Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-25

1977-1 C.B. 301

Section 3121 -- Social Security Definitions

IRS Headnote

Deferred compensation; retired executive. A company's payments to its executives because of and upon or after retirement after attaining age 65 (the age provided in its separate pension plan), under a deferred compensation plan providing for payments upon termination of employment for any reason at any age, are excludable from wages under the FICA and FUTA but are wages for purposes of income tax withholding.

Full Text

Rev. Rul. 77-25

Advice has been requested whether, under the circumstances described below, deferred compensation payments made by a company to its retired executives (salaried employees in managerial and similar key positions) are excludable from "wages" for purposes of sections 3121(a)(13) of the Federal Insurance Contributions Act, 3306(b)(10) of the Federal Unemployment Tax Act, and 3401(a) of the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

Under its deferred compensation plan, the company credits to a reserve account, at the end of each calendar year during which an executive is employed, amounts that are to be paid to the executive, or a designated beneficiary, upon termination of the executive's employment for any reason at any age. The payments are to be made over a ten year period in equal monthly installments. The company has a separate pension plan, which specifies that the retirement age for its employees is 65.

Sections 3121(a)(13) of the Federal Insurance Contributions Act and 3306(b)(10) of the Federal Unemployment Tax Act exclude from wages any payment or series of payments by an employer to an employee or dependents paid upon or after the termination of an employee's employment relationship because of death, retirement for disability, or retirement after attaining a specified age. The age must be specified in a pension plan of the employer or under a plan established by the employer that makes provision for employees generally or a class or classes of employees (or for such employees or class or classes of employees and their dependents) and the payment or series of payments must be made under the latter kind of plan. There is no exclusion under these sections for any payment or series of payments that would have been paid had the employee's employment relationship not been so terminated.

Sections 31.3121(a)(13)-1(a) and 31.3306(b)(10)-1(a) of the Employment Tax Regulations provide that a payment or series of payments made under the circumstances described in sections 3121(a)(13) and 3306(b)(10) is excluded from wages even if made pursuant to an incentive compensation plan that also provides for the making of other types of payments.

In the instant case, payments may be made under the company's deferred compensation plan for a number of reasons, including retirement. In addition, although the plan does not specify a retirement age, the company has a separate pension plan that does specify that the retirement age for its employees is 65.

Accordingly, deferred compensation payments made by the company to its executives because of and upon or after retirement after attaining the age of 65 (the age specified in the separate pension plan) are excludable from wages under sections 3121(a)(13) of the Federal Insurance Contributions Act and 3306(b)(10) of the Federal Unemployment Tax Act. Since there are no similar exclusions for purposes of the Collection of Income Tax at Source on Wages, the payments are wages for such purposes.

See Rev. Rul. 69-286, 1969-1 C.B. 253, which holds that a contingent allotment paid by a corporation after January 2, 1968, to an employee whose employment relationship has been terminated because of retirement (at the retirement age specified in the corporation's pension plan) is excluded from wages pursuant to sections 3121(a)(13) of the Federal Insurance Contributions Act and 3306(b)(10) of the Federal Unemployment Tax Act, but is included in wages for Federal income tax withholding purposes.