W-2 Compensation

[Guest Dumb & Dumber]

Here is the situation. We have an owner of a corporation who unfortunately passed away. This owner always received a bonus at the end of each year, but this year the corporation was trying to process the bonus as soon as possible because of the health situation. However the bonus did not get paid prior to the passing of the owner. The plan document defines compensation as Form W-2 Compensation. From the initial research that has been done, it appears the compensation will be listed on the 1099-Misc and will be issued in the name of the deceased employees legal representative. But the compensation will be listed on the owner’s W-2 for FICA and FUTA but will not be listed on box 1 of W-2. The question is whether or not the compensation is counted for retirement plan purposes since it is not on box 1 but is on other boxes on the W-2.

[ETA Consulting LLC]

I don't understand why they would not report the entire amount on the W-2; as it was for services rendered as an 'employee' of the company. Paying on a 1099, and then withholding FICA appears inconsistent. That's just my take.

Good Luck!

[Lou S.]

I agree with Erisatoolkit.

Also how soon after death was it paid? Within 2 1/2 months? Seems like it is for services provided to the company and unless specfically exculed somehow in the plan doc it would be comp for 415 purposes.

[masteff]

1) The W-2 and 1099 reporting is completely consistent with Circular E (IRS Pub 15) and the instructions for Form W-2.

2) It's not W-2 comp for plan purposes. The W-2 safe harbor def of comp comes from Reg Sec 1.415-2(d)(11). This brings us back to W-2 Box 1 and/or Code Section 3401. We then look at Rev Rul 86-109 which is the basis for the W-2 and 1099 treatment and tells us that the comp in question is neither Box 1 nor 3401. We also find that the wages are reported on W-2 for FICA as a result of Code Section 3121(a), which is not reference by the safe harbor def.

It might be helpful to see the discussion of safe harbor comp beginning on page 3-10 here: http://www.irs.gov/pub/irs-tege/epchd304.pdf

[MARYMM]

1) The W-2 and 1099 reporting is completely consistent with Circular E (IRS Pub 15) and the instructions for Form W-2.

2) It's not W-2 comp for plan purposes. The W-2 safe harbor def of comp comes from Reg Sec 1.415-2(d)(11). This brings us back to W-2 Box 1 and/or Code Section 3401. We then look at Rev Rul 86-109 which is the basis for the W-2 and 1099 treatment and tells us that the comp in question is neither Box 1 nor 3401. We also find that the wages are reported on W-2 for FICA as a result of Code Section 3121(a), which is not reference by the safe harbor def.

It might be helpful to see the discussion of safe harbor comp beginning on page 3-10 here: http://www.irs.gov/pub/irs-tege/epchd304.pdf

Masteff is correct. Here are the 1099 MISC Instructions:

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.

[Guest Dumb & Dumber]

I was coming to a similar conclusion that masteff came to. It still seems like you are almost punishing an employee for dying. I mean if you had two people who were exactly the same and one person terminates employment and the other person dies but both get the same bonus, the terminated participant will have more compensation that counts for retirement plan purposes than does the deceased person.

As a side note, the bonus will definately be paid within 2 1/2 months, but not sure this matters since the bonus won't be reported on box 1 of W-2.

[oriecat]

It still seems like you are almost punishing an employee for dying.

Of course you are, as it should be! Slacker stopped coming to work!

Here's my question - why would the corp still pay the bonus to someone who is deceased? Shouldn't the new owner receive it instead?

[401 Chaos]

Masteff,

Am I reading your post correctly in concluding that the post-death amounts (bonus, last paycheck, accrued leave payout, etc.) would not be counted for 401(k) plan compensation purposes regardless of whether the plan defines compensation as W-2 wages or 3401 amounts because the post-death payments are subject to FICA under 3121 rather than 3401? Thanks.