Josh62

Just following up on Carol's comment. Obviously her statements are correct. However, your question was "When are the employer match contributions subject to FICA taxes? Is it when distributed or when contributed to the plan? This plan has a 2/20 vesting schedule.". Since the employer contribution has a vesting schedule, it is not considered an annual deferral until the amount is vested. At that time the accumulated interest is also considered in determining the annual deferral. See section 1.457-2(b) of the regulations. With respect to FICA treatment, the regulations mentioned in Carol's response governs the taxation. Once there is no substantial risk of forfeiture, the amounts are taxable for FICA purposes (to the extent the employees regular wages are taxable). You asked about whether the amounts are taxable when they are an annual deferral or when distributed. This presents an interesting questions. Under the special timing rule of 3121(v)(2)©, amounts are taxable when they are not subject to a substantial risk of forfeiture. This is the special timing rule for NQDC and is an exception to the general timing rule that amounts are taxable when paid or made available for FICA purposes. This apples to all NQDC. There is a special non-duplication rule contained in section 31.3121(v)(2)-1(d) that provides that if the amounts were properly reported as FICA wages under the special timing rule under 3121(v)(2)©, that the amounts are not considered FICA wages when distributed. ​So if amounts were not reported properly as FICA wages when they were annual deferrals, the regulations would read that amounts are reported as FICA wages when the amounts are paid. This is the proper FICA tax treatment for all NQDC but when you are dealing with a governmental 457(b) plan there does appear to be an argument as to whether this applies. In discussions with the IRS general counsel's office on employment taxes they believe this does apply to governmental 457(b) plans. However, there appears to be a reporting disconnect as the requirement for all distributions from a governmental 457(b) is to report on a form 1099-R. The employer generally does not know when the distributions take place. The vendor does not know that FICA taxes have not been paid. So like all NQDC, the important thing is to properly report the FICA wages as you go.

My assumption is that the documentation shows they were participants in the 457(b). Since this is a Tax-Exempt employer rather than a governmental entity, the impact of a failure is that the plan becomes a 457(f). Since the organization is an eligible employer as defined in 1.457-2(e) of the regulations they could allow independent contractors that perform services for the eligible employer to participate. Under both 1.457-2(e) & (j). "Only individuals who perform services for the eligible employer, either as an employee or as an independent contractor, may defer compensation under the eligible plan" Section 1.457-3(a) requires compliance in form an operation. Section 1.457-9(b) provides that if the plan fails to satisfy the requirements it is treated as an ineligible plan. I am not sure there is enough information here to draw the conclusion. SO if the plan does not satisfy the requirements in operation, then there is no correction under EPCRS because EPCRS does not generally apply to 457. If there is any correction it would be under the Employee Plans Voluntary Closing Agreement- http://www.irs.gov/Retirement-Plans/Employee-Plans-Voluntary-Closing-Agreements If the employer determines that there is a failure under 1.457(b)-9(b) then it is either take your chances and make a correction and hope you are not audited or try obtaining the Employee Plans Voluntary Closing Agreemen.

I am assuming you mean one of the excluded arrangements as defined in 1.457-2(k) of the regulations. The exclusion under 1.457-2(k)(4)(i) is only for non-governmental Tax exempt. The exemption under 1.457-2(k)(4)(iii) would apply to governmental. Without identifying which section of 457 regulations exempts the deferred compensation plan it is hard to speculate. However, I think it is safe to say it was never a 457(b) and could not now be converted to a 457(b). SO what you are talking about is that if they have lost their exclusion from coverage under 457 then they would become 457(f). It was not stated whether these arrangements were subject to 409A but unless they met the grandfathering provisions of 409A they should already be dealing with 409A.

I see that no one has responded to your question. Actually, the regulations did not change anything. This difference has always existed in the IRC. See IRC 403(b)(7) and (11). Prior to the regulations there was no stated restrictions on in-service distributions of non-elective contributions to an annuity contract. What the regulations did was to set our in 1.403(b)-6(b) that the plan should have the stated event that would allow the distribution prior to severance was some applicable references.