Earned Income and Deferred Comp

Submitted by BruceM on Sun, 2009-08-30 21:36

Contributions to an IRA must come from earned income (or Alimony), which I’ve always identified as earnings subject to employment (FICA) tax.

Most forms of deferred comp involve contributed dollars that, like contributions to QRPs, was subject to FICA tax in the year of contribution, so that when it is paid out in future years, it will not be subject to FICA and will not be considered earned income.

However, some forms of deferred comp (probably more accurately called stock award plans), such as phantom stock, non-qualified stock options or junior stock, may vest in retirement years when the former employee has no other earned income. As I understand it, these gains are income to the former employee and are subject to FICA tax at that time.

Does this mean they would be considered earned income and available for contribution to the retiree’s IRA (assuming he/she would otherwise be eligible to make contributions)?

Thanks

BruceM



Submitted by Alan Spross on Sun, 2009-08-30 23:07

Bruce,
Yes, these types of income generally constitute “taxable compensation” for IRA contribution purposes. While payment of SE or SS taxes confirms eligibility of the payment for earned income, exemptions from these taxes do not necessarily exclude IRA contributions if the the income is produced by personal labor. W-2 Box 1 income less Box 11 is also considered a safe harbor for qualifying the income as earned.

The following recent discussion brought up this topic toward the last half of the posts:
http://www.irahelp.com/forum/viewtopic.php?f=1&t=3801&start=0



Submitted by BruceM on Mon, 2009-08-31 00:23

Alan
Thanks for the response and the link.
Out of curiosity, what form of earned (compensation) income might you know of that qualifies for contribution to an IRA that would not be subject to FICA tax..other than Alimony?

The bargain element of an ISO disqualified disposition is not subject to FICA…but would this be considered compensation income for IRA contribution purposes? (I know….the liklihood of this happening is very small….but it is possible)

BruceM



Submitted by Alan Spross on Mon, 2009-08-31 02:21

A couple that come to mind are exempt college students working part time for their schools, another is for children under 18 working for their parents. There have also been discussions on executor fees paid for a non professional executor, which I believe is exempt for SE income because these people are not in the estate settlement business. The IRS has not weighed in on any of this specifically, but they do not contest IRA distributions by minors unless the compensation appears excessive.

As for the disqualified disposition, since there is a W-2 issued for part of this with nothing to appear in Box 3 (SS), since nothing should appear in Box 11 (where deferred comp comes in) , the safe harbor of W-2 income would appear to apply.



Submitted by BruceM on Tue, 2009-09-01 19:07

Alan
Yep, those are good examples…thanks again
BruceM



Submitted by Bob Jones on Fri, 2018-03-23 17:00

I am a retired casualty insurance agent for a large insurance company receiving deferred comp distributions at a fixed rate of interest since money was deferred.  I was considered an independent contractor for my entire career and paid 1099 Misc box 7 income. Distributions are coded the same as box 7 1099 Misc income with no other notation on 1099.   Based on Bruce M’s question, would the deferred comp distribution qualify me for Sep Ira contribution? Also, how about Ira contribution as well? If so, IRS publication 590-A for IRA indicates that an Ira contribution is okay for self employed income which mine is but ineligible contribution types listed shows deferred compensation.  Not sure how to resolve conflict in 590-A regarding my situation.  I would appreciate your input.  Thanks, Bob 



Submitted by William Tuttle on Fri, 2018-03-23 17:36

I do not know the complete answer, but the definition of compensation in 590-A only directly excludes W-2 Box 1 wages that are reported in Box 11 as deferred compensation.



Submitted by Alan - IRA critic on Fri, 2018-03-23 23:00

Is the income from renewal commissions subject to SE tax or is the income considered termination payments not subject to SE tax?



Submitted by Bob Jones on Sun, 2018-03-25 01:54

Hi Alan,     It is income from renewal commissions subject to SE tax that was deferred from past years. At the time of deferral there was no opportunity to pay SE tax.  Yet, in the near future I will also  have life time extended termination payments which are Misc 1099 box 3.   Thanks, Bob



Submitted by Alan - IRA critic on Mon, 2018-03-26 18:28

Bob, if you are paying SE tax you should be able to consider this as net earnings from SE and make a SEP contribution using these earnings. But not from the termination payments.



Submitted by Bob Jones on Tue, 2018-03-27 14:10

Hi Alan,    Thanks for clarification on SE tax and SEP contribution. What about the traditional IRA contribution if paying SE tax even though IRA Publication 560-A says no deferred comp distribution is eligible as earned income? Per comment by spiritrider on 3/23/18 would seem to imply traditional contribution to IRA okay if SE tax?  Also, what about traditional IRA contribution from distribution of extended termination payments with no SE tax? Extended termination payments may be considered as a form of non qualified deferred compensation since not a qualified retirement plan.  Bob 



Submitted by Chrys Zaglifa on Wed, 2018-03-28 20:09

I recently ended employment while my union’s contract was being negotiated. Now that negotiations have concluded I will receive backpay differential for a 9 month period. I want all of this amount to go to my 457b account but I’m being told by the plan administrator that once I terminated employment no back pay can go into the plan account. Is this a federal regulation or something at the discretion of the administrator? TIA



Submitted by Alan - IRA critic on Thu, 2018-03-29 02:37

  • Bob, been looking into this. It’s a confusing issue. Take a look at Sec 1402(k) describing a narrow exemption for these commissions from being treated as net earnings from SE. If you meet the conditions, it appears that this income would be reported on line 21 with no SE taxes due. However, that also likely equates to no SEP or IRA contributions using this income.
  • This would not be related to box 11 on a W-2 or DC retirement plan income which indicates the amount in Box 1 for which FICA taxes were paid in the year earned and is therefore not current year income for retirement plan contribution purposes. Conversely, these post termination commissions are not related to a NQDC payment and are not reported on a W-2.


Submitted by Bob Jones on Thu, 2018-03-29 17:01

Hi Alan,    Thank you for your research. I located a letter from corporate offices of the insurance company I worked for. The letter stated that the termination payments were paid 1099 Misc Box 3 and referenced IRC Sec 1402(k) as you mentioned which would imply no SE tax. Likewise, no SEP IRA eligibility seems correct since no self employment income applies.   Would  the1099 Misc Box 3 income for the termination benefits automatically exclude a traditional IRA contribution since it is based on income from prior services performed as an insurance agent or is this a possible gray area?                                                                                                                              I assume from our prior posts that I am understanding correctly that the additional non qualified deferred comp plan distributions I receive 1099 Misc Box 7 subject to SE which would be potentially eligible for a SEP IRA would also be eligibe for a traditional IRA as well. Thank you for taking the time to clarify my complex situation.  



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