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calexbraska

FICA Taxes on Nonaccount Balance Plan

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We have a nonaccount balance plan (i.e. a defined benefit plan) that is a top-hat plan.  Under the Plan, a participant is to receive a set amount per month for life, with a 50% survivor benefit to his spouse for her life.

It appears we can take FICA into account from the offset, since the amount is readily ascertainable under Code Section 3121(v)(2).  I get how that works for the set amount to the employee for life -- we just base FICA on the present value of is benefit.  But how do we deal with the survivor benefit?  Is the present value of that amount also taken into account for FICA purposes on the employee's tax filings?  If so, how does the wife report the payments in the years they are paid?

Thank you!

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The good news is that death benefits from NQ plans are not subject to FICA.  See 26 CFR 31.3121(v)(2)-1(b)(iv).

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Are the participants paying FICA on each year's accrual?  Normally, this will be less than paying FICA at a later date of receipt.

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In general, I think there are 3 alternative ways in which FICA income attributable to a NQ db plan can be recognized:

  1. the pv of each year's vested accrual is included in the participant's FICA income for that year, with a true-up in the year the benefit becomes ascertainable (e.g., year of employment termination or year of benefit commencement)
  2. the pv of the entire vested benefit is included in the participant's FICA income all-at-once in the year the benefit becomes ascertainable
  3. the amount paid as a benefit is included in the participant's FICA income in the year paid -- i.e., in the same year as it is included for income tax purposes.

I took it that the original poster was using method 1. or 2. and was asking whether pv should reflect the value of potential payments to the spouse after the participant's death. XTitan said no. I agree ...

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