My husband and I are retired and the only amounts that are being reported on a W-2 this year for either of us are in boxes 1, 3 and 5 and 11. In boxes 1 and 11 is the amount he received for distributions from his Deferred Comp plan which we know are not considered earned income for purposes of IRA contribution purposes. The amount reported in boxes 3 and 5 are somewhat unusual in that it is the amount his former employer calculated under Treas. Reg. § 31.3121(v)(2)-1(d)(2)(iii)(A) as excess earnings because the income credited by the plan was considered “unreasonably” high. From reading the regs, this amount is being treated as a new deferral into the plan and therefore is being reported in boxes 3 and 5 (not 1) just like any other new deferral is, and we are paying FICA taxes on it this year as we have had to do in the past with all other new deferrals.

So it seems to me that since the IRS is requiring the payment of payroll taxes on this excess earnings amount, that by default, it would have to meet the definition of earned income or taxable compensation for purposes of contributing to a Roth IRA even though this amount is NOT being reported in box 1 (which is typically the safe harbor rule). Also, it would seem compensation that is put into a deferred comp plan should either count as earned income when it goes into the plan or when it comes out. And we know it is specifically excluded when it is distributed so I would then assuming that new deferrals should count as earned income in the year it is deferred AND when the FICA taxes are paid on it. Do you agree? If so, do you also agree that the “excess earnings” amount that I’ve described would be given the same tax treatment as any other new deferral into the plan.

Thanks,
Dawn