(February 11, 2014) Ponte Vedra Beach, Florida
Executive benefits consulting firm, Fulcrum Partners LLC, is pleased distribute this AALU Washington Report to its clients and friends. This continuing series of articles is intended to provide deep insight into trends, events, and issues that impact the design and operation of nonqualified executive benefit plans.
Failure to Follow Special Rules on FICA Taxes for Nonqualified Deferred Compensation Plans Can Lead to an ERISA Claim
MARKET TREND: Financial and tax planning considerations have made the use of nonqualified deferred compensation vehicles increasingly popular. While these arrangements generally result in the deferral of income taxation until the time at which the deferred compensation is paid to the plan participant, special rules under the Internal Revenue Code (“Code”) require that FICA taxes (i.e., Social Security and Medicare) be paid at an earlier time and emphasize the importance of proper plan administration.
SYNOPSIS: In Davidson v. Henkel, an employer maintained a supplemental retirement plan for the benefit of certain employees under which it promised benefits based on the amount that would be payable to a participant under the employer’s tax-qualified pension plan. The employer did not withhold and pay FICA taxes at the time they were due under the Code and, instead, paid these taxes at the time of each benefit payment. This approach resulted in the participant owing more in FICA taxes than he would have if the employer paid these taxes timely, thereby reducing the net benefit payable to the participant. The participant sued the employer for the lost benefit, and the employer filed a motion to dismiss the participant’s suit for failure to state a claim. The court found that the participant’s complaint did state a claim for benefits.
TAKE AWAY: Failure to properly administer a nonqualified plan, specifically with regard to the special rules governing the FICA taxation of these arrangements, may result in significant additional FICA tax liability to the participant and employer, as well as expose the employer to possible benefit claims. The consultants at Fulcrum Partners are available to assist nonqualified deferred compensation plan sponsors in avoiding ERISA claims by reviewing the procedures in place for paying and withholding FICA taxes on amounts deferred under these plans.
REFERENCE: Davidson v. Henkel (Case No. 12-cv-14103, filed July 24, 2013, United States District Court for the Eastern District of Michigan, Southern Division). This report is available in entirety here: Report.
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About Fulcrum Partners LLC :
Fulcrum Partners LLC is the nation’s leading and largest executive benefits consultancy. It’s consultants focus on an integrated approach to the design, financing and plan administration of executive benefit programs. Fulcrum Partners offers its clients a unique combination of industry specialists with diverse skill sets, targeted experience, and in-depth expertise in executive compensation and benefits consulting. Fulcrum Partners is a wholly independent, member-owned firm dedicated to help clients enhance their Total Rewards Strategy.
The AALU’s mission to promote, preserve and protect advanced life insurance planning for the benefit of our members, their clients, the industry and the general public reflects each of our primary issue priorities.
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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.
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