(b)lines Ask the Experts – What Is a FICA Alternative Plan?

“Among the retirement plans that they sponsor is something called a ‘FICA alternative’ plan, but I can locate little information about the plan. Can the Experts tell me if they have ever heard of such a plan?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

Yes, the Experts have heard of this somewhat-obscure plan type. Back in 1991, when employees of governmental entities first became covered under Social Security (prior to that time, employees of governmental entities were not part of the Social Security system), an exception was created under Internal Revenue Code Section 3121(b)(7)(f) for certain temporary employees, such as certain adjunct professors and medical residents, which permitted such employees to deposit contributions into a private retirement plan instead of Social Security.

Though the plan can be defined benefit plan, or a 403(b), 457(b), or 401(a) defined contribution plan, a 401(a) defined contribution plan is the most common type. A minimum contribution of 7.5% of compensation must be made to the defined contribution plan; though the 7.5% may be funded by the employer, employee or both, in the Expert’s experience most plans are funded entirely by a mandatory employee contribution. Both the employer and employee save the 6.2% Social Security tax that would normally be payable to the Social Security system on behalf of the employee (Medicare tax is unaffected and would still be paid). However, if the employee ultimately derives a  Social Security benefit from other covered employment, such benefit may be lower than it would have been had the employee been covered under the Social Security system throughout his/her working career.

As for your statement that you could locate “little information” on this plan, keep in mind that this plan, like any other qualified plan, would be subject to the written plan requirement of the Code. Thus, a written plan document should be available.

For more details on FICA Alternative plans and Social Security with respect to state and local governmental employers see IRS Publication 963.  

Thank you for your question!