present value of nonqualified DB benefit for FICA tax

[Guest Keith N]

If an employer promises to pay a termining employee $5,000 per month for the lesser of 20 years or the lifetime of the terminating employee. Assume it is now non-forfeitable.

Is there any guidance regarding the interest rates or mortality tables to be used to determine the present value for FICA tax purposes?

[Guest Ray Williams]

The FICA would be paid each month as the payments are made. No different then any other W-2 income.

[MGB]

Ray,

You must pay FICA on the present value of the benefits at the earlier of the date of accrual or the date of nonforfeitability. You may not delay the FICA until the actual payment unless there is still a substantial risk of forfeiture. Even if there is, you are allowed to pay FICA on the PV. If there is any uncertainty in the amounts to be paid (e.g., it is adjusted each year based on an underlying qualified plan's payments' increasing due to 415 limits), then you must reconcile the payments with the PV and possibly pay more FICA in the future when the payments are made. However, you cannot get a refund if the payments turn out to be less.

Why would you want to pay up front? Easy...the wagebase limitation. In this example, the FICA (both er and ee) would be 15.3% on the $60,000 payments each year. However, if you pay on the PV, you probably only need to pay 2.9% because the person is already over the wagebase (assuming we are not at the beginning of the year). You always want to have the termination late enough in the year to avoid the 12.4% up to the wagebase. However, even if you are at the beginning of the year, you only pay 12.4% up to the wagebase, not the entire amount (about $500,000).

Keith,

The rules are in Regulation 31.3121(v)(2)-1 (quite lengthy with numerous examples).

Note that if there is a unilateral provision of the compensation AFTER termination of employment, it is not considered compensation subject to FICA. FICA only applies if the agreement (which could be unilateral) is reached prior to the termination of employment (see section (B)(4)(vi) 'Benefits established after temination').

Section ©(2)(ii) 'Present value defined': "...using actuarial assumptions and methods that are reasonable as of that date."

So, no, there is no guidance...do what is reasonable and could stand up to scrutiny when audited. Note that they do give numerous examples, such as using a 7% rate and GAM83 male for a male calculation in 2001, but that isn't too usable because the regulation was finalized in 1999.

[Guest Harry O]

Ray might be correct if the employer's promise was made within 12 months of termination of employment. In this case the payments are not considered "deferred compensation" for purposes of section 3121(v) and the normal FICA rules apply. Otherwise I agree with MGB . . .

[Guest Ray Williams]

The questiuon posted said a "terminating Employee", which I took to be and employee who had not yet terminated, and therefore well wihtin the 12 month period after termination. If the question had referred to a terminated employee, then the answer might be different.

[Guest Keith N]

Thanks, this is a case where the tax needs to be paid up front on the PV.

FYI: I also found some "good stuff" in the transcripts from past EA meetings.

[david rigby]

Keith, which EA meeting(s) and which session(s)?

[Guest Keith N]

I looked at Session 606 from the 2000 meeting. I didn't go to the 2001 meeting, but I think they had a similar session.