Rev. Rul. 80-124

ISSUE

Are payments made by a company to its eligible employees under its preretirement leave benefit plan wages under sections 3121(a), 3306(b), and 3401(a) of the Internal Revenue Code?

FACTS

The company's preretirement leave benefit plan, which arose from a collective bargaining agreement with its employees' union, was adopted to offset layoffs that ordinarily resulted from the periodic slack seasons incurred by the company. By scheduling its older more experienced employees on leave at times when there is a reduced need for employees, the company is able to retain the services of short service employees who might otherwise be laid off. An additional purpose of the plan is to introduce and accustom eligible employees to permanent retirement status on a gradual basis.

To be entitled to benefits under the plan, an employee must have 30 years of service with the company. Eligible employees are entitled to 1 to 4 weeks of benefits per year, according to their age. The leave must be taken in full, consecutive weeks and any unused portion may not be accrued.

Eligible employees who desire to use the leave must apply by a prescribed date each year. The company schedules the leave after taking into account the employees' preferences, the need for their services at the times requested, and the seniority of other employees making similar applications. The leave is guaranteed whether or not the actual need for a layoff ever occurs, and if any employee dies before or while taking preretirement leave that has been scheduled, the benefits are paid to the estate. Benefits paid to employees under the plan equal about two-thirds of their regular salaries.

The union agreed to an offset of the preretirement leave plan payments against contributions required to be made by the company to its supplemental unemployment benefit plan trust account under its collective bargaining agreement with the union. The company uses that account to pay supplemental unemployment benefits to its employees who are laid off. The preretirement leave benefit plan is not a part of the supplemental unemployment benefit plan. Supplemental unemployment benefits are not wages under sections 3121(a) and 3306(b) of the Code. They are, however, treated as wages for purposes of federal income tax withholding under section 3402(o).

LAW AND ANALYSIS

Sections 3121(a) and 3306(b) of the Code provide that "wages" means all remuneration for employment. Section 3401(a) contains a similar definition.

Rev. Rul. 75-461, 1975-2 C.B. 394, holds that payments to employees under a negotiated preretirement leave benefit plan based on years of employee service and age, and established to introduce and accustom eligible employees to permanent retirement gradually, are wages under sections 3121(a), 3306(b), and 3401(a) of the Code. Benefits were about two-thirds of the employee's regular weekly wages. The payments were not made on account of retirement or sickness or accident disability and employees were permitted to choose whether to return to active status or retire permanently at the end of the leave period. The revenue ruling does not state the effect of the plan's funding on the company's supplemental unemployment benefit plan.

Rev. Rul. 57-37,, 1957-1 C.B. 18, holds that contributions conveying fully vested and nonforfeitable interests made by an employer into separate and independently controlled trusts for each employee, where each trust is created pursuant to a collective bargaining agreement for the purpose of furnishing unemployment and certain other benefits to eligible employees and paying over the balance due of such benefits to the employee upon termination of employment or retirement or to the employee's estate upon death, are wages under sections 3121(a), 3306(b), and 3401(a) of the Code.

Rev. Rul. 56-249, 1956-1 C.B. 488, holds that benefits paid to individuals by trustees of a trust created pursuant to the provisions of a supplemental unemployment benefit plan are not wages under sections 3121(a), 3306(b), and 3401(a) of the Code. The benefits are paid only to unemployed former employees of the company who are on layoff and no employee has any right, title, or interest in or to any asset of the fund or any company contributions to the fund until such time as the employee is on layoff by reason of a reduction in force or the discontinuance of a plant or operation.

Rev. Rul. 60-330, 1960-2 C.B. 46, which amplifies Rev. Rul. 56-249, holds that supplemental unemployment benefit payments made by an employer directly to qualifying former employees pursuant to the provisions of a supplemental unemployment benefit plan, but in all other material respects similar to the plan described in Rev. Rul. 56-249, are not wages under sections 3121(a), 3306(b), and 3401(a) of the Code.

In order for a payment to qualify as a supplemental unemployment benefit payment under Rev. Rul. 56-249 and Rev. Rul. 60-330, the employee must have no right, title, or interest in the payment or the company contribution to provide the payment until the employee is laid off, and the payment must be made for a layoff that is involuntary on the part of the employee. See section 3402(o)(2)(A) of the Code, which defines supplemental unemployment compensation benefits for the purpose of treating them as wages subject to income tax withholding, and section 501(c)(17)(D)(i), which defines the benefits for purposes of the exemption from federal income tax of trusts paying them. Both Code sections provide that the payment must be based on the involuntary separation of an employee from the employment of the employer only when such separation is one resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar condition.

In this case, the preretirement leave benefits do not constitute supplemental unemployment compensation benefits since benefits are provided even where there has been no layoff because of periodic slack seasons, and the benefits are guaranteed at the time the leave is scheduled. The fact that funding of the preretirement leave plan reduced the company's supplemental unemployment benefit plan contribution does not convert the preretirement leave payments to supplemental unemployment benefit payments.

HOLDING

Payments made to eligible employees under the company's preretirement leave benefit plan are wages under sections 3121(a), 3306(b), and 3401(a) of the Code.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 56-249 and Rev. Rul. 60-330 are distinguished and Rev. Rul. 75-461 is amplified.