Carruth Compliance Consulting

     Retirement Readiness      For Employees      For Employers      For Vendors      About Us      Contact Us 

    Login   
Skip Navigation Links.

What are the FICA and Limits Rules for Employer 403(b) and 457(b) Contributions?

Please consult CCC before finalizing any collective bargaining agreement or employment contract that includes provisions involving 403(b) Tax Sheltered Annuity (TSA) or 457(b) Deferred Compensation Plans (DCP). This applies especially to any type of employer contributions and to any "contributions in lieu of some other benefit." It's always easier to do things right from the outset than it is to correct problems after they occur.

FICA Treatment of Employer 403(b) Contributions

Because Employer Contributions to 403(b) Plans are considered by the IRS to be employee benefits, they are NOT subject to Social Security or Medicare (FICA) taxes. Please see page 3-9 of the IRS Federal-State Reference Guide for documentation of this fact.

The fact that Employer 403(b) Contributions are NOT subject to FICA taxation is one of several reasons they are an attractive option for employers to enhance their compensation and benefits packages (click here for illustration of FICA tax savings). Others include, but are not necessarily limited to, the following:

  • For 2014, the $57,500 combined limit on employee and employer contributions to the 403(b) Plan allows employers to contribute up to $52,000 on behalf of an employee.

  • For 2015, the $59,000 combined limit on employee and employer contributions to the 403(b) Plan allows employers to contribute up to $53,000 on behalf of an employee.

  • Employer Contributions to the 403(b) Plan can be continued for up to five years after the participant severs employment.

  • In-service distributions are allowed in 403(b) plans after attainment of age 59.5, whereas severance from employment is required for 457(b) plan distributions.

  • The 10% early distribution penalty is waived if age 55 is attained during the calendar year employment is severed.

403(b) Limits On Employer Contributions

For 2014, the basic elective deferral limit* is $17,500, whereas the limit on aggregate employee and employer contributions is $52,000. If no elective deferrals are involved, then the employer is allowed to contribute up to the $52,000 limit. An employee who has attained age 50 can defer up to an additional $5,500, it is possible for an aggregate amount of up to $57,500 to be contributed to a 403(b) plan on behalf of an employee during 2014.

For 2015, the basic elective deferral limit* is $18,000, whereas the limit on aggregate employee and employer contributions is $53,000. If no elective deferrals are involved, then the employer is allowed to contribute up to the $53,000 limit. An employee who has attained age 50 can defer up to an additional $6,0000, it is possible for an aggregate amount of up to $59,000 to be contributed to a 403(b) plan on behalf of an employee during 2015.

As explained above, exemption of Employer 403(b) Contributions from FICA taxation can represent a substantial savings to both the employee and the employer when compared with the option of making Employer 457(b) Contributions on behalf of an employee. The limitation on the combination of employer and employee contributions in the 403(b) is substantially higher that the aggregate limit under the 457(b) plan.

*Details about 403(b) employee elective limits may be found on our Contributions Limits Page.

457(b) Limits On Employer Contributions

For 2014, the basic limit on aggregate employee elective deferrals* and employer contributions is $17,500. Contributions for an employee who has attained age 50 can be increased up to an additional $5,500, making it possible for up to $23,000 to be contributed to a 457(b) plan on behalf of an employee during 2014.

For 2015, the basic limit on aggregate employee elective deferrals* and employer contributions is $18,000. Contributions for an employee who has attained age 50 can be increased up to an additional $6,000, making it possible for up to $24,000 to be contributed to a 457(b) plan on behalf of an employee during 2015.

Finally, if 2014 [2015] is one of the three years immediately preceding normal retirement age and eligibility has been determined by CCC for the 3 Year Catch-up in the 457(b) plan, the employer is allowed to contribute up to elective deferral limit plus underutilized contributions in prior years, up to a $35,000 in 2014 and $36,000 in 2015. Consequently, this is far less than the amounts thatthe employer could contribute in a 403(b) plan AND FICA taxes must be paid on employer 457(b) contributions, whereas employer 403(b) contributions are exempt from FICA taxation.

*Details about 457(b) employee elective limits may be found on ourContributions Limits Page.

 

FICA Treatment of Employer 457(b) Contributions

Unlike 403(b) Plans, Employer Contributions to 457(b) Plans are considered by the IRS to be deferred compensation, so they ARE subject to Social Security and Medicare (FICA) taxes. Please see page 3-10 of the IRS Federal-State Reference Guide for documentation of this fact.

We have been made aware that some of our clients have made Employer 457(b) Contributions on behalf of some employees, but have failed to treat those contributions as being subject to FICA taxes (Social Security and Medicare). The general rule is that both employee elective contributions and employer contributions to a 457(b) plan are reported on Form W-2 in Box 12 using Code G in the year in which the contributions are made. Further, if contributions are 100% vested when made, the employee elective and employer contributions are subject to FICA taxes on the date the corresponding services are performed. Failure to properly withhold, report and remit FICA taxes may result in penalties on the employer and should be corrected.

For open tax years (2011–2013 until April 15, 2015), the correction will likely include preparing W-2c’s, W-3c’s and 941-X’s. For prior years, there are several potential correction approaches. If employers require external expertise for correcting FICA tax issues, CCC recommends contacting their employee benefits or tax counsel for advice. CCC only has limited understanding of how to correct FICA tax issues, as these come under the Employer Tax Division of the IRS. CCC’s expertise and experience lie at the plan level, which falls within the Employee Plans Division of the IRS where failures are corrected via the Employee Plans Compliance Resolution System (EPCRS – Revenue Procedure 2008-50). However, should one of our clients obtain legal advice on employer tax issues, we are always happy to provide assistance implementing such recommendations.

The fact that Employer 403(b) Contributions are NOT subject to FICA taxation is one of several reasons they are an attractive alternative to Employer 457(b) Contributions (click here for illustration of FICA tax savings). Others include, but are not necessarily limited to, the following:

  • For 2014, a combined limit of up to $57,500 combined limit on employee and employer contributions to the 403(b) Plan is much higher than the corresponding 457(b) $17,500 limit for younger employees and $23,000 for employees aged 50 or above.

  • For 2015, a combined limit of up to $59,000 on employee and employer contributions to the 403(b) Plan is much higher than the corresponding 457(b) $18,000 limit for younger employees and $24,000 for employees aged 50 or above.

  • Employer Contributions to the 403(b) Plan can be continued for up to five years after the participant severs employment, whereas this is not possible in a 457(b) Plan.

  • In-service distributions are allowed in 403(b) plans after attainment of age 59.5, whereas severance from employment is required for 457(b) plan distributions.

Of course, there are advantages to 457(b) plan participation too, including, but not necessarily limited to, the following:

  • No 10% early distribution penalty for post-severance distributions before attaining age 59.5.

  • Often fees are lower in 457(b) plans than in 403(b) plans.

  • Employees can contribute to both plans, thus basically doubling their tax-deferred supplemental retirement savings options.

Therefore, all of the features of both types of plans should be evaluated when deciding where employer contributions should go. Employers might consider matching employee 457(b) deferrals with employer 403(b) contributions, thus saving FICA taxes on the employer matching contributions. There is no doubt that offering both 403(b) and 457(b) plans provides the broadest array of options to employees.