Sapers & Wallack
Bulletins: AALU Washington Reports
Saving FICA Taxes on SERPs
December 31, 2008
If an employer expects FICA taxes to increase next year (as many do), the
company may be able to reduce FICA taxes on some supplemental executive retirement
plans (SERPs) that it maintains by accelerating its FICA tax obligations.
Both the employer and the employee pay FICA taxes on wages, including nonqualified deferred
compensation. FICA taxes are in two parts — the larger part is the OASDI (social security) tax at 6.2% (on
each party) and the smaller amount is the HI (medicare) tax at 1.45% each. While the OASDI part is only
taxed up to the current wage cap ($102,000 for 2008), the HI part is imposed on all wages, without
limitation.
Some people expect that in the 111th Congress, an effort may be made to increase social security
taxes by eliminating the wage base on the OASDI part (which is scheduled to go to $106,800 in 2009) so
that higher income individuals will pay 6.2% tax on the full amount of the wages. President-elect Obama
has publicly stated his support in the past for a proposal that would not count wages above $106,800 but
would count wages above $250,000 (the so-called donut hole approach). Either of these proposals, if
enacted in 2009, could be retroactive back to the beginning of 2009 and if so enacted, would have the
effect of increasing FICA taxes on higher income individuals. However, given the current economic crisis,
whether this will, in fact, be pursued by Congress is far from certain at this time.
The FICA tax rules contain a provision dealing with vested benefits that are not reasonably
ascertainable (see Treas. Reg. §31.3121(v)(2)-1(e)(4)). The type of benefit to which this is likely to apply
would be a defined benefit type (non-account) SERP. Under the FICA tax rules, the employer can elect to
accelerate the FICA tax obligation on those amounts. For example, an employer sponsoring a SERP for an
executive could, instead of having the OASDI and HI tax paid when the amounts become ascertainable
(sometime after 2008), choose to accelerate the FICA tax payments into 2008, thereby largely exempting
the ultimate payments from any further FICA tax obligation (a true-up is ultimately required, however).
While this technique would accelerate the payment of tax and normally would not produce a
desirable result, it may be helpful if one expects a substantial tax increase to be enacted in the next year or
so.
AALU understands that a number of companies have decided to accelerate the FICA tax in this
manner. Whether this action effectively reduces net FICA taxes depends ultimately on the unknown factor
of what Congress will do in 2009 with respect to such taxes. It should also be kept in mind that the same
election would be available in 2009 if it then appears likely that Congress may enact these changes in 2010.
The applicable regulations (see Treas. Reg. §31.3121(v)(2)-1(e)(4)(ii)) state that the employer can
choose to accelerate the FICA tax obligation by taking the amounts “into account at any date or dates,” but
does not specify when such a decision has to be made by the employer. The actual mechanics for making
such a decision are not clear. Because of this uncertainty, it would appear that the employer could make a
decision to take the amounts “into account” as of the last payroll period in 2008 at any time before filing
the employee’s 2008 Form W-2 (i.e., before the end of January 2009, as long as the employer can make the
appropriate payroll tax adjustments). Further, it may also be possible to take these amounts into account
for 2008 later in 2009 by filing amended payroll tax returns and Forms W-2 (and making any appropriate
payroll tax adjustments).
Any AALU member who wishes to obtain a copy of any of Treas. Regs. §31.3121(v)(2)-1(e)(4)
may do so through the following means: (1) use hyperlink above next to “Major References,” (2) log onto the
AALU website at www.aalu.org and enter the Member Portal with your social security number and select
Current Washington Report for linkage to source material or (3) email Anthony Raglani at raglani@aalu.org
and include a reference to this Washington Report.
In order to comply with requirements imposed by the IRS which may apply to the Washington Report as
distributed or as re-circulated by our members, please be advised of the following:
THE ABOVE ADVICE WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT
BE USED, BY YOU FOR THE PURPOSES OF AVOIDING ANY PENALTY THAT MAY BE
IMPOSED BY THE INTERNAL REVENUE SERVICE.
In the event that this Washington Report is also considered to be a “marketed opinion” within the meaning
of the IRS guidance, then, as required by the IRS, please be further advised of the following:
THE ABOVE ADVICE WAS NOT WRITTEN TO SUPPORT THE PROMOTIONS OR
MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED BY THE WRITTEN
ADVICE, AND, BASED ON THE PARTICULAR CIRCUMSTANCES, YOU SHOULD SEEK
ADVICE FROM AN INDEPENDENT TAX ADVISOR.
The mission of AALU is to promote, preserve and protect advanced life insurance planning
for the benefit of our members, their clients, the industry and the general public.
For more information about how AALU’s advocacy efforts help protect your business and the
advanced life insurance marketplace, visit our website at www.aalu.org, or
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