Treasury decision.

Explanation of Provisions

These final regulations provide guidance under section 3306(r)(2),
relating to when amounts deferred under or paid from nonqualified
deferred compensation plans are taken into account as wages for FUTA
purposes. These rules are substantially similar to the rules
applicable to the FICA (Federal Insurance Contributions Act) tax
treatment of such amounts deferred under section 3121(v)(2). Thus,
these final regulations cross-reference the final regulations under
section 3121(v)(2) (FICA tax treatment of nonqualified deferred
compensation), published elsewhere in this issue of the Federal
Register.

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) does not apply to these regulations, and because the
notice of proposed rulemaking was issued prior to March 29, 1996,
the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal Revenue Code, the notice
of proposed rulemaking preceding these regulations was submitted to
the Chief Counsel for Advocacy of the Small Business Administration
for comment on their impact on small business.

Drafting Information

The principal authors of these regulations are Janine Cook, Linda E.
Alsalihi, and Margaret A. Owens, Office of the Associate Chief
Counsel (Employee Benefits and Exempt Organizations). 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 31.3306(r)(2)-1 is added to read as follows:

�31.3306(r)(2)-1 Treatment of amounts deferred under certain
nonqualified deferred compensation plans.

(a) In general. Section 3306(r)(2) provides a special timing rule
for the tax imposed by section 3301 with respect to any amount
deferred under a nonqualified deferred compensation plan. Section
31.3121(v)(2)-1 contains rules relating to when amounts deferred
under certain nonqualified deferred compensation plans are wages for
purposes of sections 3121(v)(2), 3101, and 3111. The rules in
�31.3121(v)(2)-1 also apply to the special timing rule of section
3306(r)(2). For purposes of applying the rules in �31.3121(v)(2)-1
to section 3306(r)(2) and this paragraph (a), references to the
Federal Insurance Contributions Act are considered references to the
Federal Unemployment Tax Act (26 U.S.C. 3301 et seq.), references to
FICA are considered references to FUTA, references to section 3101
or 3111 are considered references to section 3301, references to
section 3121(v)(2) are considered references to section 3306(r)(2),
references to section 3121(a), (a)(5), and (a)(13) are considered
references to section 3306(b), (b)(5), and (b)(10), respectively,
and references to �31.3121(a)-2(a) are considered references to
�31.3301-4.

(b) Effective dates and transition rules. Except as otherwise
provided, section 3306(r)(2) applies to remuneration paid after
December 31, 1984. Section 31.3121(v)(2)-2 contains effective date
rules for certain remuneration paid after December 31, 1983, for
purposes of section 3121(v)(2). The rules in �31.3121(v)(2)-2 also
apply to section 3306(r)(2). For purposes of applying the rules in
�31.3121(v)(2)-2 to section 3306(r)(2) and this paragraph (b),
references to section 3121(v)(2) are considered references to
section 3306(r)(2), and references to section 3121(a)(2), (a)(3), or
(a)(13) are considered references to section 3306(b)(2), (b)(3), or
(b)(10), respectively. In addition, references to �31.3121(v)(2)-1
are considered references to paragraph (a) of this section. For
purposes of applying the rules of �31.3121(v)(2)-2 to this paragraph
(b) -

(1) References to "December 31, 1983" are considered references to
"December 31, 1984";

(2) References to "before 1984" are considered references to "before
1985";

(3) References to "Federal Insurance Contributions Act" are
considered references to "Federal Unemployment Tax Act"; and

(4) References to "FICA" are considered references to "FUTA".

Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: December 23, 1998
Donald C. Lubick
Assistant Secretary of the Treasury
(Tax Policy)

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