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FICA calc for 401(k)mirror plan


Guest D Dell

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Guest D Dell

How should a client calculate the FICA liability (actually, just the HI portion since the SocSec portion is capped) pursuant to a NQDC Plan which allows the participants to direct their own "investments", similar to a 401(k)? More clearly, since the formal IRS regs now require FICA withholding on the principal amount of deferral plus one year's interest, how can the sponsoring company (and the EE) satisfy its FICA obligation if the amount of the interest can't be determined until the last day of the year? I'm familiar with the lag method and the estimated method. Is that what other companies are doing?

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I just gave a long speech on this yesterday. When I read this today, my heart sunk thinking I really missed something important in the regulations. But, I am sure I didn't.

I, too, would like to know where the reference to one year's interest comes from.

It is very clear that investment return based on an actual investment is not subject to FICA taxes, from my reading of the regs.

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Perhaps I am off base, then. But I am referring to Code Section 3121(v). For a NQDC plan that is an *account balance plan*, "the principal contribution...is included as taxable wages for FICA purposes when the principal is no longer subject to a substantial risk of forfeiture (i.e. becomes vested). Earnings (or interest) become subject to FICA in the year that the principal amount of contributions on which those earnings have accrued become subject to FICA."

I am not quoting the Code directly, but a summary of 3121(v).

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Your quote is not referring to a one-year interest calculation.

You can pay FICA anytime on or after the deferral and before the required time. The required time is when the deferral no longer is subject to a substantial risk of forfeiture (i.e., vesting). If there is never a loss of the risk of forfeiture, FICA becomes payable when the benefits are paid out. It is better to pay before it is required for a number of different reasons (present values, keeping the calculation in excess of the wage base, etc.). For an account-based plan, that usually means paying it when it is deferred, not later.

If you are paying FICA when the deferral occurs, you will never pay FICA on the earnings unless it is a stated rate of interest in the plan and is higher than the midterm AFR at the beginning of the year.

If you do not pay FICA until it becomes vested, then you must pay FICA on the entire account balance at that time, including interest credited to date. It is this requirement that the last sentence in your quote is referring to.

3121(v) is short with little technical information. I suggest reading regulation 31.3121(v)(2)-1; that is where the rules are. Any "summary" will have to leave out important information (the regulation is 32 pages in CCH small type). A good summary would take 50 pages or more because there are so many specific rules involved. (I talked for an hour and a half yesterday and only provided a brief summary.)

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In this case, the company typically makes all FICA deposits in the beginning of November- let's say November 1- as a rule of administrative convenience. Should interest on the principal be calculated on the determination date and included as FICA wages?

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