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Guest edwardc3000

YIKES ! Sis just got a 10K Bill

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Guest edwardc3000

Hello..

Please forgive me if this is posted in the wrong thread..BUT

My sister has worked for a LARGE THREE LETTER computer company since 1989.

She went out on a medical leave of absence in March of 2004 after a troublesome pregnancy, and resigned from the company last month.

She just received a letter which states that she owes over $10,000 by the end of March due to excessive benefits into her qualified pension plan. Essentially it states that both she and the company owe FICA and Medicare tax due to "recent changes in regulations, require that both you and XXX are required to pay FICA tax on excess pension benefits that you accrue each year".

My questions are

1) Why had this suddenly occurred..? She has not withdrawn any pension monies, nor was she a highly paid employee ie, less than $100K per annum

2) Are there any offsets to this payment ie, if she pays the $10K, is it deductible against regular earnings on her 2006 Federal return

3) What can be done to avoid this surprise in the future?

Your response(s) are very welcome and not construed as OFFICIAL professional advice for which there would be any liability. Recommended reading would be a welcome alternative to any other feedback.

Thank you

ED

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This is new one for me.

First of all, have you checked with the XXX's HR dept/plan adminstrator/consultant to see if this is real and not a hoax from someone.

Secondly, the benefits/allocations are calculated by the XXX's consultant/TPA. So if a mistake was made then they are responsible for the error and not the emplyee.

Thirdly, erronously computed benefit accruals or allocations are just book entries which can be corrected before they are paid out. So I don't know how the excess benefit accruals can come about.

Finally, assuming there are no penalties invloved, a FICA bill of $10k for the employee implies an imputed income of about $130k - that seems a lot of "excess accrual" for someone with <$100k pay.

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Is it possible she had a loan from the plan and this is a 'deemed' distribution?

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Is it possible she had a loan from the plan and this is a 'deemed' distribution?

There is no FICA on distributions - deemed or otherwise.

This looks like a hoax to me - a tax would normally come from the IRS and not the employer.

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Guest edwardc3000

First, I sincerely appreciate the feedback..many, many thanks..

Next, this is not possibly a hoax. I have seen both the document and the envelope in which it was received and it is a bonafide letter from XXX.

Perhaps I'm not asking the right question.. Here is the letter that was received in Dec, 2006.

Dear Benefits Recipient:

We are writing to let you know about an upcoming FICA tax obligation that must be recognized and paid on your XXX Personal Pension Account excess benefit accrual.This FICA tax obligation will be due in March 2007. We wanted to let you about this obligation in advance, so that you may plan accordingly. As a reminder, FICA tax is made up of both an employee contribution and an employer contribution for Medicare (1.45%) and Social Security (6.2%)

You have accrued an "excess benefit" in the XXX Personal Pension Account because the IRS limits the amount of earnings that may be used to calculate your tax-qualified pension. A portion of your accrued benefit exceeds this IRS limit.As a result, rather than limit your total benefit, XXX allows you to continue to accrue a benefit above the IRS limit, and pays this excess benefit out of operating funds.

The excess benefit, which is considered a non-qualified deferred compensation arrangement, is subject to different tax treatment than your ordinary pension benefit. While the IRS, does not require that FICA be collected from accruals under a tax-qualified pension, regulations changed recently and now both you and XXX are required to pay FICA tax on excess pension benefits that you accrue each year.

XXX will apply the FICA tax rate to the value of your vested excess benefit accrued through December 31, 2006, plus interest on that amount to the March 31, 2007 payment date. Interest will be calculated at the IRS Applicable Federal Rate.

This tax on your PPA excess benefit accrual through December 31, 2006 is 2007 tax event. As a result, the FICA withholding will be reported in 2007. The amount of the accrued excess benefit, with interest, will apply to 2007 Social Security wage base of $97,500. If you earn over $97,500 in 2007, you will not owe social security on wages about the $97,500 limit.

Please be aware that this is an annual tax event.For every year that you accrue an excess pension benefit, XXX will be required to calculate the annual excess benefit accrual and collect the FICA tax on your newly accrued excess benefit.

Advice, comments, suggestions..please

Thanks

ED

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Guest mjb

The program is looks like a non qualfied retirement plan for which FICA tax is due by the employhee in the year for which the excess benefit is vested. For most employees the FICA tax due on a non Q plan is taken out of their salary but there is a problem if the employee is accruing non forfeitable benefits and is not collecting any salary becuase the employer must pay both the employee's and the employer share of the FICA tax to the IRS.

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I think we all have a problem here. Based on your first post, your sister never made over $100,000 and so never exceeded the pay the IRS allows to be used for benefits. Something is missing here. It is highly unusual for a non-executive to have such an employer funded plan and not know about it.

In addition, I cannot determin if the $10,000 is the entire FICA, in which case your sister's portion would be $5,000, or just your sister's portion.

If your sister's portion is $5,000, that translates to a $65,000 (approximately) benefit for a plan I an suspicious of already.

If your sister's portion is really $10,000 then that translates to a benefit of about $272,000!

I agree that when amounts in a non-qualified plan are no longer subject to a substantial risk of forfeiture they amounts become subject to FICA. I also know that the amounts may not be available for distribution. When these two events coincide it is a problem.

Your sister needs to find out how she came to be in the plan since either the explanation you received does not make sense, OR you sister has seriously misrepresented her income to you.

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Guest edwardc3000
I think we all have a problem here. Based on your first post, your sister never made over $100,000 and so never exceeded the pay the IRS allows to be used for benefits. Something is missing here. It is highly unusual for a non-executive to have such an employer funded plan and not know about it.

Sorry if I was unclear. I didnt mean she NEVER made over $100K. I said she was on a medical LOA since March of 2004, during which she had no earnings. She absolutely knew she had a pension plan, but she did not work in 2004, 2005 or 2006, yet no similiar bill was presented.

In addition, I cannot determin if the $10,000 is the entire FICA, in which case your sister's portion would be $5,000, or just your sister's portion.

The $10K is the total bill, which I THINK is part FICA and part medicare, based on the way I read it

If your sister's portion is $5,000, that translates to a $65,000 (approximately) benefit for a plan I an suspicious of already.

What is it that makes you suspicious? When she was hired, it was company funded pension plan, which was converted to a cash balance plan in 1999.

If your sister's portion is really $10,000 then that translates to a benefit of about $272,000!

It's quite possible that the lump sum benefit equals $272K. What does that have to do with the matter at hand, please..?

I agree that when amounts in a non-qualified plan are no longer subject to a substantial risk of forfeiture they amounts become subject to FICA. I also know that the amounts may not be available for distribution. When these two events coincide it is a problem.

Your sister needs to find out how she came to be in the plan since either the explanation you received does not make sense, OR you sister has seriously misrepresented her income to you.

Again, my apologies if I am not clear. This topic is not my forte, which is why I am here. I assure you there is no misrepresentation by me or on her behalf. The issue is the sudden, unexpected request for $10K, when there are NO changes in the last three years, ie she was on a unpaid, medical Leave of Absence.

Let me know what else I can provide to help clarify.

Many thanks for the feedback..

ed

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Guest mjb
. Here is the letter that was received in Dec, 2006.

Dear Benefits Recipient:

We are writing to let you know about an upcoming FICA tax obligation that must be recognized and paid on your XXX Personal Pension Account excess benefit accrual.This FICA tax obligation will be due in March 2007. We wanted to let you about this obligation in advance, so that you may plan accordingly. As a reminder, FICA tax is made up of both an employee contribution and an employer contribution for Medicare (1.45%) and Social Security (6.2%)

You have accrued an "excess benefit" in the XXX Personal Pension Account because the IRS limits the amount of earnings that may be used to calculate your tax-qualified pension. A portion of your accrued benefit exceeds this IRS limit.As a result, rather than limit your total benefit, XXX allows you to continue to accrue a benefit above the IRS limit, and pays this excess benefit out of operating funds.

The excess benefit, which is considered a non-qualified deferred compensation arrangement, is subject to different tax treatment than your ordinary pension benefit. While the IRS, does not require that FICA be collected from accruals under a tax-qualified pension, regulations changed recently and now both you and XXX are required to pay FICA tax on excess pension benefits that you accrue each year.

XXX will apply the FICA tax rate to the value of your vested excess benefit accrued through December 31, 2006, plus interest on that amount to the March 31, 2007 payment date. Interest will be calculated at the IRS Applicable Federal Rate.

This tax on your PPA excess benefit accrual through December 31, 2006 is 2007 tax event. As a result, the FICA withholding will be reported in 2007. The amount of the accrued excess benefit, with interest, will apply to 2007 Social Security wage base of $97,500. If you earn over $97,500 in 2007, you will not owe social security on wages about the $97,500 limit.

Please be aware that this is an annual tax event.For every year that you accrue an excess pension benefit, XXX will be required to calculate the annual excess benefit accrual and collect the FICA tax on your newly accrued excess benefit.

Advice, comments, suggestions..please

Thanks

ED

The letter indicates that your sister has accrued a vested benefit in an excess benefit plan which is subect to FICA tax because it is not a qualfied plan. Excess benefits can be provided to any employee for benefits that exceed the 415 limits which are quite low for younger employees. If the letter is from who you say it is then the tax aspects have been throughly researched.

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Guest edwardc3000

The letter indicates that your sister has accrued a vested benefit in an excess benefit plan which is subect to FICA tax because it is not a qualfied plan. Excess benefits can be provided to any employee for benefits that exceed the 415 limits which are quite low for younger employees. If the letter is from who you say it is then the tax aspects have been throughly researched.

I'm curious.. Twice it's been suggested that "if this is as you say"..

Do people come here and misrepresent themselves..?

Why would anyone ask if I'm telling the truth..? What possible reason could there be to lie..?

Also, my sister is 45 years old, and worked for the company since 1989..I dont think I would define her as a "younger" employee..

So again, my question is not whether it is a valid letter, but what could be the reason(s) for this notice NOW? No circumstances have changed in the last three years with regard to either her compensation, the pension plan or anything else.

I appreciate the feedback, and I know no other way to assure this board that everything I have represented in 100% accurate.. Just hoping that one of the experts in the field that frequent this board would be able to shine some light on the rules AND more importantly, based on what I provided, are there any steps that need to be taken to avoid future "surprises" like this one.

Thank you again

ED

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Honestly, your first post read like the SPAM I delete from my email every day, right next to the Nigerian who wants me to help him transfer $10,000,000 and the poor women from Idaho who was bitten by a small spider while eating her fries at Wendy's and suddenly exploded in the booth.

We don't know you, you don't know us. Those who have posted have tried to help the best they can, but we aren't looking at the letter, we don't know the specifics of the situation, and your story doesn't exactly add up.

Non-qualified Excess Plans are generally only for high paid executives, yet your telling us your sister is just a regular employee off on medical leave.

It sounds to me that there has either been a screw-up somewhere or someone is trying to scam your sister out of $10K. I suggest you contact the company and have them explain it. Then, take it to a tax attorney and have them verify it.

Good Luck.

And yes, "45" is considered "younger" to most pension people.

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Ed, there is something unusual happening. It is possible the company was running a Cash Balance plan with a non-qualified plan component should the contributions produce a benefit over the 415 limit.

Also, the law changed last year requiring full vesting in the Cash Balance plan after 3 years but that would not directly affect this situation.

Your sister has been out for 3 years. Just maybe the company is now treating her as disabled which could trigger immediate vesting the excess plan. This is a plan document issue which your sister should get a copy to review. If this were the case, then maybe there should also be a distribution.

Our problem is not the facts you have given us, it is the information you do not have. The advice for your sister to at least have a conversation with XXX and even to engage an attorney is what should be done in this case. At least the attorney could get the documents and your sister's specifics to see what is happening and if there are any alternatives.

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Edward,

It is painfully obvious from your tone and your wording that you are not a scammer and that you are making an honest attempt to help your sister. Believe me when I say that there are some real crazies out there that come here (not often, thank goodness) and present the industry with all sorts of stories just to waste everybody's time. Hardly seems worth their effort, but they do. I'd bet more than a dollar to a donut you aren't one of them.

There really should be somebody at XXX available to answer questions for you, because if your sister is affected by this, you can just about bet a million bucks there are a heap of folks in the same confused boat that she is in.

My guess is that she is a participant in a plan of deferred compensation of some sort. My further guess is that the specific plan she is in somehow either doesn't conform or XXX has decided not to go through the effort to make it conform to the new rules on how non-qualified plans are to be treated in the US.

The IRS has recently changed the way that non-qualified plans are taxed, both at the FICA level and at the regular taxation level. It is a BIG DEAL in the non-qualified arena, so anybody who practices with non-qualified plans would immediately be aware of the fact that things have changed dramatically over the last 3 years.

For example, IRS Notice 2006-100 starts by saying: "This notice provides guidance to employers and payers on their reporting and wage withholding requirements for calendar years 2005 and 2006 with respect to deferrals of compensation...". It is 21 pages long. It goes into a lot of detail. It makes no sense to even look at something like that, from your perspective, because even if it is applicable, it is aimed at XXX, not at you. I mention it only to let you know that non-qualified plans have, indeed, undergone a recent upheaval in this country and it doesn't surprise me in the least that there is some sort of "catch up" going on which has ensnared your sister.

Somebody at XXX should know the gory details. Whether the specific issue involved is the same as what IRS Notice 2006-100 is getting at or not is not what really matters. What really matters is that somebody at XXX (or, more likely, an outsourced call center) has to be in charge of providing details to the ensnared and confused folks who got that letter.

I think you did precisely the right thing by coming here and asking for some clarification as a first step. Unfortunately for you, the best that can be done from here is to say that the letter is plausibly legit and that further details have to come from XXX.

When you get them, please come back and share. I, for one, am curious as to why the issue appears to be limited to FICA and does not appear to extend to income that needs to be reported to the IRS (and, of course, taxes paid based on that amount, which would normally be higher than the FICA taxes themselves).

Good luck.

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It would help if I read your original comment in greater detail before posting my thoughts. ;-)

I just noticed that you said she just officially terminated. This is probably the key issue. At that point in time, her status changed and the taxation issues changed as well.

As has been mentioned, if she was entitled to get her hands on some of her deferred compensation because she officially terminated her employment, then the IRS will take the position that the mere fact that she COULD have elected to receive it (or a portion) means that she owes some tax (maybe just the FICA, maybe more) on it.

The letter still is confusing to me, because it seems to be worded in a way that is intended for an active employee. Perhaps she just got the wrong letter?

In any event, I'd guess that her termination of employment triggered this thing.

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Guest edwardc3000
It would help if I read your original comment in greater detail before posting my thoughts. ;-)

I just noticed that you said she just officially terminated. This is probably the key issue. At that point in time, her status changed and the taxation issues changed as well.

As has been mentioned, if she was entitled to get her hands on some of her deferred compensation because she officially terminated her employment, then the IRS will take the position that the mere fact that she COULD have elected to receive it (or a portion) means that she owes some tax (maybe just the FICA, maybe more) on it.

The letter still is confusing to me, because it seems to be worded in a way that is intended for an active employee. Perhaps she just got the wrong letter?

In any event, I'd guess that her termination of employment triggered this thing.

Mike,

Thank you SIR for your kind and thoughtful response. While I am cogniscant of scammers all over the internet, I dont know why anyone would waste time here trying to scam information. That said, this is not my profession, so I'll admit to being unenlightened.

I just talked with my sister, and in fact, she received the letter in December (while still on LOA), and resigned in March, so I can't understand how the decision to leave was a factor. In Dec, the company still expected her to return in March, so that cant have been the trigger. Additionally, she told me that the $10K is not the tax due, but was the amount of excess, for which she owes ~$800. Given we are speaking of a fortune 50 company, it would appear to me that this is not about an error in calculation by the company, BUT by a change in law.

As I mentioned before, I'm attempting to confirm for her whether this is a one-time situation, or does she need to anticpate paying this tax annually..?

Hope that information helps..and more importantly, thank you for being so polite and helpful to me.

Ed from Nigeria (just kidding) :)

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You are welcome.

OK, I'll go back to my inferior reading, then.

And I'm going to stick with the fact that the rules on non-qualified plans have gone through an upheaval in the last few months and that just has to be the genesis.

Keep us posted.

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It is becoming clearer. Thanks for the explanation. It looks like XXX's plan provides some sort of continuation accrual. Maybe something like 10% of pay, for those on an approved leave.

One of the limits in qualified plans is that the company (XXX in this case) is restricted by not being able to make a qualified contribution in excess of 100% of somebody's pay. If your sister was on leave during all of 2006, then her pay was zero. If the plan called for her to get around $10,000 as some sort of continuation benefit, then everything makes sense. That amount would exceed the limits and be subject to the rules on non-qualified plans. Hence, the combination of the recent changes in the regulations and her remaining on leave for an extended period might have triggered this.

Let us know if my new guesses are close to what XXX says!

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Mike,

Thank you SIR for your kind and thoughtful response. While I am cogniscant of scammers all over the internet, I dont know why anyone would waste time here trying to scam information. That said, this is not my profession, so I'll admit to being unenlightened.

......

Ed from Nigeria (just kidding) :)

Ed - I don't think anyone implied that your post was a "scam" or you were scamming for infomation. Everyone has been trying to get to the bottom of this issue with the limited information you have provided.

Most people were surprised at the tax bill of $10,000 on excess benefits for someone earning less than $100k. But it now turns out that the tax bill is only $800 - big difference.

Also, how could a fortune 500 company (or their consultants) not be aware of the IRS' limit on the compensation and accrue "excess benefits" to the participants and do it annually?

How about scanning the letter (with the company's and other names deleted) and posting it on the message board?

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Guest edwardc3000
Ed - I don't think anyone implied that your post was a "scam" or you were scamming for infomation. Everyone has been trying to get to the bottom of this issue with the limited information you have provided.

Most people were surprised at the tax bill of $10,000 on excess benefits for someone earning less than $100k. But it now turns out that the tax bill is only $800 - big difference.

Also, how could a fortune 500 company (or their consultants) not be aware of the IRS' limit on the compensation and accrue "excess benefits" to the participants and do it annually?

How about scanning the letter (with the company's and other names deleted) and posting it on the message board?

Hello flosfur:

Permit me to politely disagree, it was quite clear that my original note was perceived by some as some type of a scam. In fact if you go back and read EFFEN's reply, the first sentence states "Honestly your original post read like scam". I understand a little better now why people would come here and pretend to have issues in a quest for stealing other peoples money..something I was ignorant to at first. But I have gotten over that.

Next..I never suggested that the COMPANY was not aware of the IRS' limits. My SISTER was not aware of the limitations, and my purpose for posting here was only to understand better what her liablity is (now understood to be ~$800) AND, I remain asking, will this situation happen again next year.

Lastly, after all the discussion about scams (here and on other threads) a)why would I risk anyone copying my sisters information by scanning it here, AND b) I have provided all the pertinent information in an earlier post.

So do tell, (at the risk of sounding rude) what is the point of your post..??

Thanks

ED

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To be fair:

1) Effen wrote that the first post read like "SPAM", not "scam".

2) Effen indicated that he thought the letter to your sister was a scam, not your posting here.

3) The original post did contain at least one factual error which led to the conclusion that something did not make sense.

4) Advice in these forums is free and worth every penny of it.

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Guest edwardc3000
To be fair:

1) Effen wrote that the first post read like "SPAM", not "scam".

2) Effen indicated that he thought the letter to your sister was a scam, not your posting here.

3) The original post did contain at least one factual error which led to the conclusion that something did not make sense.

4) Advice in these forums is free and worth every penny of it.

Thank you for catching my error..and for clarification..

Good to know I'm not too old to still make mistakes, and not too young to blame anyone else..

ED

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