Calculating Amount Subject to FICA

[Guest Grumpy455]

Assume Ray is a participant in a nonqualified deferred comp plan. The plan provides a defined benefit type benefit payable only when Ray's employment is terminated.

Ray's employment will terminate on June 30, 2005. From January 1, 2005 through June 30, 2005, Ray's wages are $300,000. On his termination date, he is entitled to the nonqualified plan benefit which is, in its normal form of payment, equal to a monthly payment of $10,000 for life. The Plan also permits Ray to elect a lump sum payment which, using the plan's actuarial equivalence factors is equal to $1,200,000.00.

For FICA purposes, none of Ray's nonqual benefit should be subject to the OASDI tax (since he has already earned more than $90,000). However, is Ray's HI tax equal to 1.45% of the $1,200,000 (the present value of the benefit) or is it 1.45% of each $10,000 payment (when the payment is made--assume Ray does not elect the lump sum)?

As I read the FICA rules, the present value of Ray's benefit is includable in wages for FICA purposes (in this case that would be $1,200,000) on his termination date (which is the date on which the benefit is no longer subject to a substantial risk of forfeiture). However, the client's employee benefits consulting firm has told the client that the form of payment dictates the FICA treatment so that if Ray elects the lump sum, then the $1,200,000 is treated as a wage on his termination date, but if Ray elects monthly annuity payments, then when each payment is made it is subject to FICA then. Please help!!!

[E as in ERISA]

I agree with you unless a special rule applies. See rules for "nonaccount balance" plans at http://benefitslink.com/taxregs/31.3121v2.html.

[Guest LeeNunn]

For non-account balance plans, FICA must be paid by the resolution date, which is the date when you know everything but interest and mortality. The resolution date is often the retirement date for defined benefit plans, particularly restoration plans.

I recommend reading the regulations themselves.