FICA Replacement Plan

[nancy]

An employer has opted out of Social Security and is currently providing the required retirement benefits through a thrift plan. Is there any reason why a 457(B) plan would not satisfy the requirements of Section 3121. 3121 says it must be a defined contribution retirement system and that employee contributions can be used to satisfy the requirement.

[Carol V. Calhoun]

Using a 457(B) plan to satisfy the requirements should not be a problem. Of course, to the extent that deferrals under the 457(B) plan are elective, an employee would in effect be able to elect into Social Security by declining to make contributions.

[Guest Ralph Amadio]

Carol hit the nail on the head for 457(B) used for FICA alternative. Many states have no enabling legislation for employer contributions, nor do they have language that allows contributions, which by their nature are elective, to be made mandatory. Some collective bargaining sources use the "condition of employment" argument, however I would like to hear from a labor lawyer as to how the agreement pre-empts the state law.

[Guest jriosu]

The regulations require that the alternative plan earn a "reasonable rate of interest." Would a 401(a) plan funded by annuuity contracts allowing participants to choose among several investment options satisfy that requirement?

[mbozek]

why not ? there is no bright line test for "reasonable rate of interest" Fixed rate annuities are a very good rate of of return.

[Guest S.Yahiro]

The State of Hawaii implemented a 3121 Social Security Replacement Plan using Code Section 457. We enacted a statute that made the 3121 plan mandatory for employees who are ineligible to participate in our regular defined benefit retirement plan.

Our plan is set up such that employees must mandatorily participate (if they are not eligible for the regular retirement plan) with a mandatory deduction of 7.5% of the employee's gross wages.

We implemented the plan in 1997. The State of Hawaii has saved about $6 million each year by not having to match Social Security contributions.