Owner gives back his salary

[ratherbereading]

The owner of a large company deferred 18,000 in 2018.  He gave back his entire 2018 salary at the end of 2018. They now want a refund of 18,000 processed for him. Anyone ever had this situation?

[jpod]

I have not, but it sounds impossible to me. 

[QDROphile]

Seconding jpod, he may have given back the salary, but he still had the income for income tax purposes, and a deferral for income tax purposes.  Or there is more to “gave back” than stated.  And if he gave back the salary, why would the reversal of the deferral go to him?  The deferral is part of salary.

[ratherbereading]

I  don't get it either. He got no W2 since according to them he had no compensation.

[QDROphile]

What form of organization is the company?

[jpod]

I'll wait for the answer but that there would ordinarily be a W-2 implies that it's a corporation, and the tax construct is that an elective deferral is nonetheless an employer contribution, and I don't see a "mistake of fact" that would justify the return of the $18,000 to anybody.  On the other hand, if the corporation can legitimately take the position that this individual received no wages (although I would question that), the $18,000 should be forfeited and used by the corporation to offset future non-elective contributions, so indirectly the corporation will get its $18,000 back.    

[ratherbereading]

17 hours ago, QDROphile said:

What form of organization is the company?

It's a very large corporation.

[jpod]

Is this a "clawback" or are they taking the position that he wasn't supposed to be paid at all and it was just one big goof up?

[JamesK]

Since any entity's tax liability is determined on an annual basis, it is indeed possible to return or pay back income and receive an offset for the amount repaid -- so long as it all done in the same taxable year.  But getting the money out of the 401(k) plan is an entirely different kettle of fish.  I can't think of any good reason for distributing it from the plan back to either the employer or the employee.  

In the end, the employee should have received a W-2 with $18,000 in salary deferrals, social security wages, etc., but zero in wages.  Thinking about the corrections for over withholding, it sounds like a real pain in the ass.

[ratherbereading]

21 hours ago, jpod said:

Is this a "clawback" or are they taking the position that he wasn't supposed to be paid at all and it was just one big goof up?

I'm not sure what a clawback is, but there position is not that he wasn't supposed to be paid at all -- he just "decided" to give it all back.

[BG5150]

I think we have to look at:  what does his (revised?) 2018 W2 say?

If it is zero, and code 12D is zero then maybe it is indeed a mistake of fact.  (?)

 

[david rigby]

16 hours ago, JamesK said:

In the end, the employee should have received a W-2 with $18,000 in salary deferrals, social security wages, etc., but zero in wages. 

FICA wages of $18K, but zero FICA withholding?  Is that possible?

[ESOP Guy]

4 hours ago, CEW said:

I'm not sure what a clawback is, but there position is not that he wasn't supposed to be paid at all -- he just "decided" to give it all back.

I think you need their CPA or someone like that rule what if any was his wages and then you can decide what the plan says. 

I used to do income taxes and if he had constructive receipt of the pay it is taxable to him in my mind if he gave it back.  I am happy to be told I am wrong on this point as it has been many years but that is my reaction.  

I am serious the client needs to have one of their tax people produce W-2 if any.   The plan's TPA shouldn't be guessing or giving advice in this case.  It simply isn't the plan's job to decide if he had compensation or not.  It is the plan sponsor's job to decide that and the plan decides what that means under its terms.  

[QDROphile]

FICA issues are not the greatest misses in JamesK’s assertions.  “gave back” compensation should be explored in light of the constructive receipt doctrine, as suggested by ESOP Guy.

[JamesK]

8 hours ago, david rigby said:

FICA wages of $18K, but zero FICA withholding?  Is that possible?

No, there needs to be withholding as well.  Since presumably the FICA has already been withheld, that shouldn't be a problem. The problem will be recovering the FICA amount withheld on the repayment.

[JamesK]

Here is a more thoughtful approach which focuses on the employment tax issues:

https://www.ey.com/Publication/vwLUAssets/ey-managing-wage-repayments/$FILE/ey-managing-wage-repayments.pdf