PROPOSED RULEMAKING
DEPARTMENT
OF REVENUE
[61 PA. CODE CH. 101]
Termination Pay, Severance Pay and Early Retirement Incentive Programs
[30 Pa.B. 2371] The Department of Revenue (Department), under authority contained in section 354 of the Tax Reform Code of 1971 (TRC) (72 P. S. § 7354), proposes to amend §§ 101.1 and 101.6 (relating to definitions; and compensation) to read as set forth in Annex A.
Purpose of Proposed Amendments
This regulatory change will clarify the taxation of termination pay, severance pay, early retirement incentive programs and programs offered by employers to provide benefits to employes in addition to those in qualifying retirement plans upon separation from service.
The proposed amendments also interprets section 301(d) of the (TRC 72 P. S. § 7301(d)) to mean that Federal insurance benefits paid under the Railroad Retirement Act and guaranteed payments to a partner of a partnership for services to the partnership are excluded from compensation.
Explanation of Regulatory Requirements
Section 101.1 is proposed to be amended by adding the definitions of ''limited plan of termination,'' ''qualified annuity'' and ''severance pay.'' Section 101.6(a) is proposed to be amended by updating the list of examples of compensation. Section 101.6(c)(3) is proposed to be amended to reflect the Department's interpretation of the Pennsylvania Income Tax law with regard to Federal insurance benefits paid under the Railroad Retirement Act. Text from § 101.6(a) has been deleted and moved to a new paragraph (9) in § 101.6(c). Paragraph (9) reflects the Department's interpretation of the Pennsylvania Income Tax law with regard to guaranteed payments to a partner of a partnership for services to the partnership. The numbering of this new paragraph will change upon the Department's adoption of Regulation 15-402, relating to payments for employe welfare benefit plans and cafeteria plans (see 28 Pa.B. 1946 (April 25, 1998)) and the promulgation of a proposal relating to supplemental unemployment benefit plans. The numbering of this new paragraph could also change upon adoption of Regulation 15-414 at 30 Pa.B. 2236 (May 6, 2000).
Finally, a new subsection (e) has been added to § 101.6 to explain superannuation requirements and the voluntary discontinuance of a plan. The lettering of this new subsection will change upon the Department's adoption of Regulation 15-402.
Affected Parties
This proposed rulemaking could affect employers with early-out incentive programs and employes receiving severance pay.
Fiscal Impact
The Department has determined that the proposed rulemaking will have no fiscal impact on the Commonwealth.
Paperwork
The proposed rulemaking will not require additional paperwork for the public or the Commonwealth.
Effectiveness/Sunset Date
The proposed rulemaking will become effective upon final publication in the Pennsylvania Bulletin. The regulations are scheduled for review within 5 years of final publication. No sunset date has been assigned.
Contact Person
Interested persons are invited to submit in writing comments, suggestions or objections regarding the proposed amendments to Anita M. Doucette, Office of Chief Counsel, Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061, within 30 days after the date of the publication of this notice in the Pennsylvania Bulletin.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on May 3, 2000, the Department submitted a copy of this proposed rulemaking to IRRC and to the Chairpersons of the House Committee on Finance and the Senate Committee on Finance. In addition to submitting the proposed rulemaking, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of this material is available to the public upon request.
If IRRC has objections to any portion of the proposed rulemaking, it will notify the Department within 10 days of the close of the Committees' review period. The notification shall specify the regulatory review criteria which have not been met by that portion. The Regulatory Review Act specifies detailed procedures for review of objections raised, prior to final publication of the amendments, by the Department, the General Assembly and the Governor.
ROBERT A. JUDGE, Sr.,
SecretaryFiscal Note: 15-413. No fiscal impact; (8) recommends adoption. This rulemaking clarifies the Department's current policies.
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 employes whose services are to be terminated are specified in advance.
(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 not less frequently than annually, for:
(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 employe'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 employe's annual compensation during the year preceding the employe'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 payable to, or subject in any manner to anticipation, assignment or pledge by, an employe except upon voluntary separation from the employment of the employer before 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 employe 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 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 employe 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.
* * * * * § 101.6. Compensation.
(a) Compensation includes items of remuneration received [by an employe or casual employe], directly or through an agent, in cash or in property, based on payroll periods or piecework, for services rendered as an employe or casual employe, agent or officer of an individual, partnership, [but not guaranteed payments to a partner for services rendered to the 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 employe signing bonuses, amounts received under employe 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) [Payments commonly recognized as] Federal old age [or retirement benefits paid to persons retired from service after reaching a specified age or after a stated period of employment] insurance benefits payable under 42 U.S.C.A. § 401 et seq., Railroad Retirement Act benefits payable under 45 U.S.C.A. § 228 or § 231 et seq. or any retired or retainer pay of a member or former member of a uniformed service computed under 10 U.S.C.A. § 1401. [Retirement pay includes a distribution of a lump sum upon retirement, but does not include a severance payment by an employer to an employe who terminates employment without retiring. A payment of the latter type shall be considered compensation, if paid upon termination of employment, rather than as a retirement income, to the extent that the payment exceeds the employe's contribution to any plan out of which the payment may be made.]
* * * * * (10) Guaranteed payments to a partner for services rendered to the partnership.
* * * * * (e) 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 reachingretirement age, regardless of whether the firm 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. 00-788. Filed for public inspection May 12, 2000, 9:00 a.m.]
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