FICA Taxes

[Guest BLee]

In a non-qualified deferred compensation plan, when is FICA tax payable on employee deferrals?

For example, in our plan, we allow key ees to defer their annual bonus (paid in March). If an ee elects to defer their bonus in its entirety, are they required to pay the FICA on the bonus immediately? or can they elect to pay the FICA at a later time, say out of some future earnings that year?

[This message has been edited by BLee (edited 01-28-99).]

[Guest Harry O]

I assume your deferred bonuses are not forfeitable (other than subject to a risk of nonpayment if your company goes belly-up).

If so, there is no choice -- executives must pay FICA in the year the bonus is awarded. See Code 3121(v) and proposed regs. (There may be some slight timing issues depending on the structure of your bonus plan, but current payment is just about always the rule for annual bonus plans.)

This is, IMHO, a good result. First, I suspect that most of your execs regular wages are over the social security wage base ($72,600 in 1999). The bonus is therefore only subject to the 1.45% Medicare tax. I would bet that the social security wage base will be eliminated someday or the medicare tax rate increased. Or even if there is no changes to the FICA laws, a bonus could be deferred until after retirement so that it is paid in a year when the exec has no other FICA wages -- it would then be subject to the 6.2% social security tax as well as the 1.45% medicare tax.

If these bad things happen, your execs would have already paid their FICA obligation back in good 'ol 1999 when we had a wage cap of $72,600 and a medicare rate of 1.45% and he had other wages to soak up the 6.2% social security tax. They will thank you! (Right!)

Second, the earnings on the deferred bonus are not subject to FICA. To the extent the deferred bonus's earnings exceed the exec's investment earnings capability, he comes out ahead.