Failure to credit employer non-elective contribution

[RWPHoenix]

I have a situation in which an employer's NQ plan should have credited its COO's fully vested NQ plan account with a significant amount of employer non-elective contributions over the last 5-6 years. COO is still working for the taxable employer and the crediting failure doesn't impact how or when the non-elective amounts, once credited, will ultimately be paid to the COO.  Client would like to credit all the past-due amounts into the COO's account in 2019.  It feels like this is a likely 409A violation but I am having trouble identifying the violation since the error doesn't involve an employee deferral election or the timing or form of benefit payment.  The error does, however, mean that Form W-2s issued to the COO showed the wrong amount of FICA wages in each year.

Anyone have any thoughts as to whether and how the error violates 409A and how it might be corrected?

Thanks.

[jpod]

I don't see any 409A issues either.  As to FICA/Medicare issues, you have to plow through the 3121(v) regulations and figure out what should be done with respect to both the years for which the SOL has not expired and for years for which it has expired.

[EBECatty]

I agree there's no apparent 409A issue. I recall some guidance within the last few years by IRS saying they would no longer accept amended W-2s prior to the SOL period to try to take FICA back to the correct year (and avoid paying potentially larger FICA upon distribution) but can't say I remember precisely what form the guidance took.

If the COO was over the SS wage base in prior years the impact should be minimal regardless.

I've also had many clients, as I'm sure others have, fail to withhold FICA upon vesting and have withheld upon distribution with no hassle. 

[jpod]

It's not a hassle factor; having to pay fica and medicare upon distribution can be much more expensive then necessary.  I really would be interested in seeing the guidance you seem to recall as I certainly don't recall that.

[EBECatty]

Agreed. Depending on the circumstances you certainly can overpay. 

Here's the guidance. It was a chief counsel memo from 2017 advising that IRS should not accept voluntary closing agreements from employers for closed years under these circumstances:

https://www.irs.gov/pub/lanoa/am-2017-001.pdf

[jpod]

Oh, closed years.  I misunderstood your earlier post.

[RWPHoenix]

Maybe a dumb question, but if the employer actually credits the entire amount for past years in 2019 is there anyway it can legally treat the amount as FICA wages in 2019? 

[EBECatty]

The FICA obligation is based on when the money is no longer subject to a substantial risk of forfeiture, so if the contributions/balances were vested in earlier years, FICA is triggered based on when the amount became vested. It doesn't matter when the employer earmarks funds for payment of the eventual benefit. 

[RWPHoenix]

That is my reading of the regs also.  Thanks everyone for your assistance.   

[Luke Bailey]

I don't understand how this can actually happen. the NQDC plan is just a fiction, right? If it says there were nonelective contributions, there were. It's all just paper. The fact that there may be an "as if" account that takes the contributions and invests them, e.g. with a mutual fund company, is a separate issue and just means there are some earnings to determine.

[EBECatty]

Completely agree, Luke. I think you are only left with the FICA issue outlined above if the document said the nonelective contributions were credited/vested in an earlier year. 

[Luke Bailey]

23 hours ago, EBECatty said:

Completely agree, Luke. I think you are only left with the FICA issue outlined above if the document said the nonelective contributions were credited/vested in an earlier year. 

EBECatty, I also agree with you on the FICA issues. I think the IRS would treat the amount as credited each year it was due. If some of the years are closed for FICA, then will just have to pay FICA when comes out on that portion, including the interest/earnings on that portion.

[FPGuy]

Agree that crediting and funding are distinct and FICA tax considerations are not dependent on the latter. But if NQ document stipulated a vested crediting schedule, and for the years in question the amounts were not properly credited, then FICA was under-reported in those years. This is what I expect was the case. Question as to remedial remedy for closed years: how is "that portion," and the earnings thereon, recovered? Pro-rata in some fashion from each NQ distribution? First out? What if distribution in the form of a life annuity - using the annuity exclusion rules for basis recovery?

[XTitan]

On ‎3‎/‎5‎/‎2019 at 12:16 PM, FPGuy said:

Question as to remedial remedy for closed years: how is "that portion," and the earnings thereon, recovered?

Not sure what you mean by "recovered"?  Do you mean "assessed?  Presumably you look to the general timing rule.

On ‎3‎/‎5‎/‎2019 at 12:16 PM, FPGuy said:

Pro-rata in some fashion from each NQ distribution? First out?

FICA tax the portion of each distribution that is attributable to non-FICA taxed years.

On ‎3‎/‎5‎/‎2019 at 12:16 PM, FPGuy said:

What if distribution in the form of a life annuity - using the annuity exclusion rules for basis recovery?

Assuming the life annuity was "readily ascertainable" but not FICA taxed (otherwise you'd FICA tax the lump sum equivalent when the amounts became readily ascertainable), apply FICA to the portion of each life annuity payment that is attributable to the non-FICA taxed years.