Mandatory Contributions

[Guest MDG]

My company is implementing a plan where it is contributing $2,000 worth of company stock to a plan for me. The company is then reducing my gross pay (semi-monthly) by the $2,000 over the year. My company sent around a powerpoint printout hyping this great deal. In it, they claim I am better off sice the $2,000 will not be subject to current income taxes and not subject to FICA.

My question is, can they do this? If so, how are they doing it?

P.S. I am told that I have to participate.

[GBurns]

What have they provided as the legal rationale for the exclusion from taxation of this "gift" of stock?

[mbozek]

Since the employer is reducing your pay by 2000 you will not be subject to FICA tax since it will not be paid to you. Second, employer contributions under a qualified plan are not subject to FICA taxation. Only an employee's election to reduce salary is subject to FICA tax under IRC 3121.

An employer can make participation in a retirement plan mandattory as a conditon of employment.

[GBurns]

MDG

Is this a retirement plan?

Is this a qualified plan?

Are they going to just cut your salary or are they having you sign a salary reduction agreement?

Will there be any restrictions on what or when you can do anything with this stock?

[Guest MDG]

Ok, this is part of our savings and investment plan. The stock I am told we can withdraw, subject to penalty and taxes, at any time.

I guess my problem is how an employer can just say, we are cutting your salary by $2000 and putting it in this plan.

I asked my CPA about it and he said they couldn't make me reduce my pay like that and still avoid federal income taxes and FICA taxes because I was really the one making the contribution.

He also said this contribution might affect how much I can put into my ROTH IRA. Is any of this correct?

[MGB]

Although the economic net effect is that you are making the contribution, in fact you are not making the contribution under your own decision. If it were your decision, then your CPA would be correct on the FICA, but you could still contribute pre-tax if they set this up as a 401(k) account.

There are really two completely unrelated events happening here. The company is going to make a contribution to a retirement plan for you. That's nice. (However, there may be questions of whether it is a prudent fiduciary decision to invest it all in your company's stock.)

Separately, the company has decided to reduce your salary. That's not so nice. But, they have complete control over what they pay you unless you have an employment contract with them.

It just so happens that they are instituting these both at the same time and in the same amount. But, in reality, it is not your salary that is being put into the plan.

Yes, this will affect your eligibility for IRAs.

[GBurns]

To me this needs more explanation than I am getting from MDG.

If the company is "we are cutting your salary by $2000 and putting it in this plan." and "reduce my pay like that " then it seems, as it does to his CPA who is closer to the real facts than I am, that MDG "was really the one making the contribution." through a salary reduction agreement.

If it is through a salary reduction agreement then it should not avoid FICA etc.

It is also not a 1 time election being made at the start of employment and MDG has not said that it is a 401(k) or even what kind of plan it is.

[Guest MDG]

Sorry for the lack of detail. I guess this is not so simple as I thought it would be.

The plan is a 401(k) plan. I get a nice match.

No, I have not signed anything regarding this new mandatory contribution. And it is to be an ongoing thing.

No, I do not have an employment contract. This was a kind of take it or leave us sort of thing.

Anyhow, thank you all for getting me info so quick.

[WDIK]

Is it possible that the 401(k) plan was set up using a negative deferral election (in other words, participant's are deemed to have entered into a deferral agreement)? Even so, the participant still has the right to change our opt out of the deemed election.

The facts as presented are still somewhat confusing and don't seem to correlate, as pointed out by others. (FICA exemption, matching, salary reduction, etc.)

[Brian Gallagher]

A couple of questions:

Are you 100% vested in the money right away? Will the money be considered the same as a salary deferral? If so, then how could you take the money anytime. Salary Deferral money is locked up until a distributable event happens.

And just something not really realted to the topic but, what if you leave the firm mid-year? Do you get to keep all $2K for the year, or just the stuff you "bought"?