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457 Plan as FICA Alternative

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4 replies to this topic

#1 Scott


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Posted 08 June 1999 - 02:52 PM

Under Code Section 3121(B)(7)(F), the wages of an employee of a state or local government who does not participate in a "retirement system" are subject to FICA withholding. Under the regulations, a 457(B) plan constitutes a "retirement system" if a participant defers at least 7.5% of his or her compensation. The Texas Teachers' Retirement System does not cover part-time and temporary employees. A school district desires to establish a 457(B) plan for part-time and temporary employees, under which the employees would be required to make salary reduction contributions of 7.5% of their wages, so that the plan constitutes a "retirement system" and the district does not have to withhold FICA taxes.

It appears to me that this strategy should work, with one possible exception. Section 457(B)(4) states that a plan must provide that "compensation will be deferred for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month." If part-time and temporary employees are required to defer 7.5% of their wages as a condition of employment, does this satisfy the requirement of an "agreement providing for such deferral"?

I would appreciate any comments or help from anyone who has looked into this issue.

#2 Guest_named_CVCalhoun_*

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Posted 10 June 1999 - 05:51 PM

The reference in the regulations should not preclude a 457 plan in which contributions are mandatory from meeting the requirements. What the IRS was concerned about was the opposite--a situation in which employees might be deciding whether or not to defer money under a 457 plan after the money had already been earned. If the employee has no choice about whether to defer the money, that concern is avoided.
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#3 Ralph Amadio

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Posted 12 September 1999 - 10:11 PM

State law may be the issue. In California, plans may only be voluntary in nature, since 457 plans are salary reduction arrangements. A possible problem arises when the 457 needs to be mandatory, as with a PST plan. Some agencies have stated that the plan is a condition of employment, which supposedly makes it mandatory, but I would question that issue, since state law says that 457's may only be voluntary. Another issue arises if the plan must be collectively bargained. A last and more important issue is to determine who becomes the fiduciary, particularly if employees may direct the investments, since 404(c) of ERISA does not apply to governmental plans. We were successful in California in passing legislation allowing fiduciary layoff for 457 and 401 plans in 1998. Check your local statute.

#4 Dowist


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Posted 15 September 1999 - 11:55 AM

A few questions>

It seems to me that there is also a requirement that the employees vote on the FICA drop.

Isn't there also a requirement for employer contributions?

Also, does a 457 plan meet the definition of retirement plan?

#5 Ralph Amadio

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Posted 16 September 1999 - 01:28 AM

With the exception of a collectively bargained arrangement, employees may be mandated into a compulsory plan arrangement in most states. The final 3121(B)7(f)regulations for Part time seasonal and temporary (PST) employees state that a 457 plan is an acceptable alternative plan, and is considered a retirement system if not prohibited by local (state) law. There is no employer contribution requirement under either the DC or DB final regulations for PST's. Full time employees fall under different Social Security regulations and are dealt with separately. See Chapter 10 of the Social Security Handbook which covers state and local employees as well for guidance as to FTE's.