I have previously blogged (here and here) about a lawsuit brought by participants in a nonqualified deferred compensation plan where the employer failed to report and pay FICA (social security) taxes in the most tax advantageous way. The employer had tried to get the lawsuit dismissed on the grounds that the FICA tax payments were required by the federal government. The court concluded that while the tax payments may be required by the federal government, the employer could have used a different method for determining payment of those taxes, which would have saved the plan participants millions of dollars in FICA tax payments.
The case has now settled. According to reports, the settlement amount is $3,350,000, including attorneys’ fees and litigation expenses. The settlement also provides for indemnification of participants and surviving spouses relating to FICA tax assessments against them.
As I mentioned in my earlier blog posts, FICA taxation of nonqualified deferred compensation plans can be complicated. Failure to report and withhold FICA taxes when the deferred compensation first becomes vested can result in increased FICA tax payments for participants when deferred compensation is later paid. Employers should review their procedures to make sure that they are reporting and paying FICA taxes on deferred compensation plans as required under the tax code.