FICA timing

[Guest calcu]

We have a situation where we have not taking the amounts deferred into account for purposes of FICA reporting. All employee contributions are 100% vesting and therefore should have been taken into account when. How do we go about correcting this? The regulations simply state the non-duplication rule does not apply and that the entire amount will be taken into account for FICA purposes when it is distributed. Also, it states that penalties and interest may apply. I read this to mean that we do nothing now with respect to the prior years and when it is actually paid out, include it for FICA purposes. Going forward, we will operate per the regulations.

Any thoughts? Suggestions?

Thanks!

[Guest lvegas]

One thing to determine is whether in the years deferrals were made the employees' wages exceeded the wage base for the Social Security portion of FICA (the same holds true for the Medicare portion of FICA for years prior to 1994). If so, then the Social Security portion will be considered "taken into account" for purposes of 31.3121(v)(2)-(1)(d)(1)(i) and therefore need not be paid on the back end (assuming again that wages exceeded the wage base in applicable years). You're right in that at the time of payment you will need to take such payment into account for Medicare and FUTA purposes.

Whether and to what extent penalties and interest will come into play is unclear. The preamble to the regs indicates that they MAY be imposed. The actual regs. don't speak specifically to this except to indicate that amounts will not be considered as "taken into account" (and therefore included in wages for purposes of the nonduplication rule) unless FICA plus any applicable penalties and interest have been paid.

Does anyone have practical knowledge/experience as to how IRS polices this point? Is an upfront mea culpa necessary at payment w/ W-2, or should employers simply include the amounts paid as wages to the extent necessary for purposes of FICA/FUTA and hope for the best?

[Guest mjb]

Under IRC 6501 there is a three year statute of limitations on collecting back FICA taxes. You need to check with a tax advisor.

[Guest lvegas]

The regs say generally that if you haven't paid FICA in the past on deferrals, then you have to pay it currently upon distribution (on both the amounts deferred and earnings - which is a penalty in and of itself), which seems to me to mean that the concept of back FICA taxes doesn't really come into play. If the w-2 reporting a distribution in regard to which FICA has not been paid previously is filed in, say, Jan. 06, then the statute of limitations would only limit a FICA assessment on such distribution to the extent it was made after Jan. 09. However, if penalties or interest were to be assessed, 6501 could be asserted to limit the period for which any penalties or interest might be imposed.