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Question re: FICA and qualified governmental excess benefit plans


Guest Letocha
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Guest Letocha

I have a question about FICA and qualified governmental excess benefit plans. My thinking is as follows:

1. Section 3121(a)(5)(E) excludes from wages (and therefore FICA) payments made to an employee under an exempt governmental deferred comp plan.

2. Section 3121(v)(3) defines an exempt governmental deferred comp plan, for purposes of Section 3121(a)(5), as any deferred comp plan maintained by a governmental entity. There is an exception in Section 3121(v)(3)(A) for plans to which Section 83, 402(B), 403©, 457(a) or 457(f)(1) applies. The additional exceptions in Section 3121(v)(3)(B) and © are not relevant in this instance.

3. Imagine a qualified governmental excess benefit plan that meets the requirements of Section 415(m) (no election, no trust, etc.). Such a plan would not be subject to Section 457(f)(1) because Section 457(f)(2)(E) excludes plans described in Section 415(m) from the reach of Section 457(f)(1).

4. My question: based on the foregoing, could a qualified governmental excess benefit plan, as described in Section 415(m), also satisfy the Section 3121(v)(3) definition of an exempt governmental deferred comp plan and, therefore, could payments to the plan be exempt from FICA? The exception in Section 3121(v)(3)(A) wouldn't necessarily apply, because the qualified governmental excess benefit plan would not be subject to Section 457(f)(1), thanks to Section 457(f)(2)(E). If none of the other Code Sections listed in Section 3121(v)(3)(A) applied, could the qualified governmental excess benefit plan also be an exempt governmental deferred comp plan?

If I am correct, this must be an unanticipated consequence of the SBJPA, which, after all, aimed in part to equalize the income tax treatment of governmental and for-profit employers' excess benefit plans. For some governmental plans to enjoy a FICA loophole must be an oversight. An equally plausible scenario is that I am missing something fundamental in this analysis. I'd appreciate any insight anyone could provide.

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I'd say your analysis is right on both counts--the law does permit the 3121(v)(3) exemption, and that provision was an accident.

The 3121(v)(3) language was passed before 415(m) existed. Its intent was to grandfather old plans which were exempt from sections 457, etc., so that they would also be exempt from FICA taxes. It excluded the nonqualified deferred compensation plans which existed at the time it was passed.

Because no amendment was made to 3121(v)(3) when section 415(m) was enacted, the statute by its terms would exempt 415(m) plans from FICA taxes. However, because the result was obviously unintentional, the IRS isn't thrilled with it.

The result has been that IRS is for the moment punting on this issue. See, for example, the private letter ruling issued to the New York State and Local Retirement Systems on its excess plan. The Systems had requested a ruling that, "The contributions, benefit accruals and the payments under the Excess Plans will not be subject to FICA taxation." The IRS responded by stating, "Revenue Procedure 99-1 I.R.B. 6, section 5.14, provides that the Internal Revenue Service will not issue a letter ruling if the ruling request presents an issue that cannot be readily resolved before a regulation or any other published guidance is issued. After careful consideration of your request, we have concluded that the question of FICA tax treatment of a qualified governmental excess benefit arrangement under Code section 415(m) cannot readily be resolved before published guidance is issued. Consequently, we are unable to rule on that portion of the request."

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Employee benefits legal resource site

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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  • 8 years later...
Guest jgarner

With regard to FICA and qualified governmental excess benefit plans, is there any new guidance as to whether distributions/payments are subject to FICA (employer taxes)? Also, for those governmental employers or plan administrators that have taken the position to withhold FICA, is a W-2 form being used to report? Any guidance is appreciated. Thank you.

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