Changing interest rate assumptions on nonaccount balance plan

[Guest Trirod]

I have a client corporation who has a retired executive receiving $50,000 p.a. under a non-qualified deferred compensation plan (nonaccount balance). The company wants to buy out this "expense stream" with a lump sum calculated at a discount rate of, say, 6%. The problem is that for FICA taxes when the compensation was earned, they used a discount rate of 12% (which was reasonable at the time).

Question: by using a different interest rate now, does the "additional" deferred comp become subject to FICA taxes?

I am thinking that it does not because there would be no FICA taxes if the income stream was continued at $50k pa (assuming the 12% was not considered unreasonable), and the company is now just paying out the current PV. Any thoughts?

Thanks

Rod

[MGB]

In my opinion: Not only does it create additional FICA tax, but they should have been paying more FICA tax on the 50,000 payouts. As time goes by and the 12% is no longer reasonable, it should be updated.

[Guest Trirod]

Thank you for your input - but I thought that under the non-duplication rule, so long as the actuarial assumptions are reasonable at the time the deferred comp is earned, it really does not matter what actually happens later? Reg. 31.3121(v)(2)-1(d)(2)(ii).