100% of pay

[pmacduff]

I've looked all through the message boards and can't seem to find the thread I wanted to review. What is the story with an employee who might opt to defer 100% of pay? As has been mentioned, I'm thinking of the second income earner making, oh let's say $11,000 a year. How would the FICA taxes be paid? I know that in today's economy, we probably won't see much of this, but how to address it when it happens? I know that prior threads mentioned putting in a document limit (for example 75% of pay) for administrative ease, but what about those few clients who insist on the 100% of pay limit? I thought a CPA responded that the employee would then have to "pay" the FICA taxes to the Employer, but that doesn't seem acceptable. What would go on the W-2 then? Any input is appreciated.

[RTK]

I do not recall the prior threads. Besides FICA, the employer could have state and local income tax withholding issues that would need to be dealt with, like here in PA.

I believe that it would be easier to establish a 50% or 75% contribution limit, or at least specify in the document that the employee's (100%) elective deferral election is subject to withholding obligations, deductions and reductions due with respect to the compensation.

[Kirk Maldonado]

How do you deal with the situation where the employee has to pay his or her portion of the premiums for health insurance?

[mbozek]

100 % withholding is impossible because of all of the other witholding allowances in addition to FICA and state taxes: loan repayments, cafeteria plan contributions, child support, alimony ,united way, etc. that can be taken out of an employee's pay. Use a fixed amt, e.g. 50%, which is an easy standard.

[david rigby]

This might be the thread you were seeking:

http://benefitslink.com/boards/index.php?showtopic=15011

[Archimage]

I advise my clients to use 50-75%. I would say that it would be okay to use 100% as long as you document that you are interpreting this to mean 100% after other deductions such as FICA, health, etc.

[mbozek]

Using a net approach puts a tremendous burden on the PA to constantly check the outstanding allotments of each employee-- The PA must monitor every change in the withholding allowances for adjustments down or up-- e.g., employee takes out a loan then the k contribtion must be reduced, if the employee changes income tax withholding, charitable contribitions, 125 contaributions, etc and PA runs the risk of having to pay penalities if a change in other withholdings is not reflected in the 401(k) contributions. The only way a 100% net 401(k) contribution system would work is if the payroll system is programmmed to kick out the 401(k) contribution every time there is a change in other withholding to prevent over/under contributions and the PA reviews such changes.

[Archimage]

I didn't say it would be easy....