Are 401k deferrals through 125 plan subject to FICA?

[Guest Pete Swisher]

401k deferrals through 125 plan subject to FICA? Code and Regs are unclear. In other words, if a 401k is included as a cafeteria plan benefit, are those deferrals subject to FICA or not?

[R. Butler]

FICA taxes are indeed treated differently under a 125 plan than under a 401(k) plan. FICA taxes must be paid on salary reduction dollars into a 401(k) plan, but not on salary reductions dollars put into a 125 plan.

My question is why would you want to run your 401(k) through the 125 plan. I know combining the plans results in one compensation package, but it is so much more difficult to administer.

[david rigby]

I'm not sure exactly what is meant by the question, but I'll add: If you are referring to the possibility that an employee might have 125 dollars "left over" and can then take them in cash or defer into a 401(k), then those dollars are subject to FICA tax.

[R. Butler]

I maybe understanding your question also. Again to restate the rule FICA taxes are treated differently under the 125 plan than under the 401(k). FICA taxes must be paid on salary reduction put into a 401(k) plan, but not on salary reductions put into a 125 plan. A 401(k) plan is merely one benefit that is offered under the cafeteria plan. The administrator must keep track of where each person's salary reduction is going. The portion that goes to the 401(k) would be subject to FICA.

Your question presents a good example of the difficulties in administering the 401(k) plan though the 125 plan. There are also many issues realting to nondiscrimination testing that makes this setup a poor option

[Dave Baker]

To continue this discussion, please use this thread instead:

http://www.benefitslink.com/boards/index.p...=ST&f=20&t=7366