(b)lines Ask the Experts – FICA Difference Between 403(b)s and 401(k)s

“I was surprised that you mentioned that such contributions are indeed subject to FICA. I work primarily with 401(k) plans, where this is clearly not the case. Is it different for 403(b) plans, or was this a typo.”

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Good question, as you have actually highlighted yet another difference between 401(k) plans and 403(b) plans. You are indeed correct that employee contributions pursuant to a one-time irrevocable election whether or not to participate in a 401(k) plan are NOT subject to FICA withholding. However, though it would be logical to assume that 403(b) contributions pursuant to a one-time irrevocable election would similarly not be subject to FICA, this is actually NOT the case. Due to a quirk in the law, 403(b) plans are treated differently, and contributions pursuant to a one-time irrevocable election are indeed subject to FICA withholding. The source of this is Internal Revenue Code (IRC) Section 3121(a)(5)(D), but the decision in University of Chicago v. U.S., 547 F.3d 773 (7th Cir. 2008), explains it pretty well.

This is an important example as to where the Code and regulations need to be read closely, because logic does not always dictate the appropriate answer to a question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.