Is 401(a) Tax Deferred?

[Guest John O]

We are a governmental entity. We have adopted a 401(a) defined contribution plan as our alternative retirement plan in lieu of Social Security beginning Oct 1, 2001.

Is the 401(a) tax deferred from federal, state, and/or medicare?

The agency is contributing 6.2% and the employee is contributing 6.2% (mandatory) to this 401(a) in place of Social Security. How does the W-2 reflect these contributions? Thanks!

[Carol V. Calhoun]

The employer contributions are automatically tax-deferred for federal income tax and federal income tax withholding purposes, and exempt from Medicare taxes.

The employee contributions will normally not be tax-deferred. Through an arrangement known as a "pick-up" arrangement under Internal Revenue Code section 414(h)(2), they can be made to be tax-deferred for federal income tax and federal income tax withholding purposes. Check revenue rulings and private letter rulings under Code section 414(h)(2) for details and specific requirements. Regardless of whether a pick-up arrangement is adopted, however, the contributions will be subject to Medicare taxes under Code section 3121(v).

[Guest Ralph Amadio]

Carol, I seldom have disagreement with learned counsel, however you state that contributions under the plan described are subject to SSA contributions. I believe, since this plan is intended to be a SSA alternative under 3121(B) 7 (F), the circumstances would preclude such treatment. I do agree that the contributions would be subject to Medicare. Comments?

[Carol V. Calhoun]

Sorry, I started typing without fulling engaging brain. And between terrorism (my office is 2 blocks from the White House) and tornados, I've been a bit absent here lately. You're right, Ralph, and I have edited my post to clarify that only the Medicare portion of FICA taxes, not the Social Security portion, would be due if (a) the entity is not subject to a Section 218 agreement and (B) the plan meets the requirements for being a substitute for Social Security.

[Guest Ralph Amadio]

Perfectly understandable, under the circumstances. As a military vet, have had similar "stress cracks" in my thinking lately. God bless.