Retirement Medical "Buyout" Subject to FICA
Recently two Information Letters issued by the IRS clarify the tax implications
of settlement payments on retirement. These settlements are provided to retirees
in lieu of providing medical benefits.
A recent trend to limit the financial exposure an employer has for retirees
is to make a single payment to the employee at retirement to cover future
medical expenses. An example of this is Agilent's program that will pay $55,000
to retirees and then not include them in future medical group plans.
The impact of the IRS information Letters is that not only will this settlement
be subject to income taxes, but will also be fully subject to FICA.
This means that retirees will in reality have only slightly over half of the
settlement amount for assistance in medical expenses.
One implication of this is employees planning a retirement will need to consider
the timing of their retirement. Employees whose compensation exceeds the
annual maximum on OASDI
(a portion of FICA) payments may want to look at the merits of
timing to reduce OASDI payments on their settlement.
(OASDI is Old-Age, Survivors and Disability Insurance.)
This article is based on IRS Information Letters
2008-1 and
2008-6.
The following text from the IRS web site explains the authority of Information Letters.
An information letter provides general statements of well-defined law without applying them to a specific set of facts. They are furnished by the IRS National Office in response to requests for general information by taxpayers, by congresspersons on behalf of constituents, or by congresspersons on their own behalf.
Information letters are advisory only and have no binding effect on the Service. The release of these documents is to increase public confidence that the tax system operates fairly and in an even-handed manner with respect to all taxpayers.
Responses that merely transmit Service publications or other publicly available material, without significant legal discussion; responses to taxpayer or third party contacts that are inquiries with respect to a pending request for a letter ruling, technical advice memorandum, or chief counsel advice (whose disclosure is subject to I.R.C. §6110); and responses to taxpayer or third party communications with respect to any investigation, audit, litigation, or other enforcement action are not being made available for public inspection.
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