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This article examines the case of Balestra v. United States as an astounding application of the FICA special timing rule where an individual is required to pay FICA tax on amounts he will never receive. The Court of Federal Claims, in Balestra, held that the “special timing rule” applied to subject the plaintiff’s nonqualified deferred compensation to FICA tax upon his retirement (when he became fully vested), even though he never received most of the payments because the employer’s obligation to pay was discharged in bankruptcy.
The special timing rule generally works to an employee’s advantage by taking deferred amounts into account for Social Security tax purposes at the time of contribution or vesting rather than during retirement when employees may be subject to higher FICA taxes.
However, the special timing rule can occasionally be a disadvantage if, as in this case, the deferred amounts are never paid by the employer to the employee. When employers do not include deferred amounts in FICA income at the time of contribution or vesting, employees may be subject to substantial additional FICA taxes on the date of retirement. Regardless of whether or not it is “fair,” Treasury regulations do not allow employees to recover FICA taxes paid on deferred amounts that are ultimately never received.
It is important for employers and employees to be aware of the nuances of the special timing rule and to remember that it applies not just to voluntary deferrals, but also to company contributions, matches and deferred incentive or performance awards.
The special timing rule generally works to an employee’s advantage by taking deferred amounts into account for Social Security tax purposes at the time of contribution or vesting rather than during retirement when employees may be subject to higher FICA taxes.
However, the special timing rule can occasionally be a disadvantage if, as in this case, the deferred amounts are never paid by the employer to the employee. When employers do not include deferred amounts in FICA income at the time of contribution or vesting, employees may be subject to substantial additional FICA taxes on the date of retirement. Regardless of whether or not it is “fair,” Treasury regulations do not allow employees to recover FICA taxes paid on deferred amounts that are ultimately never received.
It is important for employers and employees to be aware of the nuances of the special timing rule and to remember that it applies not just to voluntary deferrals, but also to company contributions, matches and deferred incentive or performance awards.
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