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determining what are salary deferrals


AJC

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It seems to me this plan sponsor is avoiding FICA tax.... The plan sponsor has a job-defined pay scale and adds a percentage to each employee's wages based on years of service. This added percentage ranges from 2% to 16% of their job-defined wages.

For example, an employee may have an annual job-defined wage of $40,000 plus 10% ($4,000) based on the employee's years of service, for a total annual salary equal to $44,000.

There is a salary deferral arrangement under their plan. There is also an employer non-elective contribution. There are no key employees and no hce's. Each employee's salary is determined as of the beginning of the plan year. The plan sponsor is a church.

Each year, the plan sponsor allows each eligible employee (separately) to determine whether their percentage of pay based on years of service is paid as wages or whether it is deposited into the plan as an employer contribution fbo the employee.

Thus, the plan sponsor is effectively reducing an employee's annual wages for FICA tax purposes based on the employee's election regarding how they are to receive compensation for a portion of their annual salary.

Would you agree?

And should not these "employer" contributions be considered employee salary deferrals?

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Is this a 401k plan?  If so, it may not be an illegal CODA, but it sounds like these are salary reduction amounts which should be treated as such for 402(g) purposes, FICA, and all other relevant purposes.  If it is a non-401k 401(a) plan, I agree it is an illegal CODA and also an impermissible FICA dodge.

If it is a nonqualified plan, and the contributions are immediately vested, wouldn't the FICA be picked up immediately anyway under 3121(v)?

 

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This is a 401(k) plan, and I assume it would be no different if it were a 403(b) plan.

From IRS Memorandum 200714018:  "For purposes of § 3121(v)(1)(B) the term “salary reduction” relates to amounts treated as an employer contribution under § 414(h)(2) that would have been included in wages for FICA tax purposes but for the employer contribution.  Thus, a salary reduction occurs if the amounts included in wages for FICA tax purposes (without regard to § 3121(v)(1)(B)) are less than they otherwise would have been but for the employer contribution.  Conversely, no salary reduction occurs if the amounts included in wages for FICA tax purposes are equal to what they otherwise would have been but for the employer contribution."

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I must be missing something.  Aren't these elective salary deferrals and as such subject to FICA? Also, it is my understanding that a church can opt out of the SS system for religious reasons by filing Form 8274. Is this relevant to the client church? And ministers, if they are among the Plan participants, are always treated as self employed (again, my understanding) and never subject to FICA.

 

 

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FP Guy has the item I would worry about.  This is a Church.  You may not be applying what you think are the FICA rules correctly in light of who this plan sponsor is.

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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Aside from a half dozen ministers who have an exemption and do not pay FICA tax, there are about twenty participants who are not exempt from FICA tax. This is the issue - a multi-year issue, and the cause of my concern.

Also, none of the ministers are automatically exempt from FICA tax. Those who are exempt have approved exemptions.

Thank you all for the comments.

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