Self-employment tax on Pension distribution??

[drunkewok]

A surviving spouse receives a pension as part of a joint-and-survivor pension set up for her deceased husband by his employer. The distributions are reported on a 1099-MISC in Box 7, labeled "Nonemployee Compensation." The IRS says that the amount reported in said box is subject to "self-employment tax." Can you figure why the pension distributions are being labeled as nonemployee compensation?

[My 2 cents]

Why not a 1099-R? Wouldn't that be right whether the payments come from a qualified retirement plan or an unfunded non-qualified SERP?

[drunkewok]

What if the pension is part of a nonqualified employee plan? The instructions for Form 1099-R include this blurb:

Nonqualified plans. Report any reportable distributions from commercial annuities. Report distributions to employee plan participants from section 409A nonqualified deferred compensation plans and eligible nongovernmental section 457(b) plans on Form W-2, not on Form 1099-R; for nonemployees, these payments are reportable on Form 1099-MISC. Also, report distributions to beneficiaries of deceased plan participants on Form 1099-MISC. See the Instructions for Form 1099-MISC for more information.

My concern is with the italicized language. It seems to direct classification of the nonqualified pension amount on the 1099-MISC.

[QDROphile]

For a nonqualified plan, distributions are subject to FICA and taxation under special rules. the extent that benefits have not been included in FICA wages or SECA earnings at the time of accrual, they are subject to inclusion at distribution, again subject to some special rules for annuity type distributions. The instructions to Form 1099-MISC reflect those rules, but you need to know the rules to figure out the correct taxation and reporting. You also need to know how the deferred compensation was designed and administered to know what to do now. This is an area of considerable confusion.

[masteff]

1099-MISC has corresponding language on page 3 and seems to indicate the use of box 3. https://www.irs.gov/pub/irs-pdf/i1099msc.pdf

This article also indicates nonqual death benefits should be in box 3. http://www.equiasinsights.com/issue-1-2012-tax-update/payments-to-beneficiaries

I think you need to find out more about the type of plan that made the distribution. And likely push back on them to verify box 7 vs box 3.

Edit: but part of the 2nd link speaks to what QDROphile posted just above me about the special rule on FICA.