March 2, 2005
FICA Taxes Applicable to 403(b) Contributions
The Treasury Department recently issued a temporary regulation "clarifying" what contributions it considers to be made pursuant to salary reduction agreements. This is important because all contributions made pursuant to salary reduction agreements are considered wages subject to FICA taxes.
The temporary regulation provides that a salary reduction agreement includes an arrangement where the employer makes a payment, on behalf of an employee, to a 403(b) arrangement where:
- the employee elects to reduce his/her compensation pursuant to a cash or deferred election;
- the employee elects to reduce his/her compensation pursuant to a one-time irrevocable election generally made at or before the time of initial eligibility to participate; or
- the employee agrees as a condition of employment to make a contribution that reduces his/her compensation.
Employer contributions, such as matching contributions and contributions made by the employer as a supplement to compensation, are not considered contributions made pursuant to a salary reduction agreement and, therefore, are not subject to FICA taxes.
In light of the regulations, employers sponsoring 403(b) plans should review their withholding practices to ensure that all contributions to 403(b) plans, other than pure employer contributions, are being treated as wages subject to FICA taxes. If you have any question regarding whether a particular type of contribution is subject to FICA taxes, or if you have questions about correcting a failure to withhold FICA taxes applicable to 403(b) contributions, please contact us.