The FICA Special Timing Rule for Non-Qualified Deferred Compensation: What You Don’t Know Can Hurt You

Employers know that wages are generally subject to the Federal Insurance Contributions Act (“FICA”), and that both employers and employees are liable for a portion of FICA on those wages. In most circumstances, the employee and employer portion of FICA are paid when the compensation is paid to employees—but there is a “special timing rule” that applies when compensation is subject to a non-qualified deferred compensation (“NQDC”) arrangement. Not knowing this special timing rule can cause real headaches for both employers and employees.

NQDC Plans Come in Different Flavors

An NQDC arrangement is really any kind of compensation that has been earned by an employee, but that the employee will not receive until a later tax year. This could be as simple as a bonus earned in one year and payable in a later year, or as complex as an equity-based incentive, phantom stock, supplemental executive retirement plan, or other NQDC arrangement.

Special Timing Rule for FICA

Employers that operate any kind of NQDC arrangement typically are aware that amounts under the NQDC arrangement are not subject to income tax until they are actually paid to the employee. There is a mismatch, however, between the timing of income taxes and the payment of FICA taxes with respect to NQDC under the special timing rule.

FICA taxes are due on NQDC on the later of: (1) when the employee provides the related services, or (2) when the compensation is no longer subject to a substantial risk of forfeiture (i.e., when the amounts vest).  In other words, FICA taxes could be due before the NQDC is actually paid to the employee.

For a typical employer contribution-based cash plan or phantom stock plan, this rule means that FICA taxes will be due in the year when any deferred compensation (and any earnings) vest. This can become complex to track when there is an extended vesting schedule to ensure that the appropriate amount of FICA is paid by the employer and employee when each tranche of the compensation (and earnings) vest.

For a plan where employees are deferring salary or bonus, FICA tax will be due in the year when the employee makes the deferral.

For formula-based plans, FICA taxes are reported and paid once the benefit amount is both vested and reasonably ascertainable (i.e., when the employer can calculate the actual benefit under the plan).

Corrections and Penalties

The special timing rule is not optional. Therefore, employers have an obligation to correct the failure to follow the special timing rule in tax years that fall within the statute of limitations (which will generally be the last three years). This requires the employer and employee to pay any past-due FICA taxes now. For closed years, FICA must be reported and withheld when the amounts are paid to the employee. The IRS may impose penalties and interest for underpayment.

About the Author

For more information, please contact Eric W. Gregory, a Member in Dickinson Wright’s Troy office where he assists clients in all areas of employee benefits law, including qualified retirement plans, welfare plans, and non-qualified compensation programs, or any other member of our Tax Practice Group. Eric can be reached at 248-433-7669 or and you can visit his bio here.

United States Tax Court Launching New Case Management System – Dawson

In December 2020, the United States Tax Court will be launching DAWSON (Docket Access Within a Secure Online Network), the Court’s new case management system. The Court expects DAWSON to be active no later than December 28, 2020. Beginning at 5:00 PM Eastern Time on November 20, 2020, the current e-filing system will become inaccessible and all electronic files will become read-only. In early December, those with current access to the old system will receive a new user name and temporary password for DAWSON and must promptly act within 7 days after notice, in order to avoid an interruption to access to your electronic case records.

For more information and updates, including FAQs, please continue to monitor the Court’s website,, or contact James Mauro in our Lansing, Michigan office (517-487-4701), or any other attorney in our Tax Practice Group.

Remote Execution of Estate Plan Documents Allowed in Michigan Through December 31, 2020

Remote executions of estate planning documents are again allowed in Michigan through December 31, 2020.  On November 5, 2020, Michigan’s Governor signed 2020 PA 246, allowing remote witnessing, and 2020 PA 249 allowing remote notarizations.  This applies to any document that is executed on or after April 30, 2020 through December 31, 2020.

In order to properly witness and sign estate planning documents under this legislation, the following parameters must be met, using two-way real-time audiovisual technology:

  • The technology allows direct, contemporaneous interaction by sight and sound between the signer and the witnesses.
  • The interaction between the signer and the witnesses is recorded and preserved by the signer for at least three years.
  • The signer represents that they are physically in Michigan or that, if outside Michigan,
    • the document is intended for filing with or relates to a matter before a court, governmental entity, public official, or other entity subject to Michigan’s jurisdiction; or
    • the matter involves property in Michigan or a transaction substantially connected with Michigan.
  • The signer states what document they are executing during the interaction.
  • Each title page and signature page being witnessed is shown to the witnesses in a manner that is legible to the witnesses and every page is numbered to reflect the page number and the total number of pages in the document.
  • Each act of signing is captured closely enough for the witnesses to observe.
  • The signer transmits a legible copy of the entire signed document by fax, mail, or electronic means to the witnesses within 72 hours of execution.
  • The witnesses sign the transmitted copy of the document within 72 hours of receipt and return the signed copy to the signer by fax, mail, or electronic means.

In order to properly notarize estate planning documents under this legislation, the following parameters must be met:

  • The technology allows direct interaction between the individual, any witnesses, and the notary where all can communicate simultaneously by sight and sound.
  • The technology can create an audio and visual recording of the complete notarial act that will be retained as a notarial record. MCL 55.286b(7)–(9).
  • The person seeking notary services and any required witnesses present satisfactory evidence of identity to the notary during the video conference (if the person is not personally known to the notary).
  • The person represents that they are physically in Michigan or that, if outside of Michigan,
    • the record is intended for filing with or relates to a matter before a court, governmental entity, public official, or other entity subject to Michigan’s jurisdiction; or
    • the matter involves property in Michigan or a transaction substantially connected with Michigan; and
    • the notary has no actual knowledge that making the statement or signing the record is prohibited by the laws of the jurisdiction of the person’s location.
  • The person, any witnesses, and the notary can put their signatures to the document so that any change or modification of the remote notarial act is tamper evident.
  • The person mails, faxes, or emails a legible copy of the entire signed document to the notary on the same date it was signed.
  • Once the notary receives the document with all necessary signatures, the notary notarizes the document and transmits it back to the person seeking notarization.
  • The official date and time of the notarization is the date and time when the notary witnesses the signature via two-way real-time audiovisual technology.

For more information, contact Joan Skrzyniarz in the Troy, Michigan office at 248-433-7521, or any other member of the Dickinson Wright Estate Planning and Trusts team.

The IRS Announces Updated Limitations Related to Employer Plans for 2021

The IRS announced cost of living adjustments affecting dollar limitations for employer plans for tax year 2021. Most IRS limits impacting employer retirement plans have remained the same because the increase in the cost-of-living index did not meet the legal thresholds that trigger their adjustment. See IRS Notice 2020-79 and IRS Revenue Procedure 2020-32 for additional IRS technical guidance.

Retirement Plan Limitation Highlights for 2021

The following chart lists the key dollar amounts for qualified retirement plans:

Description 2020 2021 Comment
IRC §402(g) limit on elective deferrals in 401(k) and 403(b) plans $19,500 $19,500 No Change
Catch-up contribution limit for employees age 50 or over in 401(k) and 403(b) plans $6,500 $6,500 No Change
Annual limit on compensation under §401(a)(17) $285,000 $290,000 Increase $5,000
Highly compensated employee compensation threshold $130,000 $130,000 No Change
Maximum contribution limit to a defined contribution plan $57,000 $58,000 Increase $1,000
Maximum limit on “annual benefit payments” under a defined benefit plan $230,000 $230,000 No Change
Maximum dollar limitation for key employee definition in top heavy plans $185,000 $185,000 Unchanged
Social Security Wage Cap $137,700 $142,800 Increase $5,100

Welfare and Fringe Benefit Limitation Highlights for 2021

Description 2020 2021 Comment
HSA contribution limit (employer + employee) Self-only: $3,550

Family: $7,100

Self-only: $3,600

Family: $7,200

Self-only Increase: $50

Family Increase: $100

HSA catch-up contributions (age 55 or older) $1,000 $1,000 No Change
HDHP minimum deductibles Self-only: $1,400

Family: $2,800

Self-only: $1,400

Family: $2,800

No Change

No Change

HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums) Self-only: $6,900

Family: $13,800

Self-only: $7,000

Family: $14,000

Self-only Increase: $100

Family Increase: $200

Health FSA Contribution Limit $2,750 $2,750 No Change

What These Changes Mean for Employers

Employers that are plan sponsors should ensure that their payroll and administrative systems and formulas are updated to include the limits that have been adjusted. These limits are effective January 1, 2021. Employee communications and enrollment materials should also be updated.

Additionally, employers should consider that these limitation changes may affect nondiscrimination testing results and will increase the maximum permissible profit sharing allocations under a defined contribution plan and the maximum benefits available under a defined benefit plan. Employers should also review how the 2021 IRS limits impact their nonqualified deferred compensation plans regarding employee deferrals and employer contributions.

About the Author: Roberta Granadier is an attorney in Dickinson Wright’s Troy office, where she practices in the area of employee benefits law. She has extensive experience with benefits issues in corporate transactions, executive compensation, ESOPs and public retirement plans. Roberta can be reached at 248-433-7552 or and you can visit her bio here.

Are My Employees Telecommuting Right Into a New State Income Tax Liability?

A phenomenon of the ongoing COVID-19 healthcare pandemic is the exponential expansion of telecommuting. Whether stemming from an epiphany or simply the opportunity to escape to a more appealing place to live, many members of the workforce have opted to relocate. In many instances, relocation has meant crossing state borders, all the while continuing to work for the same employer. While the relocation may be temporary, it can have significant tax consequences — notably creating a nexus in a new taxing jurisdiction.

Physical presence of an employee in a state can create the requisite nexus to cause the employer to be subject to state corporate income taxes. An employer offering workforce flexibility can come back with a tax bite. In light of this quandary, several states have issued guidance — both formal and informal — addressing the nexus question.

The states which have issued guidance have typically taken the position that the state will not assert income tax nexus if the employee telecommuting is only due to COVID-19 healthcare pandemic. States indicating that corporate nexus will not be asserted due to COVID-19 include Arizona, California, Georgia, Indiana, Massachusetts, Maryland, Minnesota, New Jersey, Pennsylvania, and South Carolina.

Other states, such as Michigan, have affirmatively stated it will not waive nexus requirements due to COVID-19 related telecommuting. Yet other states have not issued any guidance. This latter category of states includes Florida, Illinois, New York, Tennessee, and Virginia.

For further information, please contact Peter Kulick in our Lansing, Michigan office at 517-487-4729 or any other attorney in our Tax Practice Group.