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Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a grandfathered SERP. I know the SERP meets the grandfathering

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I have a grandfathered SERP. I know the SERP meets the grandfathering provisions of sec 409A. I was retired when the first payment and all susequent payments were made. Never had any obligation to the company after retirement. Was legally due the full 10 year benefit. Payment has always been reported in box 3 on my 1099 from the company and reported as other income my return Now after 9 years the IRS is saying I should report on schedule C and pay self employment tax. Before I call them can you give me some comfort that I'm right?

Lev :

Hi and welcome to Just Answer!
Special transition rules as provided in section 409A apply for 2005 - 2008 tax years.

After Dec 31, 2008 nonqualified plans must comply with the final rules.
As you were an employee - and did not provide services as a self-employed person - I agree with you - that income is not reported on schedule C and is NOT subject of self-employment taxes.
However - if such payments are considered as wages - and as such could be subject of FICA taxes - that is a separate issue - and generally must be directed to the plan administrator.

Lev :

Generally, SERP benefits are subject to FICA taxes when they are vested.
Specifically timing is determined by Treasury Regulations, Subchapter C, Sec. 31.3121(v)(2)-1 - see here -,_Subchapter_C,_Sec._31.3121(v)(2)-1

(ii) Special timing rule. Except as otherwise provided in this section, an amount deferred under a nonqualified deferred compensation plan is required to be taken into account as wages for FICA tax purposes as of the later of—

(A) The date on which the services creating the right to that amount are performed (within the meaning of paragraph (e)(2) of this section); or

(B) The date on which the right to that amount is no longer subject to a substantial risk of forfeiture (within the meaning of paragraph (e)(3) of this section).

It is possible that some benefits does not constitute wages and as such are not taken into account as wages for FICA tax purposes. Regulations provide an example of death and disability benefits.
Wages are defined in Sec. 31.3121(a)-1 -,_Subchapter_C,_Sec._31.3121(a)-1
and in particular includes
i) Remuneration for employment, unless such remuneration is specifically excepted under section 3121(a) or paragraph (j) of this section, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them.

So far - I suggest to contact the plan administrator and inform them that the IRS objects the treatment of SERP benefits as not wages.

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