Supplemental Retirement Plan and Roth Contributions
A client is a retiree of a Fortune 500 firm and was part of their supplemental retirement plan.
from the SPD:
“an unfunded pension plan primarily for the purpose of providing deferred compensation to a select group of management or HCE within the meanings of section 201,301,401 of ERISA (and DOl regulations 2520.104-23) In particular this plan provides NQ retirement pension benefits which supplement the benefits provided under the qualified salaried plan.”
The first payment he received had FICA withholding for an amount equal to the whole amount payable. The payments are received over a 5 year period.
I have been told by other CPA’s that this plan’s payments count as earned income and thus the client would be eligible to contribute to a Roth IRA (which he could never do before as his income was too high.)In addition, the compensation folks at the company have also had that opinion. However, his CPA is questioning that and maintains that he is not eligible and that is not considered earned income.
I would be very grateful for any input and especially any tax code that would pertain to this.
Will
Permalink Submitted by mk foss on Mon, 2009-03-16 23:52
When companies pay out nonqualified deferred compensation, they ususally accrue all of the Social Security and medicare the first year. That allows both the company and the employee to avoid those taxes each year during retirement. This should be the only year with any social security tax.
Generally for earned income, it must be something subject to social security. In future years this deferred compensation will not qualify as earned income. Since there are employment taxes this year, it’s possible that it could support a Roth IRA contribution. I’ve never seen this exact issue because normally the deferred compensation starts in the last employment year when the Social security max has already been met.
I don’t think you’re going to find a definitive answer.
Permalink Submitted by Alan Spross on Tue, 2009-03-17 00:00
Mary Kay,
The usual W-2 Box 1 less Box 11 would not work here for determining taxable compensation?