RULES AND REGULATIONS
Title 61--REVENUE
DEPARTMENT OF REVENUE
[61 PA. CODE CH. 101]
Supplemental Unemployment Benefit Plan
[32 Pa.B. 250] The Department of Revenue (Department), under the authority contained in section 354 of the Tax Reform Code of 1971 (TRC) (72 P. S. § 7354), amends §§ 101.1 and 101.6 (relating to definitions; and compensation) to read as set forth in Annex A.
Purpose of Regulation
The final-form amendments provide an explanation of the meaning and scope of the exclusion from compensation in the Pennsylvania Income Tax Law section 301(d)(vi) of the TRC (72 P. S. § 7301(d)(vi)) for employer or labor union payments for supplemental unemployment programs. The final-form amendments also address the tax treatment of programs offered to provide supplemental benefits to employees terminated from service as a result of layoff, workforce reduction, plant closings or other involuntary terminations.
Explanation of Regulatory Requirements
Section 101.1 is amended by adding the definition of ''supplemental unemployment benefit plan.'' Section 101.6 is amended by adding a new paragraph (14) relating to benefits payable under a supplemental unemployment benefit plan, under subsection (c) which enumerates what compensation does not mean or include. The numbering of this new paragraph was changed from the proposed rulemaking because of the Department's adoption of Regulation 15-402 at 30 Pa.B. 3938 (August 5, 2000), relating to payments for employee welfare benefit plans and cafeteria plans and because of the pending adoption of Regulation 15-413, relating to termination pay, severance pay and early retirement incentive programs.
Affected Parties
Persons receiving employer or labor union payments for supplemental unemployment programs may be affected by the final-form amendments.
Comment and Response Summary
Notice of proposed rulemaking was published at 30 Pa. B. 2236 (May 6, 2000). The proposed rulemaking is being adopted with changes as set forth to read in Annex A.
No comments were received from the public during the public comment period. No comments were received from the House and Senate Finance Committees. The Department did receive comments from the Independent Regulatory Review Commission (IRRC).
Amendments to the proposed rulemaking in response to comments are as follows:
(1) In its comments, IRRC questioned the use of the phrase ''established or maintained by an employer or by an employee organization, or by both'' in the definition of ''supplemental unemployment benefit plan'' and requested an explanation of how the phrase is consistent with section 301 of the TRC.
Labor unions are employee organizations; however, not all employee organizations are labor unions--for example, voluntary employees' beneficiary associations or employee representation committees. Section 301(d)(vi) of the TRC does not deal with payments made by employee organizations other than labor unions. To clarify the proposed rulemaking, the Department added the phrase ''by an employer or labor union'' to § 101.6(c)(14).
(2) IRRC also questioned the necessity of the phrase ''under the plan'' in subparagraphs (i) and (ii) of the definition of ''supplemental unemployment benefit plan'' as well as the use of the term ''permanent'' in subparagraph (i)(A). The Department reviewed these areas of the definition and determined that the language was not necessary and deleted it from the definition.
(3) In subparagraphs (i) and (ii) of the definition of ''supplemental unemployment benefit plan,'' IRRC questioned what was meant by the phrase ''or subject in any manner to anticipation, assignment or pledge by.'' To clarify its intent, the Department amended the subparagraphs by deleting the phrase IRRC found unclear and adding language that more clearly explains the provision.
Amendments initiated during the Department's internal review of the final-form amendments are as follows:
(1) For clarity and to respond to questions raised by the public since the publication of the proposed rulemaking, the Department has revised the definition of ''supplemental unemployment benefit plan'' by adding a third necessary attribute that employer payments to provide benefits are paid to an independently controlled trust or pooled fund established or maintained for the purpose of funding or providing benefits under the plan.
(2) As referenced in the proposed rulemaking preamble, certain proposed amendments to § 101.6 would need to be reclassified with the adoption of Regulation 15-402. Because Regulation 15-402 was adopted at 30 Pa.B. 3938 and because of the pending adoption of Regulation 15-413, relating to termination pay, severance pay and early retirement incentive programs, proposed § 101.6(c)(9) was moved to paragraph (14). See 32 Pa.B. 253 (January 12, 2002).
Explanations to questions raised by IRRC:
(1) In subparagraph (i) of the definition of ''supplemental unemployment benefit plan,'' IRRC questioned why the parenthetical phrase ''(whether or not such separation is temporary)'' was needed. The purpose of the parenthetical phrase is to make sure that it is clear that no distinction is to be drawn between a temporary layoff and a permanent termination of employment.
(2) In subparagraphs (i)(E) and (ii)(B)(III) within the definition of ''supplemental unemployment benefit plan,'' the Department uses the phrases ''similar circumstances'' and ''similar acts.'' In its comments, IRRC asked the Department to explain what criteria it will use to determine similarity. The determining factor in subparagraph (i)(E) is that the circumstance be beyond the control of the participant and in subparagraph (ii)(B)(III) it is that the act be within the control of the participant.
(3) In its comments, IRRC noted that § 101.6(c)(6) references supplemental unemployment benefits; however, the Department's proposal provides that supplemental unemployment benefits also be listed in a new paragraph (9). For clarity, IRRC suggested that the Department incorporate the provisions for supplemental unemployment benefits under one paragraph.
Section 101.6(c)(6) deals with the funding for supplemental unemployment benefit pay plans, not the actual supplemental unemployment benefit plan distributions. Conversely, proposed paragraph (9) (now paragraph (14)), deals with the actual distribution of benefits; therefore, the two paragraphs should remain separate.
(4) Given the definition of ''supplemental unemployment benefit plan'' in § 101.1, IRRC questioned why the qualifying phrase ''whether payable on a periodic basis or in the form of cash, services or property'' is needed in § 101.6(c).
The qualifying phrase questioned by IRRC is needed only if there might be some question whether aperiodic cash payments and benefits payable in the form of services or property are taxable. As the Department's position was previously that aperiodic cash payments and benefits payable in the form of services or property were taxable, the possibility for questions seems quite likely.
Fiscal Impact
The Department has determined that the final-form amendments will have no fiscal impact on the Commonwealth.
Paperwork
The final-form amendments will not require additional paperwork for the public or the Commonwealth.
Effectiveness/Sunset Date
The amendments will become effective upon final-form publication in the Pennsylvania Bulletin. The final-form amendments are scheduled for review within 5 years of publication. No sunset date has been assigned.
Contact Person
The contact person for an explanation of the final-form amendments is Anita M. Doucette, Office of Chief Counsel, Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on April 26, 2000, the Department submitted a copy of the notice of proposed rulemaking published at 30 Pa.B. 2236 to IRRC and to the Chairpersons of the House Committee on Finance and the Senate Committee on Finance for review and comment.
Under section 5(c) of the Regulatory Review Act, IRRC and the Committees were provided with copies of the comments received during the public comment period, as well as other documents when requested. In preparing this final-form rulemaking, the Department has considered the comments received from IRRC, the Committees and the public.
Under section 5.1(d) of the Regulatory Review Act (71 P. S. § 745.5a(d)), on November 20, 2001, the final-form rulemaking was deemed approved by the House and Senate Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on December 6, 2001, and approved the final-form rulemaking.
Findings
The Department finds that:
(1) Public notice of intention to amend the regulations has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The amendments are necessary and appropriate for the administration and enforcement of the authorizing statute.
Order
The Department, acting under the authorizing statute, orders that:
(a) The regulations of the Department, 61 Pa. Code Chapter 101, are amended by amending §§ 101.1 and 101.6 to read as set forth in Annex A, with ellipses referring to the existing text of the regulations.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for approval as to form and legality as required by law.
(c) The Secretary of the Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
LARRY P. WILLIAMS,
Secretary(Editor's Note: For the text of the order of the Independent Regulatory Review Commission, relating to this document, see 31 Pa.B. 6998 (December 22, 2001).)
Fiscal Note: Fiscal Note 15-414 remains valid for the final adoption of the subject regulations.
(Editor's Note: The amendments adopted by the rulemaking at 32 Pa.B. 253, have been consolidated into this Annex.)
Annex A
TITLE 61. REVENUE
PART I. DEPARTMENT OF REVENUE
Subpart B. GENERAL FUND REVENUES
ARTICLE V. PERSONAL INCOME TAX
CHAPTER 101. GENERAL PROVISIONS § 101.1. Definitions.
The following words and terms, when used in this article, have the following meanings, unless the context clearly indicates otherwise:
* * * * * Limited plan of termination--A plan that has one or more of the following attributes:
(i) The plan, when begun, is scheduled to be complete on a certain date or upon the occurrence of one or more specified events.
(ii) The number, percentage or class of employees whose services are to be terminated are specified in advance of the employees' terminations of service.
(iii) The plan is otherwise temporary or limited.
* * * * * Qualified annuity--An arrangement under which the payee is entitled to equal, or substantially equal, periodic payments, paid at least annually, for any of the following periods:
(i) The life of the participant, or, if applicable, the joint lives of the recipient and recipient's designated beneficiary.
(ii) The life expectancy of the participant, or, if applicable, the joint life expectancies of the recipient and recipient's designated beneficiary.
(iii) A period of at least 10 years.
* * * * * Severance pay--A payment made upon separation from employment under:
(i) A plan which has both of the following attributes:
(A) Payments are not contingent solely upon an employee's retirement from service or being the same age as, or older than, the earliest retirement age under a qualifying retirement benefit plan or qualifying retirement income plan sponsored by the employer.
(B) Total payments cannot exceed twice the employee's annual compensation accruing during the year preceding the employee's termination.
(ii) A plan under which all payments to any plan participant are completed within 120 months of the participant's termination.
(iii) A plan under which no benefit is, or only reduced benefits are payable to, or can be taken, assigned, pledged or otherwise charged or dealt with by, any plan participant after the participant reaches normal retirement age or service.
(iv) A plan, including a stock bonus or profit-sharing plan formed by a trust that meets the requirements for qualification described in section 401 of the IRC (26 U.S.C.A. § 401) or employee stock ownership plan, with one or more of the following attributes:
(A) The amount of earnings on contributions (or allocations of contributions or earnings) and the amount of benefits are determined with regard to the current or accumulated profits or losses of the employer.
(B) The employer can contribute only in those years when it has current or accumulated profits.
(C) The employer's contributions can fluctuate depending on the level of its profits.
(D) The employer's contributions are made out of current or accumulated profits.
(E) Distributions are paid with respect to stock of a corporation which is held by an employee stock ownership plan.
(v) A plan under which the accrued benefit payable to each vested participant who does not die before the payment starting date is neither paid nor payable in the form of a qualified annuity.
(vi) A limited plan of termination.
* * * * * Supplemental unemployment benefit plan--A plan established or maintained by an employer or by an employee organization, or by both, that has all of the following attributes:
(i) No benefit is payable to, or can be taken, assigned, pledged or otherwise charged or dealt with by, any plan participant except upon lay-off or involuntary separation from the employment of the employer (whether or not the separation is temporary) resulting directly from:
(A) A reduction in force.
(B) Plant closing.
(C) Change in organizational structure.
(D) Discontinuance of an operation.
(E) The participant's failure to meet or maintain standards of performance for the position due to inability to carry out the responsibilities of the position, health, obsolescence, failure to meet the changed responsibilities of the position or similar circumstance beyond the control of the participant.
(ii) No benefit is payable to, or can be taken, assigned, pledged or otherwise charged or dealt with by, any plan participant if the participant either:
(A) Voluntarily separates from service.
(B) Is separated or discharged from service for any of the following reasons:
(I) Refusal to accept another position with reasonably comparable compensation.
(II) The commission of illegal acts.
(III) Insubordination, failure or refusal to comply with rules or regulations or similar acts within the control of the participant.
(III) Employer payments to provide benefits are paid to an independently controlled trust or pooled fund established or maintained for the purpose of funding or providing benefits under the plan.
* * * * * § 101.6. Compensation.
(a) Compensation includes items of remuneration received, directly or through an agent, in cash or in property, based on payroll periods or piecework, for services rendered as an employee or casual employee, agent or officer of an individual, partnership, business or nonprofit corporation, or government agency. These items include salaries, wages, commissions, bonuses, stock options, incentive payments, fees, tips, dismissal, termination or severance payments, early retirement incentive payments and other additional compensation contingent upon retirement, including payments in excess of the scheduled or customary salaries provided for those who are not terminating service, rewards, vacation and holiday pay, paid leaves of absence, payments for unused vacation or sick leave, tax assumed by the employer, or casual employer signing bonuses, amounts received under employee benefit plans and deferred compensation arrangements, and other remuneration received for services rendered.
* * * * * (c) Compensation does not mean or include any of the following:
* * * * * (3) Federal old age insurance benefits payable under 42 U.S.C.A. § 401, Railroad Retirement Act benefits payable under 45 U.S.C.A. § 228 or § 231 or any retired or retainer pay of a member or former member of a uniformed service computed under 10 U.S.C.A. § 1401.
* * * * * (13) Guaranteed payments to a partner for services rendered to the partnership.
(14) Benefits payable by an employer or labor union under a supplemental unemployment benefit plan, whether payable on a periodic basis or in the form of cash, services or property.
* * * * * (m) For purposes of this section:
(1) A person who separated from service before satisfying superannuation requirements shall be deemed to be retired from service upon reaching retirement age, regardless of whether he has permanently and wholly withdrawn from active working life or not.
(2) The voluntary discontinuance of a plan within 3 years after it has taken effect, for any reason other than business necessity, will be evidence that the plan was temporary and limited.
[Pa.B. Doc. No. 02-39. Filed for public inspection January 11, 2002, 9:00 a.m.]
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