FAQs for government entities regarding Retirement Plan Issues
These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided.
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Are the employer and employee contributions to a section 457 plan taxable for social security and Medicare?
Yes, your contributions to a 457 plan are subject to social security and Medicare taxes. Section 3121(v)(2)(A) of the Code provides that any amount deferred under a nonqualified deferred compensation plan shall be taken into account for purposes of social security and Medicare as of the later of (i) when the services are performed, or (ii) when there is no substantial risk of forfeiture of the rights to the amount.
Section 3121(a)(5)(E) of the Code provides that wages do not include any payment made to, or on behalf of, an employee or his beneficiary under, or to, an exempt governmental deferred compensation plan (as defined in section 3121(v)(3)).
However, section 3121(v)(3) of the Code provides that the term “exempt governmental deferred compensation plan” does not include any plan to which section 457(a) or section 457(e)(1) applies. Thus, contributions to an eligible state deferred compensation plan are not excludable from the definition of the term “wages” for purposes of the FICA taxes.
Both the employer and employee contributions to a section 457 plan are taxable for social security and Medicare.
Employee X has 34 years of service with school districts. X is a participant in the State Retirement System and contributes 7.65% of his gross salary to the plan. For the past 4 years, X has been employed as superintendent of schools of the ABC school district in the state. What is the maximum amount of elective deferrals X can contribute in 2015 to a 403(b) contract purchased for X by ABC School District based on his salary of $50,000+?
A plan that provides for salary reduction contributions must not exceed the maximum deferral limitations under section 401(a)(30) of the Code. For the 2015 year, the maximum 403(b) elective deferral limit is $18,000 plus additional contributions permitted for l5-year employees and "catch-up" contributions for employees over age 50. See Publication 571 and Retirement Topics – 403(b) Contribution Limits for an explanation of how to figure the total deferral allowed.
Same facts as Q3 - do either employer or employee contributions to the State Retirement System,or both, have to be included when figuring the limit on elective deferrals under the 403(b) contract?
If the retirement plan is any of the plans described below, the annual limit on Employee X’s deferrals under a 403(b) contract would have to be reduced by the total of all elective deferrals contributed for the year on behalf of X (even if by different employers) to:
See section 401(a)(30) and page 4 of Publication 571.
If the State Retirement System is a section 457 plan, the school district should adjust the limitations accordingly.
Same facts as Q3 - when figuring the amount previously excludable, what exactly do you include in this figure?
To figure Employee X’s exclusion allowance, you must know the amounts previously excludable from X’s income. Page 8 of Publication 571 explains how to figure this.
A municipality offers employees not participating in the state retirement system the option of a matching IRA up to $1,000. Employees must show proof of contribution through bank documentation. The municipality then sends a check directly to the bank for contribution to the employee's IRA. Is this contribution taxable?
Yes. This arrangement is an IRA described in Code section 408(c). Employer contributions to IRAs are treated as payment of compensation to the employee. They are includible in the employee’s gross income in the taxable year for which the amount was contributed. Section 219(f)(5). The total amount of the employee’s contribution and the employer’s contribution cannot exceed $5,500 in 2014 and 2015 ($6,500 for a person age 50 or older) or the amount of compensation includible in the employee’s gross income for the taxable year if the employee’s compensation is less than $5,500. You may be able to deduct your IRA contribution, however. See IRA Deduction Limits.
The employees of a town are covered by the State Retirement life insurance. This insurance coverage, combined with the town's other life insurance, is in an amount greater than $50,000 for each employee. Are these policies combined to figure the taxable income over $50,000?
The statute excluding from income the cost of up to $50,000 of group-term life insurance coverage on the life of an employee does not apply to insurance provided under a life insurance contract purchased as part of a qualified retirement plan. Different rules of taxation apply to such insurance. Whether the life insurance is provided under the retirement plan depends on the provisions of the plan.
Assuming that the life insurance provided through the state is not purchased as part of the provisions of a retirement plan, the insurance provided through the city and that provided through the state are generally combined to determine the amount to be included in an employee’s income. But refer to the discussion below (concerning whether a policy is carried directly or indirectly by the employer) if one or both of the insurance coverages are paid for entirely by the employees.