Griswold

Tax treatment/reporting of a 457(f) payment to beneficiary

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Griswold    7

An executive passes away and becomes fully vested in 457(f) plan. Payment to be made to a beneficiary.

Could someone point me to how I can figure out the FICA, FUTA, Medicare taxes and reporting?

TYIA!

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jpod    161

You need to look at the regulations under IRC Section 3121(v) and the W-2 instructions. Resolution of this turns on the compensation being "deferred compensation." I don't believe the fact that it is deferred compensation subject to the 457(f) special income tax rule is relevant.

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Griswold    7

Thanks jpod. I read those a few times. I guess what I don't understand is how to run this. The plan calls for the payment to be made to the beneficiary. Should they run a payment to the deceased in the amount of the withholdings and then pay the rest to the beneficiary? Anything to withhold for her? I guess its IRD, and so it will retain its character as ordinary income. And she'll just report it on her 1040. That makes the most sense to me, but I just can't find guidance for it....

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XTitan    3

Here is the relevant section from the 1099-MISC instructions: https://www.irs.gov/pub/irs-pdf/i1099msc.pdf

Deceased employee's wages. If an employee dies during the year, you must report the accrued wages, vacation pay, and other compensation paid after the date of death. If you made the payment in the same year the employee died, you must withhold social security and Medicare taxes on the payment and report them only as social security and Medicare wages on the employee's Form W-2 to ensure that proper social security and Medicare credit is received. On the Form W-2, show the payment as social security wages (box 3) and Medicare wages and tips (box 5) and the social security and Medicare taxes withheld in boxes 4 and 6; do not show the payment in box 1 of Form W-2.

If you made the payment after the year of death, do not report it on Form W-2, and do not withhold social security and Medicare taxes.

Whether the payment is made in the year of death or after the year of death, you also must report the payment to the estate or beneficiary on Form 1099-MISC. Report the payment in box 3 (rather than in box 7 as specified in Rev. Rul. 86-109, 1986-2 C.B. 196). See the Example that follows. Enter the name and TIN of the payment recipient on Form 1099-MISC. For example, if the recipient is an individual beneficiary, enter the name and social security number of the individual; if the recipient is the estate, enter the name and employer identification number of the estate. The general backup withholding rules apply to this payment.

Death benefits from nonqualified deferred compensation plans or section 457 plans paid to the estate or beneficiary of a deceased employee are reportable on Form 1099-MISC. Do not report these death benefits on Form 1099-R. However, if the benefits are from a qualified plan, report them on Form 1099-R. See the Instructions for Forms 1099-R and 5498.

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