Sick Payout Taxable

[Guest JLF2009]

When an employer makes an elective contribution to an employee's 403(b) or 457 account, it's my understanding the dollars are FICA taxable. If an employer makes a contribution to one of these accounts for a sick or vacation payout at the end of an employee's employment, is it still subject to FICA tax? Thus making it part of their earnings that should be reported on their W2. This is for a public school.

[J Simmons]

When an employer makes an elective contribution to an employee's 403(b) or 457 account, it's my understanding the dollars are FICA taxable.

Correct as to the eligible 457(b) plan. As for a 403(b) and by 'employer makes an elective contribution' you are describing an employer making contributions by reason of an employee's salary reduction agreement, also correct. On the other hand, if you are referring to contributions made at employer expense, and as to which the employee did not have the option to take as extra pay, then FICA tax does not apply to the contributions.

If an employer makes a contribution to one of these accounts for a sick or vacation payout at the end of an employee's employment, is it still subject to FICA tax?

The tax rules that apply to 403(b) and 457 plans (the additional ERISA rules would not apply because the employer is a public school) do not contemplate tagging specific contributions for specific purpose payouts, such as sick or vacation payout. When an employee's employment ends, all benefits are distributable from either the 403(b) or 457 plan, unless drafted to restrict payout beyond what the tax laws require.