SSR 75-2: SECTIONS 209 and 218(e) (42 U.S.C. 409 and 418(e)) -- WAGES -- DEFERRED COMPENSATION -- WHEN WAGES ARE PAID -- POINT AT WHICH SOCIAL SECURITY CONTRIBUTIONS LIABILITY ATTACHES TO DEFERRED COMPENSATION
20 CFR 404.1026(c) and 404.1222(a)
This ruling distinguished from SSR 73-30, C.B. 1973, p. 48
- Where State employees voluntarily executed agreements for participation in a deferred compensation program whereby amounts were deducted from their salaries for use in funding annuity or insurance contracts and where a question arose as to whether contributions were due under section 218 of the Social Security Act with regard to the amounts deducted, held, for purposes of the Act, the amounts deducted constituted wages paid to such employees at the time of the deduction.
A question has been raised with respect to the status, for purposes of the Social Security Act, of amounts used to fund a deferred compensation plan which is available to all employees of the State of Y.
The Legislature of the State of Y enacted a bill which authorized the State or any political subdivision thereof to contract with any employee of such State or political subdivision to defer all or a portion of the employee's compensation and, with the consent of the employee, to secure for the employee a life insurance annuity or mutual fund contract for the purpose of funding a deferred compensation program for the employee. The bill also provides that payroll deductions shall be made in each instance and that any amounts deferred under the program shall not be subject to taxation until distribution is actually made to the employee.
An employee eligible to participate in the plan in its initial year must execute an agreement to defer compensation not yet earned prior to or within a reasonable time after the plan becomes effective. All other agreements to defer compensation must be made prior to the beginning of the calendar year in which the compensation will be earned. The amount of compensation to be deferred may be changed by any participant but such change must be made prior to the beginning of the calendar year in which it is to become effective.
The statutory scheme contemplated that the State would create a special book account to which amounts deferred under the plan would be credited. The account is to be increased or decreased by gains or losses realized on investments made with the deferred amounts. The State is authorized to purchase fixed or variable life insurance or annuity contracts or mutual fund contracts. In the agreement with the employee, the State is styled as "the owner, premium payor and beneficiary" of each such investment contract.
All investments purchased under the program are to be general, upledged and unrestricted assets of the State. Employees participating in the plan, or their beneficiaries, would have no vested, secured, or preferred interest in the fund, but would have only a contractual right to receive benefits provided for in the agreement.
Benefits under the plan will be paid to an employee upon his retirement or termination of employment with the State, or, in the case of death of an employee, to his beneficiary.
While an employee's agreement is in effect, all investments in his account will be reflected at cost. Prior to the day the first benefit payment is made to the employee or his beneficiary, adjustment will be made for gains and losses on investments. The State, at its discretion, may pay the value of the account (1) in a lump-sum payment, (2) in installment payments over a period of 60 to 240 months, or (3) in payments for the lifetime of the employee unless the employee should not live to receive 120 monthly payments, in which event the balance would be paid to the employee's beneficiary.
The State, in its discretion, may approve an application by a participating employee for an emergency withdrawal of funds, but only in the event of a serious emergency which is beyond the employee's control and which would cause that employee great hardship if the emergency withdrawal were not permitted. Any emergency withdrawal which is approved will be limited to the amount necessary to meet the emergency situation.
Deductions made from wages to fund the plan do not affect a reduction of any retirement, pension or similar benefit otherwise provided by law.
The specific issues presented for resolution are (1) whether the amounts deferred under the deferred compensation plan constitute wages for purposes of determining liability for contributions due under the Social Security Act and (2), if so, when such wages are considered paid to the employee.
In most instances, the question of whether compensation constitutes wages subject to social security taxes depends upon whether it constitutes remuneration for employment under that portion of the Internal Revenue Code known as the Federal Insurance Contributions Act. See section 3121(a) of the Code. That statute is administered by the Internal Revenue Service, which has primary responsibility for the proper interpretation of its provisions. Under section 3121(b)(7) of the Code, however, the Federal Insurance Contributions Act is inapplicable to service performed by individuals as employees of State or local governments. Thus, the provisions of that statute are not controlling in determining whether the compensation of State and local employees constitute wages.
Instead, the status of the compensation being discussed herein depends upon whether it constitutes wages and when it is considered paid within the meaning of the Social Security Act. That Act is administered by the Social Security Administration and the proper construction of its provisions are within the jurisdiction of that agency.
Section 209 of the Social Security Act, 42 U.S.C. 409, defines wages as remuneration for employment with specified exceptions which are not relevant herein. By virtue of section 210(a)(7)(A) of the Act, 42 U.S.C. 410(a)(7)(A), unlike its concomitant in the Federal Insurance Contributions Act, employment includes services of State and local employees which are included under an agreement for social security coverage between a State and the Secretary of Health, Education, and Welfare, as provided for in section 218 of the Act, 42 U.S.C. 418.
The State of Y has entered into such a coverage agreement and the services of employees participating in the deferred compensation plan are included under that agreement. Consequently, compensation paid for those services is remuneration for employment and thus constitutes wages within the meaning of the Social Security Act.
Under 218(e)(1)(A) of the Social Security Act, 42 U.S.C. 418(e)(1)(A), a State is required to pay certain contributions on wages included in its coverage agreement, at such times as the Secretary of Health, Education, and Welfare may be regulations prescribe. Social Security Administration Regulations No. 4, section 404.1222(a), 20 C.F.R. 404.1222(a), insofar as applicable herein, provides that the State's liability for such contributions attaches at the time that the wages are "actually or constructively paid" to the employee. This raises the question of whether the so-called deferred compensation herein is "paid" at the time of deferral or at the time of actual distribution to the employee.
The answer to that question is not affected by State legislation which purports to preclude taxation of any sum deferred under its plan until distribution is actually made to the employee. Since liability for payment of contributions once a State has properly entered into an agreement under section 218, is a matter of Federal law, the operative provisions of such law may not be nullified or modified by State law.
Rather the question of when liability arises for contributions due under section 218 of the Act requires an examination of the facts of each case to determine when wages are considered to be paid within the meaning of section 404.1222(a) of Social Security Administration Regulations No. 4, 20 C.F.R. 404.1222(a). The determinative fact in this case is that employees participating in the State of Y's deferred compensation plan have voluntarily chosen to have the employer deduct certain amounts from their salaries for payment into investment accounts.
For purposes of social security coverage, those employees are in the same position that they would have been in if they had actually received the amounts deducted and personally paid them into the investment accounts. In other words, the payroll deductions in this case assist the employees to "spend" their own funds; the employer is a conduit for that purpose. Such a situation clearly comes within the purview of Social Security Administration Regulations No. 4, section 404.1026(c); 20 C.F.R. 404.1026(c). That section provides that amounts deducted from wages of an employee by an employer constitute wages paid to the employee at the time of the deduction.
This accords with decisions of the United States Supreme Court which hold that, for purposes of determining when liability for employment taxes attaches, the time at which an employee's earned wages were considered to be paid was not affected by a contractual arrangement for diversion of such wages to another party. For example Lucas v. Earl, 281 U.S. 111 (1930), points out:
- There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it.
Also, see United States v. Basye et. al., 410 U.S. 441 (1973).
SSR 64-59, Cumulative Bulletin 1964, p. 48, is an appropriate administrative precedent for the present case. In that ruling, as in this one, certain State employees voluntarily agreed to have amounts deducted from their salaries for use in financing later payments to them of annuities. It was determined that the amounts deducted were then creditable as wages paid to the employees for purposes of the Social Security Act.
It is recognized that, in SSR 73-30, Cumulative Bulletin 1973, p. 48, where certain amounts were paid to a former employee during his post-retirement years under an agreement which treated those amounts as deferments of portions of previously earned salary, it was determined that such amounts were wages for the years in which they were physically paid out to the employee. On the basis of the facts stated in that ruling, however, it appears only that such payments were a requirement of the employment contract itself; there is no evidence that, like the employee here, the employee there voluntarily executed a deferred compensation agreement. The employee involved in that case had no right to immediate possession of his earned wages and could receive them only at a future date. Hence, that ruling is not determinative in the present situation.
While not previously so stated, the payments in SSR 73-30 were also not excluded as wages under section 209(m) of the Social Security Act. That specific wage exclusion, in addition to other criteria, generally requires that payments be made under a plan established by the employer which makes provision for his employees generally or a class or classes of his employees. The payments which were the subject of SSR 73-30 were not made under such a plan.
In summary, the question of when wages are considered to be paid for purposes of the Social Security Act must be determined on the basis of the facts of each case. Thus, except for wages withheld by mandate of Federal or State law, if an employee has no option or right to receive wages he earned until a certain future date, the wages may not be considered paid before such date. On the other hand, where, as in the present case, an employee has a right to immediate possession of his earned wages but agrees to have certain amounts deducted from his pay for use in financing an annuity, the deductions made pursuant to that agreement constitute the employee's exercise of his right to spend his wages, and the amounts deducted must therefore be considered as wages which were paid to the employee at the time of deduction.
Accordingly, for purposes of determining liability for contributions due under section 218 of the Social Security Act, where deductions are made from the salaries of employees of the State of Y under agreements which the employees have voluntarily executed pursuant to the State's deferred compensation plan, the amounts deducted may be credited as wages paid to the employees at the time of the deductions.