Final FICA tax regs issued 1/29/99 by IRS

[Dave Baker]

The IRS has released final regulations under section 3121(v)(2)

of the Internal Revenue Code that provide guidance as to when

amounts deferred under or paid from a nonqualified deferred

compensation plan are taken into account as wages for purposes

of the employment taxes imposed by the Federal Insurance

Contributions Act (FICA). Section 3121(v)(2), relating to

treatment of certain nonqualified deferred compensation, was

added to the Code by section 324 of the Social Security

Amendments of 1983.

The final regs are quite similar to the proposed regs, but

appear to reflect many helpful tweaks that had been suggested by

employers and practitioners in comments to the proposed version.

The final regs are online at http://www.benefitslink.com/taxregs/31.3121v2.shtml (click)

[Guest kp]

Any thoughts on how the final regs impact administrative and actuarial costs of nonaccount nonqualified plans? Consider a nonqualified SERP that credits 3% a year for a total maximum percentage of 50% based on the last 12 months of base pay plus bonuses. Eligibility is certain employees who are (1) age 55 or older with 20 years service or (2) age 60 years or older with at least five years of service. Payouts options are either a lump sum or an annuity.

Suppose an employee in the SERP is vested, and terminates employment at age 51. We know the final 12 months of base pay, bonuses, and credited service. However, employee does not know when he will retire (anywhere between age 55 and 60), and he does not know what form of payment he will elect (lump sum or annuity). The final regs say that you can make certain assumptions for nonaccount balance plans which have multiple benefit distribution options or commencement dates--by using the "normal form of benefit commencing at normal commencement date."

Does this mean we assume one of the payment distribution options (lump sum?), and assume a commencement date (which one--age 55-60) and then calculate the present value for the HI FICA? In this case, the actuarial fees and record tracking to "true up" later far outweighs the value of the HI tax. In addition, we're not necessarily doing the employee a favor by saving taxes either since he may have wages to offset the FICA limits in later years depending on when he takes his distribution.

Given these facts, can we estimate a normal form of benefit and a normal commencement date in order to calculate the HI FICA?

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