67054 Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Rules and Regulations 

(B) Establishes joint legal cutody; or, 

(C) Prohibits the child’s travel without 

the permission of both parents or the 

court; or, 

(D) Requires the permission of both 

parents or the court for important 

decisions, unless permission is granted 

in writing as provided therein. 

(ii) For passport issuance purposes, a 

court order providing for joint legal 

custody will be interpreted as requiring 

the permission of both parents. The 

Department will consider a court of 

competent jurisdiction to be a U.S. state 

court or a foreign court located in the 

child’s home state or place of habitual 

residence. Notwithstanding the 

existence of any such court order, a 

passport may be issued when 

compelling humanitarian or emergency 

reasons relating to the welfare of the 

child exist.

* * * * *

[FR Doc. 04–55520 Filed 11–15–04; 8:45 am] 

BILLING CODE 1505–01–D

DEPARTMENT OF THE TREASURY

Internal Revenue Service 

26 CFR Part 31

[TD 9159] 

RIN 1545–BD50

Payments Made by Reason of a Salary 

Reduction Agreement

AGENCY: Internal Revenue Service (IRS), 

Treasury.

ACTION: Temporary regulation.

SUMMARY: This document contains a 

temporary regulation that defines the 

term ‘‘salary reduction agreement’’ for 

purposes of section 3121(a)(5)(D) of the 

Internal Revenue Code (Code). The 

temporary regulation provides guidance 

to employers (public educational 

institutions and section 501(c)(3) 

organizations) purchasing annuity 

contracts described in section 403(b) on 

behalf of their employees. The text of 

the temporary regulation also serves as 

the text of the proposed regulation set 

forth in the notice of proposed 

rulemaking on this subject in the 

Proposed Rules section in this issue of 

the Federal Register.

DATES: Effective Date: This regulation is 

effective on November 16, 2004. 

Applicability Date: For dates of 

applicability, see § 31.3121(a)(5)–2T(b).

FOR FURTHER INFORMATION CONTACT: Neil 

D. Shepherd, (202) 622–6040 (not a tollfree number).

SUPPLEMENTARY INFORMATION: 

Background 

This temporary regulation (REG–

155608–02) amends the Employment 

Tax Regulations (26 CFR part 31) by 

providing guidance relating to section 

3121(a)(5)(D). The Federal Insurance 

Contributions Act (FICA) imposes taxes 

on employees and employers equal to a 

percentage of the wages received with 

respect to employment. Code section 

3121(a) defines wages for FICA tax 

purposes as all remuneration for 

employment unless otherwise excepted. 

Code section 3121(a)(5)(D), added by the 

Social Security Amendments of 1983 

(Public Law 98–21 (97 Stat. 65)), 

generally excepts from wages payments 

made by an employer for the purchase 

of an annuity contract described in 

section 403(b). In a codification of longstanding administrative practice, 

however, section 3121(a)(5)(D) expressly 

excludes from the exception payments 

made by reason of a salary reduction 

agreement (whether evidenced by a 

written instrument or otherwise). See

Rev. Rul. 65–208, 1965–2 C.B. 383, and 

S. Rep. No. 98–23, at 41, 98th Cong., 1st 

Sess. (1983). This temporary regulation 

defines the term ‘‘salary reduction 

agreement’’ for purposes of section 

3121(a)(5)(D). 

Explanation of Provisions 

The FICA taxation of payments made 

by an employer for the purchase of 

annuity contracts described in section 

403(b) has been shaped by a 

congressional concern for the social 

security revenue base and for 

employees’ social security benefits. In 

the context of contributions for the 

purchase of such annuity contracts, 

Congress has interpreted the term 

‘‘wages’’ for FICA tax purposes more 

broadly than the term ‘‘gross income’’

for income tax purposes. See S. Rep. No. 

98–23, at 39, 98th Cong., 1st Sess. (1983) 

relating to the Social Security 

Amendments of 1983 (Public Law 98–21 

(97 Stat. 65)).

An amount is generally includible in 

wages for FICA tax purposes at the time 

it is actually or constructively paid by 

the employer and received by the 

employee. Additionally, wages 

generally include an amount that an 

employer contributes to a plan only if 

the employee agrees to reduce his or her 

compensation. For income tax purposes, 

however, section 403(b) provides an 

exclusion from gross income for 

contributions made by an employer, 

including contributions made pursuant 

to a cash or deferred election or other 

salary reduction agreement. See section 

1450(a) of the Small Business Job 

Protection Act of 1996 (Public Law 104–

188 (110 Stat. 1755)). Conversely, for 

FICA tax purposes, wages include 

contributions made by an employer to a 

section 403(b) contract pursuant to a 

cash or deferred election or other salary 

reduction agreement. See S. Rep. No. 

98–23, at 40–41, 98th Cong., 1st Sess. 

(1983). Thus, while section 403(b) 

excludes from gross income 

contributions made pursuant to certain 

cash or deferred elections, such 

contributions are made by reason of a 

salary reduction agreement under 

section 3121(a)(5)(D) and are included 

in wages for FICA tax purposes. 

Consequently, this temporary regulation 

explicitly provides that the term ‘‘salary 

reduction agreement’’ includes a plan or 

arrangement whereby a payment will be 

made if the employee elects to reduce 

his or her compensation pursuant to a 

cash or deferred election as defined at 

§ 1.401(k)–1(a)(3) of the Income Tax 

Regulations. 

Pursuant to regulation § 1.401(k)–

1(a)(3)(iv) of this chapter, a cash or 

deferred election does not include a 

one-time irrevocable election made 

upon an employee’s commencement of 

employment with the employer. 

Similarly, pursuant to section 402(g)(3), 

while the term ‘‘elective deferrals’’

generally includes any employer 

contribution to purchase an annuity 

contract under section 403(b) under a 

salary reduction agreement (within the 

meaning of section 3121(a)(5)(D)), an 

employer contribution made pursuant to 

a one-time irrevocable election is not 

treated as an elective deferral. See H.R. 

Rep. No. 100–795, at 145, 100th Cong., 

2d Sess. (1988) and S. Rep. No. 100–

445, at 151, 100th Cong., 2d Sess. (1988) 

relating to the amendment of section 

402(g)(3) by the Technical and 

Miscellaneous Revenue Act of 1988 

(Public Law 100–647 (102 Stat. 3342)). 

Notwithstanding that section 403(b) 

contributions made pursuant to a onetime irrevocable election are excluded 

from cash or deferred elections under 

section 401(k) and from elective 

deferrals under section 402(g)(3), such 

contributions are made pursuant to a 

salary reduction agreement. If the 

employee had not made a one-time 

irrevocable election, the employer’s 

cash payment to the employee would be 

includible in the employee’s gross 

income and in wages for FICA tax 

purposes. Consequently, this temporary 

regulation explicitly provides that the 

term ‘‘salary reduction agreement’’

includes a plan or arrangement whereby 

a payment will be made if the employee 

elects to reduce his or her compensation 

pursuant to a one-time irrevocable 

election made at or before the time of 

Federal Register / Vol. 69, No. 220 / Tuesday, November 16, 2004 / Rules and Regulations 67055

initial eligibility to participate in such 

plan or arrangement (or pursuant to a 

similar arrangement involving a onetime irrevocable election). 

A contribution that is made as a 

condition of employment and that 

reduces an employee’s compensation 

generally constitutes an employee 

contribution includible in wages for 

FICA tax purposes. See section 1015 of 

the Employee Retirement Income 

Security Act of 1974 (Public Law 93–

406 (88 Stat. 829)) relating to amounts 

designated as employee contributions 

under section 414(h) of the Code; see 

also H.R. Rep. No. 93–807, at 145, 93d 

Cong., 2d Sess. (1974) wherein Congress 

stated that ‘‘[u]nder present law, 

contributions which are designated as 

employee contributions are generally 

treated as employee contributions for 

purposes of the Federal tax law.’’ Code 

section 414(h)(1) merely codified the 

existing administrative and judicial 

treatment of amounts designated as 

employee contributions. See, for 

example, Howell v. United States, 775 

F.2d 887 (7th Cir. 1985) holding that 

mandatory contributions to a state 

retirement plan of amounts designated 

as employee contributions and withheld 

from the employee’s salary are 

employee contributions includible in 

the employee’s gross income. Thus, as 

with employer contributions made 

pursuant to cash or deferred elections 

and one-time irrevocable elections, 

employer contributions that are made as 

a condition of employment and in lieu 

of mandatory employee contributions 

and that reduce an employee’s 

compensation are amounts otherwise 

includible in wages for FICA tax 

purposes. 

Whether a contribution that reduces 

an employee’s compensation is required 

by statute, contract, or otherwise, an 

employee implicitly agrees to the 

contribution as a condition of 

employment. The acceptance of 

employment and the subsequent 

performance of services manifests the 

employee’s agreement to the 

contribution. See H.R. Conf. Rep. No. 

98–861, at 1415, 98th Cong., 2d Sess. 

(1984) relating to the amendment of 

section 3121(v)(1)(B), wherein Congress 

stated that ‘‘[t]he conferees intend that 

the term salary reduction agreement also 

includes any salary reduction 

arrangement, regardless of whether 

there is approval or choice of 

participation by individual employees 

or whether such approval or choice is 

mandated by State statute.’’ In Public 

Employees’ Retirement Board v. 

Shalala, 153 F.3rd 1160, at 1166 (10th 

Cir. 1998), the court noted that ‘‘an 

employee’s decision to go to work or 

continue to work * * * constitutes 

conduct manifesting assent to a salary 

reduction.’’ Accordingly, the court held 

that a designated employee contribution 

picked up by an employer with a 

corresponding reduction in the 

employee’s gross salary constitutes a 

contribution made pursuant to a salary 

reduction agreement. Similarly, this 

temporary regulation explicitly provides 

that the term ‘‘salary reduction 

agreement’’ includes a plan or 

arrangement whereby a payment will be 

made if the employee agrees as a 

condition of employment (whether such 

condition is set by statute, contract, or 

otherwise) to make a contribution that 

reduces the employee’s compensation. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that section 

553(b) and (d) of the Administrative 

Procedure Act (5 U.S.C. chapter 5) do 

not apply to this regulation. For the 

applicability of the Regulatory 

Flexibility Act (5 U.S.C. chapter 6), refer 

to the Special Analyses section in the 

preamble to the notice of proposed rule 

making published in the Proposed Rules 

section in this issue of the Federal 

Register. Pursuant to section 7805(f) of 

the Code, this temporary regulation will 

be submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on its 

impact on small businesses. 

Drafting Information 

The principal author of this regulation 

is Neil D. Shepherd, Office of Division 

Counsel/Associate Chief Counsel (Tax 

Exempt and Government Entities). 

However, other personnel from the IRS 

and Treasury Department participated 

in its development.

List of Subjects in 26 CFR Part 31

Employment taxes, Income taxes, 

Penalties, Pensions, Railroad retirement, 

Reporting and recordkeeping 

requirements, Social security, 

Unemployment compensation.

Amendments to the Regulations

■ Accordingly, 26 CFR part 31 is 

amended as follows:

PART 31—EMPLOYMENT TAXES

■ Paragraph 1. The authority citation for 

part 31 continues to read in part as 

follows:

Authority: 26 U.S.C. 7805 * * *

■ Par. 2. Section 31.3121(a)(5)–2T is 

added to read as follows:

§ 31.3121(a)(5)–2T Payments under or to 

an annuity contract described in section 

403(b) (temporary). 

(a) Salary reduction agreement 

defined. For purposes of section 

3121(a)(5)(D), the term salary reduction 

agreement means a plan or arrangement 

(whether evidenced by a written 

instrument or otherwise) whereby 

payment will be made by an employer, 

on behalf of an employee or his or her 

beneficiary, under or to an annuity 

contract described in section 403(b)—

(1) If the employee elects to reduce 

his or her compensation pursuant to a 

cash or deferred election as defined at 

§ 1.401(k)–1(a)(3) of this chapter; 

(2) If the employee elects to reduce 

his or her compensation pursuant to a 

one-time irrevocable election made at or 

before the time of initial eligibility to 

participate in such plan or arrangement 

(or pursuant to a similar arrangement 

involving a one-time irrevocable 

election); or 

(3) If the employee agrees as a 

condition of employment (whether such 

condition is set by statute, contract, or 

otherwise) to make a contribution that 

reduces his or her compensation. 

(b) Effective date.

(1) This section is applicable 

November 16, 2004. 

(2) The applicability of this section 

expires on or before November 15, 2007.

Approved: November 1, 2004. 

Nancy Jardini, 

Acting Deputy Commissioner for Services and 

Enforcement.

Gregory Jenner, 

Acting Assistant Secretary of the Treasury.

[FR Doc. 04–25236 Filed 11–15–04; 8:45 am] 

BILLING CODE 4830–01–P

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117

[CGD07–04–136] 

Drawbridge Operation Regulations; 

Broward County Bridges, Atlantic 

Intracoastal Waterway, Broward 

County, FL

AGENCY: Coast Guard, DHS.

ACTION: Notice of temporary deviation 

from regulations; request for comments. 

SUMMARY: The Commander, Seventh 

Coast Guard District, has approved a 

temporary deviation from the