PLR 200247040: Federal instrumentality's supplemental pension benefits excluded from payroll wages

Plain-English summary

Two federal instrumentalities maintained an unfunded supplemental pension plan for selected officers. They asked whether payments under the plan were wages for Social Security, Medicare, and federal unemployment tax purposes. The IRS found that the plan deferred compensation and was established and maintained by instrumentalities of the United States. It ruled that the plan was an exempt governmental deferred compensation plan under section 3121(v)(3), so payments under it were excluded from FICA and FUTA wages. The special FICA timing rule for other nonqualified deferred compensation plans also did not apply to amounts deferred under this plan.

Ruling snapshot

• Question: Are payments under the supplemental pension plan excluded from FICA and FUTA wages?
• Outcome: Approved: the plan qualified as an exempt governmental deferred compensation plan.
• Key authorities: IRC §§ 3121(a)(5)(E), 3121(v)(3), 3306(b)(5)(E); Treas. Reg. § 31.3121(v)(2)-1.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200247040
Washington, DC 20224
Release Date: 11/22/2002
Index Number: 3121.01-12 Person to Contact:

Telephone Number:

Refer Reply To:
CC:TEGE:EOEG:ET2/PLR-112423-02
Date:
August 21, 2002

Legend

= V
= W
= X
= Y
= Z
= Retirement Make-up Plan
= Thrift make-up Plan
= Industry
= Ruling A
= Ruling B
= Ruling C
= Ruling D
= Date 1
= Date 2

= Selected Officers

Dear

This is in reply to your request for a ruling concerning whether the supplemental non- qualified defined benefit pension plan (“Supplemental Plan”) maintained for the benefit of selected officers of Z, except W, constitutes an "exempt governmental deferred compensation plan" for purposes of sections 3121(a)(5)(E) and 3121(v)(3) of the Internal Revenue Code ("the Code").
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FACTS

Y and Z are an integral part of X. V and W are included in Z. Y and Z are exempt from federal income tax under section 501(c)(1) of the Code as "corporation[s] organized under Act of Congress which [are] instrumentalities of the United States . . ." Y and Z sponsor the following employee retirement plans for the benefit of their employees:

The Retirement Plan for Employees of X (the "Retirement Plan") The Thrift Plan for Employees of X (the "Thrift Plan") The Retirement Make-up Plan for Employees of X (the "Retirement Make-up Plan")
The Thrift Make-up Plan for Employees of X (the "Thrift Make-up Plan")
The Supplemental Retirement Plan for Selected Officers of Z, except W (“Supplemental Plan”)

The Retirement Plan, Thrift Plan, Retirement Make-up Plan and Thrift Make-up Plan have all been ruled “exempt governmental deferred compensation plans" for purposes of sections 3121(a)(5)(E) and 3121(v)(3) of the Code. See Ruling D.

Your request for a ruling concerns only the Supplemental Plan. Specifically, you have requested a ruling that the Supplemental Plan is an "exempt governmental deferred compensation plan" within the meaning of section 3121(v)(3) of the Code and, accordingly, payments to, or on behalf of, a participant under such plan are not "wages" for purposes of employment taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).

The Supplemental Plan is an unfunded non-qualified defined benefit pension plan established by Y and Z for the benefit of Selected Officers. The Supplemental Plan benefits are offset by any benefits paid under the Retirement Plan and Retirement Make-up Plan. No benefit is payable until the participant’s retirement or death, if earlier.

LAW

Section 3121(a) of the Code provides, for purposes of FICA, that the term "wages" means all remuneration for employment, unless specifically excepted.

Section 3121(a)(5)(E) of the Code provides that the term wages does not include any payment made to, or on behalf of an employee or his beneficiary under or to an exempt governmental deferred compensation plan (as defined in section 3121(v)(3) of the Code).

Section 3121(v)(3) of the Code defines an exempt governmental deferred 3

compensation plan as any plan providing for deferral of compensation established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing. Such term shall not include - (1) any plan to which Code sections 83, 402(b), 403(c), 457(a), or 457(f)(1) applies; (2) any annuity contract described in Code section 403(b); and (3) the Thrift Savings Fund (within the meaning of subchapter III of chapter 84 of title 5, United States Code).1

None of the following Code sections apply to the Supplemental Plan: 83, 402(b), 403(c), 457(a), 457(f)(1) or 403(b). The plan is not the Thrift Savings Fund within the meaning of subchapter III of chapter 84 of title 5, United States Code.

Section 3121(v)(2) provides special timing rules for the application of FICA to non- qualified deferred compensation plans. However, section 3121(v)(2) does not apply to amounts that are excluded from wages for FICA purposes. See e.g., Treas. Reg.
§ 31.3121 (v)(2)- 1(a)(2)(v).

Section 3121(v)(2)(c) provides that for purposes of section 3121(v)(2), the term “non- qualified deferred compensation plan” means any plan or other arrangement for deferral of compensation other than a plan described in 3121(a)(5).

Section 31.3121(v)2-1(b)(3) of the Treasury Regulations states that a plan provides for the deferral of compensation with respect to an employee only if, under the terms of the plan and the relevant facts and circumstances, the employee has a legally binding right during a calendar year to compensation that has not been actually or constructively received and that, pursuant to the terms of the plan, is payable to (or on behalf of) the employee in a later year. An employee does not have a legally binding right to compensation if that compensation may be unilaterally reduced or eliminated by the employer after the service creating the right to the compensation has been performed. For this purpose, compensation is not considered subject to unilateral reduction or

1 Code sections 457(a) and 457(f) apply only to deferred compensation plans of an “eligible employer.” Code section 457(e)(1) includes within the definition of “eligible employer” a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State and any other organization (other than a governmental unit) exempt from tax under this subtitle. Because Z and Y are governmental units, but not of a State or political subdivision of a State, they are not eligible employers and neither § 457(a) nor § 457(f) applies. In addition, neither the Retirement Make-up Plan nor the Thirft Make-up Plan is a qualified governmental excess benefit arrangement described in section 415(m) of the Code. Therefore, this ruling should not be interpreted to suggest any answer on the issue of whether a plan under § 457(a), § 457(f) or § 415(m) maintained by a State or local government is subject to FICA.
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elimination merely because it may be reduced or eliminated by operation of the objective terms of the plan, and an employee does not fail to have a legally binding right to compensation merely because the amount of compensation is determined under a formula that provides for benefits to be reduced due to investment losses.

Section 3306(b) of the Code provides, for purposes of FUTA, that the term "wages" means all remuneration for employment, unless specifically excepted.

Section 3306(b)(5)(E) of the Code provides that the term wages does not include any payment made to, or on behalf of, an employee or his beneficiary under or to an exempt governmental deferred compensation plan (as defined in section 3121(v)(3) of the Code).

DISCUSSION

In order for the Supplemental Plan to be an "exempt governmental deferred compensation plan" within the meaning of section 3121(v)(3) of the Code, it must be a plan that provides for the deferral of compensation and must be established and maintained by an agency or instrumentality of the United States.

Deferral of Compensation

The Supplemental Plan provides for the deferral of compensation. A participant has a legally binding right to benefits that accrue during a calendar year, but because each plan is unfunded, such benefits are not actually or constructively received when accrued. See e.g., Rev. Rul. 69-650, 1969-2 C.B. 106. Participants are not entitled to payment of their accrued benefits until either their retirement or termination of employment.

Participants also have a "legally binding right" to their plan benefits upon accrual. Under the Supplemental Plan, a participant's accrued benefit cannot be unilaterally reduced or eliminated by an employer, except that the objective terms of the plan provide that unvested benefits are forfeited upon termination of employment. Additionally, benefits under the Supplemental Plan can be reduced to reflect investment losses. For purposes of determining whether a plan provides for a deferral of compensation, benefit forfeitures or reductions pursuant to objective plan vesting provisions and account reductions due to investment losses are expressly permitted under the Treasury Regulations without causing a participant to fail to have a legally binding right to those benefits. See e.g., § 31.3121(v)(2)-1(b)(3). Thus, the Supplemental Plan provides for the deferral of compensation for employment tax purposes.

United States Agency or Instrumentality
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In order to be classified as an exempt governmental deferred compensation plan, the Supplemental Plan must be established and maintained by an agency or instrumentality of the United States for the benefit of such agency's or instrumentality's employees. The Supplemental Plan was established by Y and Z and is maintained jointly for the benefit of Selected Officers.

The Service utilizes certain factors in determining whether an entity is a government agency or instrumentality. See e.g., Rev. Rul. 57-128, 1957-1 C.B. 311 (providing factors to be considered in determining whether an organization is an instrumentality of a state or political subdivision for purposes of Code section 3121(b)(7)); and Rev. Rul. 89-49, 1989-1 C.B. 117 (providing factors to be considered in determining whether an organization is an agency or instrumentality of a government for purposes of Code section 414(d)). These factors include whether the government exercises control and supervision over the organization, whether there is specific legislation creating the organization, and the source of operating funds of the organization.

The Service has consistently ruled that the components of Z are instrumentalities of the United States. See e.g., Ruling A, Ruling B and Ruling C. On Date 1, the Service ruled that W is an instrumentality of the United States, and the Retirement Plan and Thrift Plan maintained for employees of W are governmental plans for purposes of section 414(d) of the Code. Additionally, on Date 2, the Service ruled that the Thrift Make-up Plan and the Retirement Make-up Plan are “exempt governmental deferred compensation plans.” See Ruling D. Section 414(d) of the Code defines a governmental plan as "a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing."

Y was created by an Act of Congress to perform governmental functions. The President with the advice and consent of the Senate appoints its members, and it must regularly report to and consult with the full Congress. Further, Congress has delegated to Y broad powers that are inherently governmental in nature, including the power to promulgate and enforce certain federal industry regulations and assess civil penalties that are payable to the United States. X is required to submit reports to Congress, including an annual report of its operations and weekly reports indicating the condition of Z. In addition, the financial accounts of Y are subject to audit by the General Accounting Office. Although Y is not funded through Congressionally appropriated funds, it is funded through profits of Z, which, after payment of statutory dividends to members of Z, are otherwise earmarked for the United States Treasury.

The components of Z were established under an act of Congress as separate corporate entities. Z performs governmental functions such as performing industry services for the federal government and conducting examinations and inspections of certain industry institutions. Z is subject to the oversight of Y. Y appoints one-third of the directors of Z and approves the compensation of all directors, officers and employees of 6

Z.

Based on the foregoing, we conclude that Y and Z (including V) are instrumentalities of the United States for purposes of section 3121(v)(3) of the Code. Accordingly, the Supplemental Plan is an "exempt governmental deferred compensation plan" within the meaning of section 3121(v)(3) of the Code, and payments to, or on behalf of, the participants in such a plan are not wages for purposes of FICA and FUTA. In addition, section 3121(v)(2) does not apply to amounts deferred under the Supplemental Plan.

This ruling is directed only to Y, the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Lynne Camillo
Chief, Employment Tax Branch 2
Office of the Assistant Chief Counsel
(Exempt Organizations / Employment Tax / Government