TN 24 (11-09)

A. Introduction to deferred compensation plans

Under a plan, which meets the requirements of section 457 of the Internal Revenue Code, employees are permitted to set aside a portion of their salary for receipt later (usually after the employment has terminated).

B. Policy for deferred compensation plans

The amounts deferred at the employee's option are in reality deductions from the employee's salary and thus are wages for Social Security purposes at the time of deferral. (See SSR 75-2.)

Even if payments into these plans are made with employer funds, they are wages because no wage exclusion in the Social Security Act applies.

Do not consider the amounts deferred as gross income for income tax purposes until they are distributed to the employee under the conditions of the plan.

EXAMPLE

This example illustrates the application of Social Security and Medicare tax: State R’s 457(b) plan provides for elective deferrals from current salary, as well as a one percent of salary non-elective contribution for each employee who participates in the plan and who is employed with State R during the plan year. All employees who participate in the plan are covered by a Section 218 Agreement. All deferrals and contributions, including the state’s contribution, are fully and immediately vested. Because these contributions are not subject to a substantial risk of forfeiture (and the services have already been performed), the elective deferrals and the state’s non-elective contributions are required to be taken into account as wages for purposes of the Social Security and Medicare tax.