Contribution to 403(b) tax sheltered annuity in lieu of health insurance

[Guest tws]

Governmental entity makes contributions to a 403(b) tax sheltered annuity on behalf of employees who opt out of health insurance. Are the contributions subject to income and FICA taxes?

[Guest taylorjeff]

I can't quote the code #, but 403b contributions are sheltered from federal and (in Illinois) state income tax but not FICA.

[Everett Moreland]

I believe the IRS position is that the employer's 403(b) contribution is not subject to income tax but the employer's contribution for health insurance is (for those employees who elect health insurance) subject to income tax, because the employee has been allowed an election between a taxable benefit (the 403(b) contributon, which is eventually taxable) and a nontaxable benefit (health insurance) outside of a cafeteria plan. The health insurance benefit would also be subject to FICA. The employee's ability to elect between the 403(b) contribution and the health insurance contribution might also make the 403(b) contribution subject to FICA.

[mbozek]

I think the answer depends on how the benefit is provided. Constructive Receiept occurs when the employee has a choice between cash and a deferral, e.g., the employer's policy provides that employees who opt out of health ins will recieve additional wages which can be deposited in a 403(b) plan. If the 403(b) plan provides for a larger employer contribution for persons who do not participate in a health plan there is no CR because the employees do not have a choice of receiving cash and the er contribution is exempt from fica tax. IRS rulings permit employer contributions of excess vacation and severance pay into a qualified plan which are exempt from FICA tax as long as the employee does not have the opportunity to receive cash.