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 31 (marked 3-12) 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 illustrations of FICA tax savings). Others include, but are not necessarily limited to, the following:
- If the 403(b) Plan Document allows, 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 2023, the basic elective deferral limit* is $22,500.00. An employee who will have attained age 50 by the end of 2023 can defer up to an additional $7,500.00, for a total of up to $30,000.00. The limit on aggregate employee and employer contributions (referred to as annual additions) is $66,000.00. If no elective deferrals are involved, then the employer is allowed to contribute up to the $66,000.00 limit. Moreover, if the employee will have attained age 50 by the end of 2023 and the employee elects to defer up to $7,500.00, it is possible for an aggregate amount of up to $73,500.00 to be contributed to a 403(b) plan on behalf of an employee during 2023.
For 2022, the basic elective deferral limit* is $20,500.00. An employee who will have attained age 50 by the end of 2022 can defer up to an additional $6,500.00, for a total of up to $27,000.00. The limit on aggregate employee and employer contributions (referred to as annual additions) is $61,000.00. If no elective deferrals are involved, then the employer is allowed to contribute up to the $61,000.00 limit. Moreover, if the employee will have attained age 50 by the end of 2022 and the employee elects to defer up to $6,500.00, it is possible for an aggregate amount of up to $67,500.00 to be contributed to a 403(b) plan on behalf of an employee during 2022.
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.
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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 19 and 20 of the IRS Federal-State Reference Guide for documentation of this fact, as well as the Governmental Plans Toolkit on the IRS website and Notice 2003-20 .
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, the correction will likely include preparing W-2c’s, W-3c’s and 941-X’s. Several potential correction approaches exist. If employers require external expertise for correcting FICA tax issues, CCC recommends contacting their employee benefits or tax counsel for advice. CCC has limited knowledge about 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.
457(b) Limits On Employer Contributions
For 2023, the basic limit on aggregate employee elective deferrals* and employer contributions is $22,500.00. Contributions for an employee who will have attained age 50 by the end of 2023 can be increased up to an additional $7,500.00, making it possible for up to $30,000.00 to be contributed to a 457(b) plan on behalf of an employee during 2023. If 2023 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 $22,500.00 plus underutilized contributions in prior years, up to $45,000.00 in 2023.
For 2022, the basic limit on aggregate employee elective deferrals* and employer contributions is $20,500.00. Contributions for an employee who will have attained age 50 by the end of 2022 can be increased up to an additional $6,500.00, making it possible for up to $27,000.00 to be contributed to a 457(b) plan on behalf of an employee during 2022. If 2022 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 $20,500.00 plus underutilized contributions in prior years, up to $41,000.00 in 2022.
*Details about 457(b) employee elective limits may be found on our Contributions Limits Page.
Note the limit on employer contributions is far less in the 457(b) plan than the amount that the 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.
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.
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