FICA Alternative Plan

[oldman]

As part of the Omnibus Reconciliation Act of 1990 ("OBRA"), as an alternative to the payment of FICA taxes, state and local governments may establish a retirement program to cover part-time, temporary or seasonal employees. In order for an employer to avoid FICA tax liability, its FICA alternative plan must satisfy certain design and benefit requirements. A FICA alternative plan:

must provide a benefit of at least 7.5% of compensation;

contributions must be credited with a reasonable rate of interest

benefits must be 100% nonforfeitable.

A question has come up whether these type of arrangements may allow participants to invest in variable funds and permit loan distributions.

Based on Treas. Reg. §31.3121(b)(7)-2(e)(2)(iii)©, variable investments would not provide a reasonable rate of interest and would conflict with providing a benefit comparable to an OASDI Social Security benefit. The practical approach would be to offer only a fixed investment (i.e., stable value fund) as the only investment option.

There is no explicit reference in the regs prohibiting loans. It is implicit in the nonforfeitability requirements of the regs that require a covered participant to be "unconditionally entitled to a single-sum distribution from the retirement system equal to 7.5 percent of the employee's compensation over the period of covered service, plus interest." Hence, there should be no access to the funds before termination of employment, retirement, death or disability. It would follow that such plans would not allow for in-service withdrawals on account of a serious financial, attainment of age 59-1/2, or loan distributions.

What do you think?