On November 15, 2007, the Treasury and Internal Revenue Service published final regulations defining section 403(b) 'salary reduction agreements' for FICA purposes. (Click here for a copy.) In contrast to the income tax treatment, contributions pursuant to these agreements are “wages” subject to FICA. The final regulations reject the arguments of commentators that one-time irrevocable or mandatory elections should be excluded, and adopt the 2004 proposed and temporary regulations without change. Accordingly, under the final regulations, FICA “wages” include section 403(b) contributions made pursuant to:
- A cash or deferred election as defined in the section 401(k) regulations;
- A one-time irrevocable election made at or before the time of the employee’s initial eligibility to participate in the plan or arrangement, for contributions that reduce the employee’s compensation; and
- An agreement by an employee as a condition of employment (set by statute, contract or otherwise) to make section 403(b) contributions that reduce the employee’s compensation.
The temporary and proposed regulations are applicable to contributions on or after November 16, 2004. The final regulations apply to contributions made on or after November 15, 2007.