REVENUE RULE 90-32

1990-1 C.B. 177, 1990-16 I.R.B. 11.

Internal Revenue Service
Revenue Ruling

REEMPLOYED FEDERAL ANNUITANT; ADJUSTED SALARY

Published: April 16, 1990

Section 3121. - Definitions, 26 CFR 31.3121(b)(6)-1: Services in employ of United States or instrumentality thereof.

(See Also 31.3121(a)(5)-1.)
(See Also Sections 3101, 3111; 31.3101-2, 31.3111-2.)

Reemployed federal annuitant; adjusted salary. The adjusted salary of a reemployed federal annuitant is not subject to the OASDI taxes of sections 3101(a) and 3111(a) of the Code, but is subject to the hospital insurance taxes of sections 3101(b) and 3111(b).

ISSUE

What portion of the salary of a reemployed federal annuitant is 'wages' for purposes of the Federal Insurance Contributions Act (FICA) when the employee's salary is reduced by an amount equal to the amount of the annuity received?

FACTS

A, a federal employee, retired in 1985 and began receiving an annuity from the Civil Service Retirement and Disability Fund (Fund). A was appointed in 1987 to a federal civil service position and continued to receive the annuity. A did not elect to be covered under the Federal Employees Retirement System (FERS) and does not perform any service described in section 3121(b)(5)(C) through (G) of the Internal Revenue Code. Under 5 U.S.C. section 8344(a) (1988), an amount equal to the annuity allocable to the period of reemployment was deducted from A's pay and deposited in the Treasury of the United States.

LAW AND ANALYSIS

Sections 3101(a) and 3111(a) of the Code impose old-age, survivors, and disability insurance taxes on employees and employers, respectively, based on wages 'received' or 'paid' for employment. Sections 3101(b) and 3111(b) impose hospital insurance taxes on employees and employers, respectively, based on wages 'received' or 'paid' for employment.

Section 3121(a) of the Code provides that for FICA purposes, the term 'wages' means all remuneration for employment, with certain specified exceptions. Section 3121(a)(5) excepts from the definition of 'wages' payments such as the annuity received by A from the Fund.

Section 3121(b) of the Code defines 'employment' for FICA purposes as any service of whatever nature performed by an employee for the person employing the employee. Section 3121(b)(5)(A) and (B)(ii) generally except from this definition service performed in the employ of the United States by an individual who is receiving an annuity from the Fund. Section 3121(u)(1) states that the exceptions provided by section 3121(b)(5) shall not apply for purposes of the hospital insurance taxes imposed by sections 3101(b) and 3111(b).

A's remuneration for current services is the salary A would otherwise receive less the reduction prescribed by 5 U.S.C. section 8344(a) (1988) (A's 'adjusted salary'). This follows because A, as a federal annuitant, is not entitled to receive the full amount of salary for the civil service position. Instead, A will continue to receive the annuity without reduction during the period of reemployment. Compare 5 U.S.C. section 8344(a) (1988) (which reduces the salary of the annuitant, but continues the annuity) with 5 U.S.C. section 8 the full salary be paid). This result is further supported by section 3121(b)(5)(B)(ii) of the Code, which recognizes for FICA purposes that an employee of the United States Government may also be receiving an annuity from the Fund. Thus, A is treated as receiving an annuity from the Fund and as receiving the adjusted salary with respect to the services that A is currently performing.

Section 3121(a)(5) of the Code operates to exempt A's annuity both from old-age, survivors, and disability insurance taxes and from hospital insurance taxes. Because A is receiving an annuity from the Fund, section 3121(b)(5) excepts A's adjusted salary from old-age, survivors, and disability insurance taxes. Under section 3121(u), however, this exception does not apply for purposes of the hospital insurance taxes.

HOLDING

The adjusted salary received by A is subject to the hospital insurance taxes imposed by sections 3101(b) and 3111(b) of the Code. No part of A's adjusted salary is subject to the old-age, survivors, and disability insurance taxes imposed by sections 3101(a) and 3111(a), and none of A's annuity is subject to the taxes imposed by sections 3101 and 3111.

DRAFTING INFORMATION

The principle author of this revenue ruling is Patricia McDermott of the Office of the Assistant Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this revenue ruling contact Ms. McDermott on (202) 566-4747 (not a toll-free call).

Rev. Rul. 90-32, 1990-1 C.B. 177, 1990-16 I.R.B. 11.