Social Security and Withholding Taxes

<div class="Section1"><br /> <br /> Yes, if certain conditions are met.<br /> <br /> An employer is permitted to amend its 403(b) plan to eliminate future contributions for existing participants, or to limit participation to existing participants and employees. A 403(b) plan also is permitted to contain provisions that provide for plan termination and that allow accumulated benefits to be distributed on termination.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In the case of a 403(b) contract that is subject to distribution restrictions relating to<br /> custodial accounts and 403(b) elective deferrals, termination of the plan and the distribution of accumulated benefits is permitted only if the employer does not establish a successor 403(b) plan by making contributions to any 403(b) contract that is not part of the plan during the period beginning on the date of plan termination and ending twelve months after distribution of all assets from the terminated plan, taking into account all entities that are treated as the same employer under IRC Sections 414(b), 414(c), 414(m), or 414(o) on the date of the termination.<br /> <br /> The alternative 403(b) contract will be disregarded if, at all times during the period beginning twelve months before the termination and ending twelve months after distribution of all assets from the terminated plan, fewer than 2 percent of the employees who were eligible under the 403(b) plan as of the date of plan termination are eligible under the alternative 403(b) contract.<br /> <br /> For a 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan. For this purpose, delivery of a fully paid individual insurance annuity contract is treated as a distribution. The mere provision for, and making of, distributions to participants or beneficiaries on plan termination does not cause a contract to cease to be a 403(b) contract. The IRS has informally taken the position that a custodial account cannot qualify for treatment as a fully paid individual annuity contract.<br /> <br /> <em>Employers that cease to be eligible</em> employers. An employer that ceases to be an eligible employer may no longer contribute to a 403(b) contract for any subsequent period and the contract will fail to satisfy Treasury Regulation Section 1.403(b)-3(a), which is the exclusion for contributions to 403(b) contracts, if any further contributions are made with respect to a period after the employer ceases to be an eligible employer.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The IRS has not recognized the distribution of custodial accounts as being terminating distributions from a plan.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.403(b)-10(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.403(b)-10(a)(2).<br /> <br /> </div>

<div class="Section1"><br /> <p style="text-align: center;"><strong>Excess Contributions to Custodial Accounts</strong></p><br /> Contributions to a custodial account for the purchase of regulated investment company stock and to a retirement income account to the extent funded through custodial accounts are subject to a tax of 6 percent, not to exceed 6 percent of the value of the account, on (1) the amount by which the contributions other than a permissible rollover contribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>) exceed the lesser of the amount excludable from gross income under IRC Section&nbsp;403(b) or the overall limitation under IRC Section&nbsp;415, or whichever is applicable if only one is applicable, plus (2) any such excess carried over from the preceding tax year ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4053">4053</a>).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <p style="text-align: center;"><strong>Early or Premature Distributions</strong></p><br /> If a taxpayer receives a premature distribution from a tax sheltered annuity, he or she will be subject to an excise tax equal to 10 percent of the portion of the distribution includable in income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4074">4074</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <p style="text-align: center;"><strong>Minimum Required Distribution Failure</strong></p><br /> If the amount distributed during a tax year is less than the minimum required distribution for the year, there generally is a tax equal to 25 (50 percent prior to 2023) of the amount that the distribution made in the year falls short of the required amount. The tax is imposed on the payee, not the plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4075">4075</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <p style="text-align: center;"><strong>Excess Aggregate Contributions</strong></p><br /> If an employee makes after-tax contributions or the employer makes contributions that match contributions under an employee&rsquo;s salary reduction agreement or match employee after-tax contributions and the aggregate amount of the contributions exceeds the nondiscriminatory amount ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3804">3804</a>), a tax of 10 percent of the amount in excess of the permitted, nondiscriminatory maximum is imposed on the employer to the extent the excess amount and income attributable to it is not distributed within 2&frac12; months after the end of the plan year ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4973.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;72(t).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;4974.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;4979.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Excludable amounts paid into a tax sheltered annuity are not wages subject to income tax withholding, even if the amounts are derived from a salary reduction agreement.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The amount of salary reduction contributions to the plan is subject to Social Security taxes even though it is excludable from the employee’s gross income. Employer non-salary reduction contributions are not includable in wages for Social Security purposes.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Under the final regulations, salary reduction agreement means a plan or arrangement under which payment will be made by an employer on behalf of an employee or his or her beneficiary under or to an annuity contract if the employee:<br /> <p style="padding-left: 40px;">(1)  elects to reduce his or her compensation under a cash or deferred election;</p><br /> <p style="padding-left: 40px;">(2)  elects to reduce his or her compensation pursuant to a one time irrevocable election made at or before the time of initial eligibility to participate in such plan or arrangement; or</p><br /> <p style="padding-left: 40px;">(3)  if the employee agrees as a condition of employment to make a contribution that reduces his or her compensation.<a href="#_ftn3" name="_ftnref3">³</a></p><br /> The Seventh Circuit Court of Appeals concluded that Congress intended IRC Section 3121(a)(5)(D) to include salary reduction agreements, whether voluntary or mandatory, in the FICA wage base. Accordingly, the Seventh Circuit held that payments made under a salary reduction agreement include salary reductions made under voluntary and mandatory agreements.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Amounts contributed by salary reduction by a minister or by church employees whose organizations have chosen to be exempt from FICA are not treated as wages subject to Social Security taxes to the extent the contributions are not more than the employer contribution limit.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Amounts of salary reduction treated as wages for Social Security tax are creditable to the individual’s Social Security account for benefit purposes.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Rev. Rul. 65-208, 1965-2 CB 414. <em><em>See also</em></em> IRS Pub. 571.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 3121(a)(5); Rev. Rul. 65-208, 1965-2 CB 383; Rev. Rul. 181, 1953-2 CB 111. <em><em>See also</em></em> CCA 200333003; TAM 200305006; Let. Ruls. 200318074, 200234009.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 31.3121(a)(5)-2.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  <em>University of Chicago vs. United States</em>, 547 F.3d 773 (7th Cir. 2008).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  IRS Pub. No. 517.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  SSR 64-59.<br /> <br /> </div>