non-profit 457b FICA

[Guest Esther]

My nonprofit employer of 30 years terminated our 457b Top Hat plan with 5 days notice on November 2. I understand that this distribution is ordinary income for this year and Fidelity Investments withheld state and federal income tax before sending me a check. The accrued monies are employer contributions from the last 27 years and were not reported on my W-2 statements; no FICA or FUTA was withheld or paid. Fidelity assumes that my employer paid those taxes when the amounts were deferred (there was no vesting period). My employer has not mentioned it. My salary has always been well below the Social Security maximum. My questions: who is responsible for those taxes (employee and employer shares) now, are they due on the earnings as well, and are there penalties and interest due?

[Don Levit]

Esther:

I can't comment on 457(b) specifically, but according to Publication 15, Employer's Tax Guide, on page 35, employer contributions to a qualified plan are exempt from Social Security and Medicare taxes.

Now, if these were elective employee contributions or employer contributions by a salary reduction agreement, Social Security and Medicare taxes are due.

On page 30, it states, if Social Security and Medicare taxes were underpaid, the employer can make it up from later pay to that employee. But the employer is the one who owes the underpayment.

Go to: http://www.irs.gov/pub/irs-pdf/p15.pdf.

Don Levit

[Don Levit]

Esther:

According to Notice 2003-20, "Federal unemployment taxes do not apply to service for a state or local govenment entity because sec. 3306©(7) provides a FUTA exemption for service performed in the employ of a state or any political subdivision."

"To the extent a section 457(b) plan provides that annual deferrals are immediately vested they are subject to Social Security and Medicare at the time of deferral."

"If amounts deferred under a 457(b) plan are properly taken into account as Social Security and Medicare wages when deferred, the amounts subsequently paid that are attributable to those deferrals generally are not subject to Social Security and Medicare taxes.

If an amount deferred for a period is not properly taken into account, distributions attributable to that amount , including income on the amounts deferred, may be wages for FICA purposes when paid.'

I still do not know if these deferrals are referring only to elective employee deferrals, as opposed to employer contributions.

Don Levit

[Guest Esther]

Don,

Thank you for your detailed comments. Putting both comments together: If I no longer worked for this employer in 2010 and the FICA oversight came to light, the employer would have to pay both portions of FICA on the deferrals and earnings.

Esther

[Guest patrick076]

I must say 457(b) is really very disturbing for employs and designed for the benefits of employers i am disturbed to read that you are terminated on five days notice any way its just me

best of luck

[30Rock]

Esther

To the extent your employer made contributions to the plan, rather than deferred from your own salary, then employer contributions are treated as wages and subject to FICA payroll taxes at the time contributed since there was no vesting schedule. Therefore, you were responsible for the employee portion of the payroll taxes for each year and the employer was responsible for the employer share. Employer should have withheld both. If no withholding, then the employer has underwithholding issues. If withholding occurs now upon distribution, I believe it will be increased by the earnings on the contributions, so the payroll tax liability has increased.