Tax Facts Q: 3541. Are contributions to, and postretirement payments from, a deferred compensation account balance or nonaccount balance plan subject to FICA and FUTA taxes?
IRS Info. 2012-0032
The IRS has recently provided guidance on the withholding of FICA taxes on the value of certain deferred compensation benefits. The IRS clarified that withholding FICA taxes in the year an employee begins receiving benefits may be proper, because the present value of the benefit is reasonably ascertainable.
FICA taxes are generally due on wages when they are actually or constructively paid to an employee. Despite this, IRC Section 3121(v)(2) provides an exception in situations involving deferred compensation benefits.
Under Section 3121(v)(2), the deferred compensation benefits become wages subject to FICA taxation either when the employee performs the services for which the deferred compensation benefit is paid, or when the benefit is no longer subject to a substantial risk of forfeiture, whichever is later.
However, there is an additional exception that allows the employer to delay FICA withholding on amounts distributed as monthly annuity payments until the present value of those payments become reasonably ascertainable. Under these types of plans, called nonaccount balance plans, benefits typically become reasonably ascertainable when the employee retires.
Therefore, in this case, it was proper for the employer to wait until the employee retired and began receiving benefits under the deferred compensation plan in order to withhold and pay the related FICA taxes.