Basic Q on FICA taxes

I don't operate in this area so forgive the basic question - there is, or at least was, a rule that if NQDC payments are subject to FICA taxes in, say, the first year of the program, then they are all withheld then, and not subject to FICA later.  I may have stated it poorly but you know what I'm talking about.

An accountant suggested that it can't be done any more; i.e. you'd have to withhold FICA each year.  I'm not aware of any changes - is this true?

I'm not aware of any such changes. The rules are set out by regulation in 26 CFR 31.3121(v)(2)-1.

If you defer separate amounts every year (i.e., each year $50,000 is deferred into the plan) then FICA taxes would be due on the $50,000 deferred each year. If the $50,000 is fully vested when deferred, FICA is due immediately. If the $50,000 vests in a later year, FICA is due on vesting. Once FICA is paid on the amount deferred, it is not subject to FICA (nor are its earnings) when ultimately paid back out.

However, if you defer only one amount (i.e., $500,000 is deferred in year one and there are no other deferrals) then FICA would be due on the $500,000 only once (in the year deferred or vested if later). The original $500,000 deferral would not be subject to FICA separately in every succeeding year. 

If memory serves, within the last few years the IRS did say they would no longer accept amended tax returns for closed years to pay FICA on amounts deferred. So, for example, if the $500,000 was originally deferred in 2010, but FICA was not paid, the IRS would not accept amended returns reporting/paying FICA because 2010 is closed. If FICA is not paid at its original due date, all amounts distributed (including earnings) are subject to FICA as and when paid.

This primarily impacts defined benefit or installment payout structures, e.g., in the example above, if the original $500,000 deferred in 2010 has generated earnings and now results in 5 annual retirement payments of $200,000 each, then FICA would be due on $200,000 each year during the payment period. This both increases the amount subject to FICA ($1,000,000 of deferrals plus earnings vs. original $500,000 deferral) and causes repeated inclusion for social security (original $500,000 deferral would have been subject to wage base in year deferred and likely already exceeded when executive was working vs. 6.2% of $200,000 [edit: up to the wage base for the year in which payment is made] for all five years in retirement). 

Thanks so much!

Agree totally with EBECatty, but would add that it was not exactly amended returns that IRS stopped accepting, but rather returns outside the 941-X amended return period under a closing agreement. Generally, a 941-X if within the current calendar year.

On 10/1/2020 at 7:08 AM, Bird said:

I don't operate in this area so forgive the basic question - there is, or at least was, a rule that if NQDC payments are subject to FICA taxes in, say, the first year of the program, then they are all withheld then, and not subject to FICA later.  I may have stated it poorly but you know what I'm talking about.

An accountant suggested that it can't be done any more; i.e. you'd have to withhold FICA each year.  I'm not aware of any changes - is this true?

No changes this century. 

Out of curiosity, are you talking about a defined contribution or a defined benefit NQ plan?  For a DB plan, once the benefit is readily ascertainable, then the amount is subject to FICA in a lump sum (effectively the present values of expected benefits) as opposed to withholding FICA on the amount of each distribution.

18 hours ago, XTitan said:

Out of curiosity, are you talking about a defined contribution or a defined benefit NQ plan?  For a DB plan, once the benefit is readily ascertainable, then the amount is subject to FICA in a lump sum (effectively the present values of expected benefits) as opposed to withholding FICA on the amount of each distribution.

I think it is a DB.  It was posed as a general question.  Thanks.