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1. Are the employer and employee contributions to a section 457 plan taxable for social security and Medicare?
2. Please explain a SEP-IRA. Can a town offer its employees a SEP-IRA?
3. A state retirement plan pays for life insurance for the employee's spouse and children in the amount of $5,000. Is this coverage taxable as income to the employee?
4. Is there an obligation to pay social security tax for employees who were previously covered under a state retirement system, but who withdrew their contributions?
5. 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 2000 to a 403(b) contract purchased for X by ABC School District based on his salary of $50,000+?
6. Same facts as Q5, 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?
7. Same facts as Q5, when figuring the amount previously excludable, what exactly do you include in this figure?
8. Same facts as Q5, in figuring the increase in the dollar limit of elective deferrals, can Employee X use the years in other school districts to qualify for the increase in the dollar limit for a 15-year employee?
9. 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?
10. 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?
11. An employee was covered by a state retirement plan while employed. This employee resigned and withdrew his contribution from the retirement plan. The employee then went to work for another employer and was covered under social security. If this worker has the required quarters, will he be subject to the public pension offset?
    

Are the employer and employee contributions to a section 457 plan taxable for social security and Medicare?

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 457 plan are taxable for social security and Medicare.

Please explain a SEP-IRA. Can a town offer its employees a SEP-IRA?

Yes, a town can offer its employees a SEP-IRA (simplified employee pension).  Under a SEP, you make the contributions to an individual retirement arrangement established by or for each eligible employee. SEP-IRAs are owned and controlled by the employees, and you make contributions to a financial institution where the SEP-IRAs are maintained. A SEP-IRA is set up for, at a minimum, each eligible employee.                   

An eligible employee is an individual who has:

1. reached age 21;
2. worked for you in at least 3 of the last 5 years; and
3. received at least $450 in compensation from you during the calendar year 2000.

Note: You can establish less restrictive participation requirements than those listed but not more restrictive ones.                                                                                          

There are three basic steps in setting up a SEP:

1. You must execute a formal written agreement to provide benefits to all employees who are eligible.
   
   
2. You must give each eligible employee certain information about the SEP, and
   
   
3. An IRA account must be established by or for each eligible employee.

The SEP rules permit you to contribute a limited amount of money each year to each employee’s SEP-IRA. You do not have to make contributions every year.  But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees. When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, even employees who died or terminated employment before the contributions were made.

Contributions cannot be more than the smaller of l5% of the employee’s compensation or $30,000. Do not include SEP contributions as wages on an employee’s Form W-2. 

Your contributions to a SEP, to any other qualified defined contribution plan, and benefits under any other qualified defined benefit plan cannot exceed certain limits set forth in Code section 415. 

Publication 560 discusses Simplified Employee Pension plans in detail. This publication discusses what type of plan to set up, as well as how to set up a plan. It also tells how much you can contribute to a plan, how to treat distributions, and how to report information about the plan to the Internal Revenue Service and your employees. 

You can also call the Employee Plans Taxpayer Assistance telephone service between the hours of  l:30 PM and 3:30PM, Eastern Time, Monday through Thursday at 202-622-6074/6075. Please note that these phone numbers are not toll-free.

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A state retirement plan pays for life insurance for the employee's spouse and children in the amount of $5,000. Is this coverage taxable as income to the employee?

The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is deemed to be a de minimis fringe benefit. Amounts with a higher face amount may also be a de minimis fringe benefit. IRS Notice 98-110 requires that in determining whether coverage higher than $2,000 is a de minimis fringe benefit, only the excess (if any) of the cost of such insurance over the amount paid for the insurance by the employee on an after-tax basis shall be taken into account.

If the face amount exceeds $2,000 (or is not otherwise a de minimis fringe benefit described in Notice 89-110), the entire cost of the insurance, including the cost of the first $2,000, is included in the employee’s income. The cost of the insurance must be computed using the premiums prescribed in the Uniform Premium Table (Table I) found in the Code section 79 regulations. Any premium amounts paid by the employee on an after-tax basis reduce the amount included in the employee’s income.

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Is there an obligation to pay social security tax for employees who were previously covered under a state retirement system, but who withdrew their contributions?

An employee can withdraw his or her contributions from a state retirement plan after termination of services. The prior services would not be subject to social security.

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 2000 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 2000 year, the maximum 403(b) elective deferral limit is $10,500 plus increases permitted for l5-year employees. See Publication 571 , page 4, “Increase for 15-year employees,” for an explanation of how to figure the amount of the yearly increase.

Same facts as Q5, 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?

We have not been told the plan type of the State Retirement System, i.e., the Code section which applies to it. 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:

• 401(k) plans to the extent excluded from X’s income,
• Section 501(c)(18) plans to the extent excluded from X’s income,
• SIMPLE plans, and
• 403(b) plans.

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 Q5, 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 .

Same facts as Q5, in figuring the increase in the dollar limit of elective deferrals, can Employee X use the years in other school districts to qualify for the increase in the dollar limit for a 15-year employee?

No. Tacking of years of service for purposes of section 402(g)(8) is not permitted in other than a 414(e)church environment .

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 $2,000, or the amount of compensation includible in the employee’s gross income for the taxable year if the employee’s compensation is less than $2,000.

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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.

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An employee was covered by a state retirement plan while employed. This employee resigned and withdrew his contribution from the retirement plan. The employee then went to work for another employer and was covered under social security. If this worker has the required quarters, will he be subject to the public pension offset?

No. The employee will not receive a public pension because he withdrew his contribution from the retirement plan.