Recently released guidance from the IRS Office of the Chief Counsel advises that FICA taxes paid under the “special timing rule” for nonqualified deferred compensation are not eligible for refund even if some or all of the benefits are later forfeited as a result of an employer’s bankruptcy. Under the special timing rule, amounts deferred under a nonqualified plan are included in an employee’s FICA wages as of the later of when the services are performed or when the benefits are vested and the deferred amount is reasonably ascertainable.
The memorandum describes several similarly situated employers that set up plans under which eligible employees accrued benefits during their working years that were expected to be paid to them following retirement. Because the plans were unfunded, each employee received only an unsecured promise to pay, with rights no greater than those of other unsecured creditors in the event of an employer’s bankruptcy.
As required under the special timing rules, the deferred amount under the plan became reasonably ascertainable when an employee retired. The employers paid the FICA taxes, including the employee’s share, due on the present value of each retired employee’s expected plan benefits. The employers then recouped the FICA taxes from the plan benefits paid to the retiree.
Subsequently, one employer filed for Chapter 11 bankruptcy and terminated its plan, and the retired employees’ monthly benefits stopped. A large number of retirees filed claims for FICA tax refunds. The Office of the Chief Counsel concluded that no statutory or regulatory provision allows for a refund of properly paid FICA taxes in cases where the benefits are not ultimately paid. Such FICA taxes are not refundable merely because the total benefits on which taxes were paid ultimately are not distributed.