Academic journal article Journal of Accountancy

FICA Required on 403(b) Salary Reductions

Academic journal article Journal of Accountancy

FICA Required on 403(b) Salary Reductions

Article excerpt

The Seventh Circuit affirmed a district court's ruling that FICA must be withheld on contributions made by salary reduction to a section 403(b) retirement plan. The circuit also affirmed the trial court's upholding of a penalty for failing to deposit the taxes.

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The University of Chicago made contributions to purchase nontransferable annuity contracts, and its employees contributed to a section 403(b) plan. The employees were required to contribute a portion of their salary after signing a salary reduction agreement.

From 2000 through 2003, the university did not withhold or pay FICA on the amounts withheld from the employees' salaries or on the university's additional contributions to purchase the annuities. The IRS assessed unpaid employment taxes, failure-to-deposit penalties and interest for all the years in question. The university sought relief from the U.S. District Court for the Northern District of Illinois, which held for the IKS.

The IRS relied on IRC [section] 3121(a)(5)(D), which excludes from wages any payments made to or on behalf of an employee or beneficiary under a section 403(b) plan but includes such payments in wages if they are "made by reason of" a salary reduction agreement. The agreement need not be in writing. Because the university's payments were made by mason of a salary reduction agreement, the IRS argued, they were subject to FICA withholding and payment.

The university emphasized the word "agreement" in the Code provision, arguing that because its employees had no choice in the matter, it didn't apply to them, only to payments pursuant to individually negotiated agreements. …

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