FICA Replacement Plan and Medicare Tax

[Guest gaham]

I represent a governmental employer that maintains a FICA replacement plan for certain collectively bargained employees. The contribution is 7.5% of pay. The employer is grousing about it's obligation to still pay Medicare taxes. They don't understand why they can't reduce the 7.5% by the amount of the Medicare rate. I've just read that the IRS plans new guidance this year on "the application of the Hospital Insurance tax to employees covered under section 3121(B)(7)(F)". Does this represent a glimmer of hope for my client? Can anyone give me an idea of what the IRS guidance will involve?

[Mike Preston]

Everything I've read on these plans indicates that the total contribution needs to be 7.5%. This can be funded by employer or employee dollars. This compares to 12.4% which would be funded 6.2% from the employer and 6.2% from the employee were they to instead be subject to FICA taxes.

If the above is true, couldn't the employer modify the plan to call for 6.2% by the employer and 1.3% by the employee? I know this would seem like a cutback to the employees, but it would be something that would get the employer where they want to be.

Maybe just for new hires?

Obviously they need to be concerned with the employee relations issues, so the above idea may not have any merit in their particular situation.

[MGB]

The employees are eligible for Medicare when they retire, no matter what kind of replacement retirement plan they have. Therefore, they must pay the HI tax. No new guidance can change that fact -- it is the law.

There are technical issues with grandfathered older employees that are not covered by Medicare. I presume that is what the guidance will be focusing on.

[MGB]

The IRS just released a new publication (963) on this issue, but there really is no new guidance. It is just a comprehensive review of all of the different state agreements and rules that apply.

http://www.ssa.gov/slge/pubs.htm

[Guest Peaches]

All employees hired after 1986 are mandatorily required to pay medicare tax. The 7.5% of compensation is the requirement for the defined contribution plan to be considered comparable to Social Security. It can be from employer and employee contributions, separate or combined. Pub. 963 contains good explanations of the applicability of social security and medicare.