The IRS recently released an “issue snapshot” indicating that it is refocusing on the Social Security and Medicare (FICA) tax rules applicable to eligible deferred compensation plans under Section 457(b). Eligible deferred compensation plans are plans that meet the requirements of Section 457(b) and are established and maintained by a state or political subdivision thereof, or by any agency or instrumentality of any of the foregoing, and any other organization (other than a governmental unit) exempt from federal income taxes.
The IRS explains that, in some cases, employers are not withholding, paying, or reporting FICA taxes on contributions to Section 457(b) eligible plans. The IRS also noted that under Section 3121(v)(2), and in accordance with Notice 2003-20, an employer must take amounts deferred under a nonqualified deferred compensation plan, including a Section 457(b) eligible plan, into account for FICA tax purposes as of the later of when the employee performs the services or when there is no substantial risk of forfeiture of the rights to such amounts.
The snapshot also includes “issue indicators” and audit tips for IRS examiners to focus on when looking for this issue.
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