FICA question with a SERP

[Kevin C]

One of our clients is asking questions about FICA for a SERP she will be receiving a benefit from. The SERP benefit is the difference between what her benefit would be in the DB plan if no limits applied and what she has accrued in the DB. The SERP document does not have any references to vesting or forfeiture of benefits. She is approaching retirement and has been told that FICA applies at retirement to the present value of her plan benefit. The amount of the FICA amounts to about 15 months of payments. She is being told the plan will offset her monthly benefits by the amount of FICA paid until the entire FICA amount has been recouped. Then, she will start receiving monthly payments in about 16 months. Does this information sound correct?

[jpod]

15 months sounds high because the tax should probably be exclusively or almost exclusively the 1.45% Medicare amount. Also, a 100% offset until recovery is a little chintzy, in my opinion, but I suppose the SERP could be written that way. Bottom line is, you need to see the calculation of the estimated FICA and Medicare taxes to be paid at retirement AND find out what the SERP document says about the financing of the employee share of these taxes.

[Kevin C]

They are calculating FICA as 7.65%. I'm not sure if she will have other income subject to FICA this year.

There is nothing in the SERP document about FICA or taxes in general. It does have a reference that benefits payable shall be subject to additional provisions set forth in one or both of the Rabbi Trust agreements used to provide benefits. I don't have a copy of either trust agreement. Is FICA something that would typically be addressed in the Rabbi Trust agreement?

[david rigby]

See IRC 3121 for definition of "wages". Note that (a)(5)(A) exempts payments from a qualified plan. Next read 3121(v) for references to NQ plans. Note especially, (v)(2)(A), and its reference to "substantial risk of forfeiture" (ie, vesting).

Bottom line: NQ plan benefits are (generally) subject to taxation as wages.

Hey, but I'm not giving you tax advice.

[Kevin C]

Thank you for the replies. I'd already seen one of David's prior posts with those cites. So, I was expecting to see FICA applied when the benefit vested or if not, when the payments were made. My first thought was that maybe the SERP benefits vested at retirement. We requested a copy of the document, but as mentioned above, there is nothing in the SERP document addressing vesting.

I don't want to provide tax advice either, but I've been asked to look at this to see if it warrants further inquiry.

[david rigby]

Kevin,

just an opinion: if the document is silent on vesting, you may have to look to other sources of information. Likely, the first source is whether there is a precedent for another participant.

If nothing else is available, the result might be as you imply: vested at retirement date. However, if the plan has an Early retirement date (that applies to this person), it will be difficult to claim vesting occurs at Normal retirement date.

[XTitan]

When it comes to nonaccount balance plans, timing of FICA is less an issue of vesting than it is when the benefit is "readily ascertainable". Given the SERP is based on the QP amount, subjecting the present value of the expected benefits to FICA at the time the benefit is calculable (no more salary increases or YOS to worry about) sounds reasonable. Course, I don't give tax advice either, blah, blah, blah.