Deferred compensation/FICA proposed regs. released.

• Author: Dunn, Bill

The IRS and Treasury have issued the much-anticipated proposed regulations under Sec. 3121 (v) (2) on when amounts deferred under or paid from certain nonqualified deferred compensation plans are taken into account as "wages" for purposes of the employment taxes imposed by FICA.

Under Sec. 3121 (v) (2) (A), any amount deferred under a nonqualified deferred compensation plan must be taken into account as wages for FICA purposes as of the later of (1) when the services are performed or (2) when there is no substantial risk of forfeiture of the rights to such amount. This is referred to as the "special timing rule." Sec. 3121 (v) (2) (B) provides that, once an amount deferred under a nonqualified deferred compensation plan has been "taken into account" as wages, neither that amount nor the income attributable to that amount is again treated as FICA wages. The effect of this rule is to subject amounts to FICA prior to their receipt.

A nonqualified deferred compensation plan is any plan or other arrangement established by an employer for one or more employees that provides for the deferral of compensation.

Prop. Regs. Sec. 31.3121 (v) (2)-1 (c) differentiates between account balance plans and nonaccount balance plans in making the determination of how much compensation has been deferred. Under an account balance plan, the amount deferred for a period equals the principal amount credited to the employee's account for the period, increased or decreased by any income attributable to the principal amount through the date the principal amount is required to be taken into account as FICA wages. A plan will be deemed an account balance plan if under the terms of the plan, a principal amount (or amounts) is credited to an individual account for an employee, the income attributable to each principal amount is credited or debited to the individual account, and the benefits payable to the employee are based solely on the balance credited to the individual account.

If a nonqualified deferred compensation plan is not an account balance plan, the amount deferred for a period equals the present value of the additional future payments to which the employee has obtained a legally binding right during that period. The regulations give employers the flexibility of using any reasonable actuarial assumptions and methods to determine the present value amount.

Deferrals subject to Deferrals not subject to Sec. 3121 (v) (2) Sec. 3121 (v) (2)

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