SERP

[lexi]

We have an EE who no longer faces the threat of forfeiture with respect to his SERP benefits.

I read the Regs for 3121 re FICA taxes and understand that section but i am wondering if we don't also need employer federal income tax withholding on the SERP benefits.

can anyone help?

[Guest mjb]

If plan is unfunded the lapse of forfeiture doesn't determine income taxation. Under IRC 451 and regs 1.451-2 nq benefits are subject to income tax when they are made available to the participant even if not paid, e.g., the benefits are payable upon termination or retirement. Need to review plan terms to determine when benefits are available to the participant.

[Guest Harry O]

. . . and just because a DB SERP (I assume you are talking about a DB SERP) is vested doesn't mean you have an immediate FICA withholding obligation. You can defer withholding FICA in many cases until the employee terminates if the benefits are not yet "reasonably ascertainable." It is usually more convenient to wait until the employee terminates to withhold FICA.

[Guest Joshua]

Employment taxes don't folow the income tax rules. In general, they are covered under the 3121 "special timing rule" and "nonduplication rule" that applies employment taxes to deferred compensation benefits at the earlier of:

1.) when services are performed, or

2.) when any section 83 substantial risk of forfeiture lapses.

For a SERP (nonaccount balance plan), the ideal time for the risk to lapse is right before payment begins and dump the PV into the last years compensation, but if it has lapsed sooner, then it is best to pay employment taxes anyway, so long as the employee cannot lose the benfit thereafter.

Under 3121, if the benefit is hit with employment taxes prior to retirement, they won't thereafter apply to the retirement payments at all (nonduplication rule), and as a practical matter there will be no incremental employment taxes paid (except for the small Medicare portion that has no cap) when the benefit is included in compensation before retirement assuming the employee is receiving annual compensation that is already above the current FICA/FUTA taxable wage cap ($94,200 for 2006, $97,500 for 2007), and has thus maxed out on employment taxes for the year absent the benefit's value.

[Steelerfan]

Although I don't disagree with any of the above responses, I would point out that when an employer elects to pay the FICA taxes on vested amounts in a DB SERP on an annual basis prior to retirement, the amount taxed will inevitably be "non ascertainable" and therefore a "true up" will almost necessarily be required when the employee terminates. Such is the nature actuarial assumptions.

Of course, the answer to the origninal question depends entirely upon whether or not the SERP is an "unfunded" top hat plan.