CARES Act Distribution from a FICA Alternative Plan (401(a))

[Patricia Neal Jensen]

Are there any provision(s) required in a FICA Alternative 401(a) plan which would prevent the addition of a CARES Act distribution provision? 

Thanks   

Patricia Neal Jensen

QBI/Ascensus

[Larry Starr]

18 minutes ago, Patricia Neal Jensen said:

Are there any provision(s) required in a FICA Alternative 401(a) plan which would prevent the addition of a CARES Act distribution provision? 

Thanks   

Patricia Neal Jensen

QBI/Ascensus

Before I get too deep into it, is it a governmental plan not subject to ERISA that you are referring to?

[Peter Gulia]

An employer might want its lawyer’s advice about whether a coronoavirus-related distribution defeats the rule’s conditions for allocations no less than 7.5% of compensation and reasonable investment returns, and that the “plan is maintained to provide retirement benefits”.

 

Internal Revenue Code 3121(b)(7); 26 C.F.R. § 3121(b)(7)-2(e).

[Luke Bailey]

Patricia Neal Jensen, I think I agree with Peter that there is not going to be a clear answer until IRS provides guidance. Of course the CARES Act merely protects you on plan qualification-type issues (I say "-type") because the statutory language specifically references 403(b) and 457). Does not address FICA replacement, otherwise you would not have asked the question, of course. The 3121(b)(7)(F) regs say the determination of whether the required allocation amount is for a retirement-type benefit is based on facts and circumstances, and contains an example where the requisite amounts are allocated, but because they are available for distribution to participants at any age five years after being allocated, the plan is not a good FICA replacement plan because does not accumulate amounts for retirement. And Congress also did not give COVID-19 folks the option of taking now a one-time lump sum of some portion from SSA now, in exchange for an actuarial reduction of what would otherwise be their eventual SS benefit. So I would be cautious, although this is such a big potential gotcha that IRS should put out guidance on it quickly.

[Patricia Neal Jensen]

Larry... Not a governmental plan.  And thank you, Luke and Peter.  Just as uncertain as I thought it was!

PNJ

[Luke Bailey]

9 minutes ago, Patricia Neal Jensen said:

Larry... Not a governmental plan.  And thank you, Luke and Peter.  Just as uncertain as I thought it was!

PNJ

PNJ, you or someone else will need to educate me on how the concept of a FICA replacement plan is relevant for a nongovernmental plan?

[Patricia Neal Jensen]

"FICA Alternative" is what I am told this plan is.... 

"A FICA Alternative Plan is a type of 3121 retirement plan for your seasonal, part-time, and temporary employees that replaces Social Security. Employers avoid the matching 6.2% Social Security contribution, replacing it with an impactful benefit for employees.

 

What is a FICA replacement plan?

A "public retirement system (sometimes referred as a "FICA replacement system or plan) is a pension plan maintained by a public employer that meets the requirements of Internal Revenue Code 3121(b)(7)(F). These requirements must be met as an alternative to mandatory social security coverage."

[Luke Bailey]

3 hours ago, Patricia Neal Jensen said:

"FICA Alternative" is what I am told this plan is.... 

"A FICA Alternative Plan is a type of 3121 retirement plan for your seasonal, part-time, and temporary employees that replaces Social Security. Employers avoid the matching 6.2% Social Security contribution, replacing it with an impactful benefit for employees.

 

What is a FICA replacement plan?

A "public retirement system (sometimes referred as a "FICA replacement system or plan) is a pension plan maintained by a public employer that meets the requirements of Internal Revenue Code 3121(b)(7)(F). These requirements must be met as an alternative to mandatory social security coverage."

Patricia, this could be something I have just run across, but I'm pretty sure "FICA Alternative" and "FICA Replacement" are referring to same thing. With very few exceptions, e.g. the student FICA exception, no employer of an employee subject to U.S. taxing jurisdiction is going to avoid FICA for that employee unless the employer and employee are governmental. The small exceptions that do exist, e.g. for student employees meeting certain requirements, do not require a retirement benefit to avoid FICA.

[Larry Starr]

4 hours ago, Patricia Neal Jensen said:

Larry... Not a governmental plan.  And thank you, Luke and Peter.  Just as uncertain as I thought it was!

PNJ

OK; that's the reason I asked. If it's not a governmental plan, you need to know what it is, since I think you can't have one of those 
"FICA Alternative" plans UNLESS the employees are exempt from SS, and a non-governmental plan doesn't fit.  Now, lots of universities have these, because they are state entities and can be exempt from SS. Private colleges do not. 

I haven't looked at these plans in 100 years (maybe more) so there could be some changes that I am not aware of and with all the PPP stuff going on (I GOT MY APPROVAL AT NOON TODAY, just before they are supposed to run out of money by close of business!!!! YEA!) I just don't have the time to dig back into it.

Let's start with "what kind of employer is it?".

[Peter Gulia]

Most service-provider businesses call it a FICA-alternative plan; an IRS publication calls it a FICA-replacement plan.  Both labels refer to a plan meet to meet the rule I cited.

This would be an alternative only if the employer is governmental.

[Patricia Neal Jensen]

Thanks to both/ all of you.   I sent the material we have found to the Consultant.  She will recommend that they take the withdrawal from the 403(b) and get advice from their attorney if they still want to explore a CARES Act distribution from the 401(a)  plan.  The attorney also wrote the 401(a) plan so I leave the issue of a governmental sponsor to him as well.

 

Thanks!