How Best to Collect FICA Due from Retiring Employee

[Eric Taylor]

Forgive me if this is addressed elsewhere as I was unable to find.  

Client has an executive with SERP type benefit that will vest upon his upcoming retirement.  As a result, he will recognize significant Medicare taxes on the present value of the future SERP benefits in 2017.  (Executive is already maxed out on SS taxes for 2017 so no amount owed there.)  Question is how best to collect those taxes from the executive.  In the month he retirees, he will only work a short portion of the month and will not net enough regular wages to cover the significant Medicare taxes due.  

Can executive simply write check to employer to cover the remaining FICA taxes due?

Would it be possible / preferrable to withhold the full amount needed from pay for the month prior to the retirement month (even though benefits not technically recognized / vested then) since executive will net more than enough to cover during the full month of work preceding retirement?

Can employer take advantage of rule of administrative convenience and wait until 12/31/17 to recognize FICA amount then employ lag rule for withholding and collect from the SERP payments made during the first quarter of 2018?

Ideally I think everyone would just have executive pay the amount due into the employer upon retirement (out of personal funds) but that amount is not already in the employer's payroll system, etc. so question becomes how to get that added in or credited if that is possible.

[jpod]

Does the SERP agreement/plan say anything about this?  Assuming it's silent, another alternative would be for the employer to advance the employee's share as a loan (perhaps without interest if it is less than $10,000) and then repay itself out of the SERP payments, although the practicality and desirability of this would depend upon when the SERP payments start.

[CuseFan]

The employer remits the tax when due then withholds from SERP payments until employee portion is recouped, so it may be that the first few SERP payments don't get paid, depending on the amount of Medicare taxes versus the SERP payments.

[EBECatty]

You would need to be careful with making a loan that will be offset by future distributions. The 409A regulations generally consider this an acceleration of the future payments. However, payment of FICA taxes (plus income taxes on the FICA tax distribution) is a permissible acceleration event under 409A, so you could probably achieve the same substance calling it an accelerated distribution, which presumably would be offset from later distributions. Or, if it's not much, consider a bonus that would sufficient to cover the FICA taxes.

[XTitan]

I've seen diversity of thought on combining administrative convenience with the lag rule, but pushing the collection into 2018 would require assessing FICA in 2018, so you have OASDI up to the SSWB in addition to HI to collect.

OP didn't say whether this was a public company or not, but thinking of this as a loan could have SarBox issues.

[jpod]

EBECatty, upon reflection I agree that the loan idea is problematical under 409A.  Thanks for catching my mistake.