Company Match taxable ?

[Guest tkraynak]

I have a client where the match portion of the 401K is taxable for the City. They have a vesting schedule, 20% per year, and the employee is funded on a quarterly basis. If an employee leaves during the quarter, they do not receive any of the company match during that period.

Since the employee is on this vesting schedule, I am not sure if they should be taxed on the full company match portion or only on their vested portion.

Any recommendations ?

[Theresa Lynn]

I am a little confused by your fact situation. A state or local government cannot sponsor a 401(k) plan. Is this instead a 457 plan or is this why you are talking about taxable matches? I also am confused by the statement about the matches being taxable to the company and then later that they are taxable to the employee. It also appears that you have some vesting issues as well.

Could you provide a few more details?

I think this might help us provide more useful guidance.

Theresa Lynn

[david rigby]

Actually, there are some governmental 401(k) plans, grandfathered because they were in existence prior to some date. Sorry, I don't know the applicable date.

[Guest tkraynak]

Thanks for your assistance & clarifying questions.

This is a 401k plan for a Corp within the City of Cleveland. The City is taxing the company match portion of the EE's deduction. The specific law is : "..Contributions to a pension, annuity, or tax shelter by an employer is deemed to be other compensation subject to withholding if the employe's interest in or entitlement to the amount contributed is vested and non-forfeitable at the time of contribution".

The EE's vesting schedule is 20% per year. The company matches the employee portion on a quarterly basis. If an employee leaves during the quarter, they do not receive any of the company match during that period.

Since the employee is on this vesting schedule, I am not sure if they should be taxed on the full company match portion or only on their vested portion.

Tim

[KIP KRAUS]

If an employee leaves a company and forfiets company matching contributions and takes a distribution then the employee is only going to recieve that portion of the Company match in which he is vested and tax would apply to that portion only. I don't see how a person can be taxed on a forfieted benefit. I don't think there's a construtive reciept question either since the benefit is forfieted.

[Greg Judd]

Originally posted by tkraynak

The City is taxing the company match portion of the EE's deduction. The specific law is : "..Contributions to a pension, annuity, or tax shelter by an employer is deemed to be other compensation subject to withholding if the employe's interest in or entitlement to the amount contributed is vested and non-forfeitable at the time of contribution".

I'm not a lawyer, but entertain this interpretation anyway; the law's aimed only at contributions vested & non-forfeitable at the time of contribution. That isn't the case with your plan - so no withholding applies.

Now-does that mean the value of the contribution isn't taxable to the recipient (rather than the company making the contribution)? Oops, more homework for you....

[david rigby]

I see two things going on.

First is the question of taxable income. But the quoted statute mentioned "subject to withholding". This might imply that the entire match is subject to taxation, but only a portion is subject to withholding.

Or something else. Terminology can be important.

[Richard Anderson]

Is it possible that the quoted statute is referring to non-qualified plans?

[Guest TAG]

Maybe consider calling the City Tax Collector/Attorney and pose the question to them. Local law is specific and I would ask for a written answer as guidance to cover yourself.

[IRC401]

Question: Does this mean that Cleveland also taxes 401(k) contributions?

Comment: Is it possible that unvested contributions are taxable at the time they vest? I don't have the whole ordinance handy.