Deferred Comp / SERP

[austin3515]

Employer contributions made to the Plan to make up for qualified plan limits. Contributions are 100% vested. If the contribution is $10,000 is it necessary to run $10,000 through payroll in order to pay the necessary FICA (but not Federal/State) income taxes?

[Kevin C]

You've got me curious. How do you get 100% vested contributions in a non-qualified plan that are income tax deferred? You mentioned SERP, so I assume you are not talking about a 457(b) for a non-profit.

[austin3515]

My understanding is that because they can't take the money it is not FEDERAL taxable income ("constructive receipt"). But because it is vested, it is subject to Medicare and SS.

[Kevin C]

My understanding, based on a discussion with the attorney who drafted a non-qualifed plan for one of our clients, is that a substantial risk of forfeiture is needed to defer taxation under 409A. He did not explain why. Trying to read some of 409A, the only thing I found was 409A(a)(1)(A)(i) saying that if a plan fails to satisfy the rules in form or in operation, amounts are taxable to the extent not subject to a substantial risk of forfeiture. I'm more than happy to leave 409A details to the attorneys. But that doesn't mean I can't learn a thing or two along the way by asking questions.

[austin3515]

You and me both...

[jpod]

Don't know what you mean by "run[ning] . . . through payroll," but the answer is that FICA/Medicare tax must be deposited with IRS - both employee share and employer share. Typically employee share is withheld from the employee's other income; if the employee's share is withheld from the $10,000 employer contribution then the employee will be subject to current income tax on the amount withheld, and then the employer must apply income tax withholding to that amount. Assuming the flat rate of income tax withholding of 25%, you actually need to deplete the $10,000 by $1,020 in order to cover the income tax withholding and the FICA/Medicare tax withholding. If that then triggers state income tax and withholding, it can get very complicated.

[austin3515]

But in what scenario do you have to run the calculations you describe? I don't think my plan has any vesting schedule at all, but someone above is saying there must be a substantial risk of forfeiture to qualify under 409A and to avoid to avoid depositing payroll taxes. Thoughts?

[QDROphile]

You are gettng confused information about "risk of forfeture" under sections 3121 and 409A : " there must be a substantial risk of forfeiture to qualify under 409A" is not true. For FICA withholding purposes, look to 3121 and forget about 409A unless you are somehow responsible for compliance issues under section 409A. Section 409A relates to income taxes. The two can interact, but don't start there.

[austin3515]

You do not have to have a substantial risk of forfeiture to qualify for 409A. It's just that if you don't comply with 409A, you're subject to taxes and a 20% penalty on anything that is not subject to a substantial risk of forfeiture. I'm reading through the regs now.

I assume everyone agrees that if 100% vested with no substantial risk of forfeiture that FICA taxes apply?

[QDROphile]

If it is a defined contribution type plan. A SERP that is a defined benefit type plan operates under different rules.

[austin3515]

Yes, mine is a DC Plan. Thanks!