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Substantial Risk of Forfeiture?


Guest jmckee

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Guest jmckee

Does the risk of bankruptcy constitute a "substantial risk of forfeiture" within the meaning of Sec. 3121(v)(2)(A)-FICA Special Timing Rule, given an unfunded, unsecured promise to pay money in the future of which the NQDCP is still subject to the Employer's general creditors? Does Sec 83 apply? What else defines a "substantial risk of forfeiture" for unfunded, unsecured promises to pay money in the future?

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See e(3) of the final regs:3)

Substantial risk of forfeiture. For purposes of this section, the determination of whether a substantial risk of forfeiture exists must be made in accordance with the principles of section 83 and the regulations thereunder

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Guest jmckee

After reading through section 83, I arrive at Sec. 1.83 which lists out the meanings and use of certain terms of which "property" specifically excludes "...unfunded, unsecured promises to pay money or property in the future." Does this mean section 83 doesn't apply? It seems odd to me that it would, but I cannot find authority that explains this one way or the other.

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you are correct. unfunded unsecured promises to pay are excluded from the definition of property. the doctrines that are applicable are constructive receipt and the economic benefit doctrine.

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Guest EAKarno

Nevertheless, the definition of a "substantial risk of forfeiture" is based upon the Section 83 definition. The bankruptcy risk from being an unsecured general creditor is not relevant in determining whether there is a substantial risk of forfeiture for the FICA timing rules.

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Guest jmckee

Thanks for all the help, here is my final question.

Executive X defers $100,000 of his 2002 salary to a nonqualified plan via an unfunded, unsecured promise to pay this amount plus interest at retirement, which could be tomorrow or 15 years from now. The amount deferred is subject to the company's general creditors. When is the FICA tax applied? Is the amount "subject to a substantial risk of forfeiture" within the meaning of Sec 3121 and Sec 83? Or will it be when services are performed? Thanks

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Guest EAKarno

FICA will be due at the time of deferral. Plus, with a 15% interest crediting rate, you should have additional FICA due annually on the excess earnings.

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Guest jmckee

So the FICA tax will be assessed when services are performed rather than "no longer at risk of forfeiture?" And the authority would be?

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Guest EAKarno

To what definition of "risk of forfeiture" are you referring?!

Deferred Compensation is FICA taxed when it is no longer subject to a substantial risk of forfeiture as that term is defined by Section 83. In other words, when it is vested. Except for Company matching contributions, deferred compensation is almost invariably vested at the time of deferral (when services are performed). So, it follows, it is FICA taxed at the same time.

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Guest jmckee

An unfunded, unsecured promise to pay in the future clearly falls outside the definition of "property" in Sec 83, and Sec 83 is supposed to provide the definition of a "substantial risk of forfeiture" for purposes of applying FICA tax and the special timing rule. This leads me to believe that defintion of a "substantial risk of forfeiture" does not apply to unfunded, unsecured promises to pay in the future. That being said, "when the services are performed" is when the FICA tax should be applied given the HYPO I stated earlier. An unfunded, unsecured promise to pay should "vest" immediately at time of deferral according to the principles of Sec. 83 and that should trigger the application of the FICA tax. Is this the correct understanding?

Thanks for all your help, it is greatly appreciated.

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jmckee: Sec. 83 and the regs thereunder encompass more than the conditions that give rise to a "substantial risk of forfeiture." For example, the definition of the term "property" set forth in Sec. 1.83-3(e) merely limits the forms of subject matter to which the rule applies, it doesn't impact the definition of the term "substantial risk of forfeiture," which is defined in sec 1.83-3©. Accordingly, it is not within the scope of the statutory x-ref set forth in the FICA wage inclusion rules set forth in Sec. 31.3121(v)(2)-1(e)(3). If you didn't read these rules that way, the exception you cite would swallow the rule.

Phil Koehler

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Guest BobParks

I need some help here.

As I understand it -

FICA is only due on the first 80 some thousand and since this person is deferring 100k they have already paid their full 6 plus percent FICA. Why would the deferral above that amount have FICA exposure?

When the employee is vested in the deferral the issue of both parts of the hospital insurance - medicare tax arises. As I understand it - both FICA and Medicare taxes are on earned income only.

The income credited to the deferral amount is not earned income so I don't think interested credited would be taxed for hospital insurance - medicare.

What am I missing?

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There are two SS taxes, and have been for a few decades. The "old age" portion is 6.2%, and is assessed on comp up to the wage base. The medicare portion of 1.45% is assessed on all comp, including many forms of imputed comp, without a maximum.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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