FICA Fiasco

[Guest Doug Johnston]

Our firm is consulting with a client about establishing a cafeteria plan for benefits the employees currently pay for after-tax. Management is concerned that a cafeteria plan would be a disservice to employees since it would reduce their Social Security benefits. We have provided some analysis, using data from the SSA website, showing that the impact on SSA benefits is minor (even for a older participants) compared to the tax savings.

Now the client is considering developing a cafeteria plan to take advantage of the income tax savings, but reporting the benefits for FICA tax purposes. I think it's strange, but I don't want to blow-off the client. I'd appreciate any suggestions on how to design the plan to minimize the impact on SSA benefits and/or convince the client to get past the issue.

[SLuskin]

Most of the employers I work with want to save the matching FICA, and that is one of the motivators for them to put the plan in in the first place.

In addition, Social Security may not be there in any recognizable form for the younger workers.

We also tell the employees to take just some of the savings generated by the cafeteria plan and put it into their 401K or other type of retirement plan. Surely they can do better for themselves than the government can.

[GBurns]

Have you tried using the material developed by the OPM that developed to address this same issue when the Federal Gov. was putting in their Cafeteria Plan last year?

There is also some material available in the Q&A etc on the SSA site.

This plus the OPM material should allow you to show authoritatively how little the impact will be etc.