FICA and Medicare Tax applied to ER Contributions

[bcmom]

A not-for-profit non-governmental employer sponsors a 457(b) plan for their Executive Director. Only employer contributions are made to the plan. They recently learned that the Executive Director should have been paying FICA and Medicare Taxes on his employer contributions. The plan has been inexistence for at least 10 years and this is the first they are hearing about (I have no idea how it came up). Because they were never aware of this, they want to know if the laws changed recently to apply FICA and Medicare taxes to these Employer Contributions. They have also asked other non-profits who sponsor 457(b) plans to see if they withhold FICA and Medicare Taxes to the employer contributions and those plan sponsors were not aware of it. Is this a common misconception? Is there a way to fix it?

[masteff]

But it's more complicated than that if the plan has a vesting schedule, see Example 2 on page 11, here: http://www.irs.gov/pub/irs-drop/n-03-20.pdf

It may also be that most plans simply (if not entirely properly) treat it as FICA wages when actually distributed. See earlier on that same page: "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 or made available. See 31.3121(v)(2)-1(d)(1)(ii)."

[QDROphile]

The law did not change recently, but it is a common oversight. Part of a fix that is impleemtned by some involves paying the FICA and Medicare taxes on the amounts distributed, but any fix should be advised by a compentent adviser. Intiating and maintaining a deferred compensation plan should be advised by a compentent adviser -- another commmon oversight.

[jpod]

This message board should not be used as a substitute for competent, one-on-one advice, but I will point you in the direction of considering that many dollars may be saved by (1) starting to handle this correctly going forward, and (2) filing amended 941s (I believe it is via Form 941-X) for all open years.

[bcmom]

I absolutely agree, I know the basis of 457 plans, but when it comes to the details like this, I don't begin to pretend I know the rules. The terms used are confusing and so are the rules. They will be glad to hear that it is a common error and that they aren't the only ones that missed it. I will recommend they consult with an attorney. Thanks everyone for your input.

[Guest AngelaSayers]

IS the additional amount for the calculated future benefits of the pension plan included in Medicare also subject to the .9% additional Medicare tax. What happens if you did not eventually recieve all of the money previously taxed on ( Almost any company could go out of business or not be able to pay). This can be very excessively costly for those with the non qualified plans for plans especially with the additional .9% tax over $250,000.