CCA 1310034: Recurring early-retirement incentives may be subject to FICA as deferred compensation

Plain-English summary

Chief Counsel considered whether an early-retirement incentive arrangement was a window benefit excluded from nonqualified deferred compensation. A window benefit generally must be offered for no more than one year to employees who terminate during that period or under specified circumstances. Counsel noted that repeated similar benefits over substantially consecutive periods are not treated as window benefits. If the incentives were recurring, they would be nonqualified deferred compensation and subject to FICA when paid at retirement, with the present value of the future benefit taken into account.

Ruling snapshot

• Question: Are recurring early-retirement incentives window benefits or nonqualified deferred compensation?
• Outcome: Advice given, recurring incentives are treated as nonqualified deferred compensation on the stated facts.
• Key authorities: IRC § 3121(v)(2); Treas. Reg. § 31.3121(v)(2)-1(b)(4)(v)(B)

Full text (IRS public release)

ID: CCA_2013010315500332 Number: 201310034
Release Date: 3/8/2013
Office: --------------
UILC: 3121.16-02

From: -------------------
Sent: Thursday, January 03, 2013 3:50:10 PM
To: ----------------------
Cc: ----------------
Subject: FW: Employment tax question

Greetings ---------------

This arrangement sounds like nonqualified deferred compensation (NQDC). The regs at 31.3121(v)(2)-
1(b)(4)(v)(B) describe "window benefits" as benefits provided in connection with impending termination of
employment. "For this purpose, a window benefit is an early retirement benefit, retirement-type subsidy,
social security supplement, or other form of benefit made available by an employer for a limited period of
time (no greater than one year) to employees who terminate employment during that period or to
employees who terminate employment during that period under specified circumstances." Although
"window benefits" are excepted from the definition of NQDC, there is a special rule for recurring window
benefits. "A benefit will not be considered a window benefit if an employer establishes a pattern of
repeatedly providing for similar benefits in similar situations for substantially consecutive limited periods of
time. Whether the recurrences of these benefits constitutes a pattern of amendments is determined
based on the facts and circumstances…" You indicate that these early retirement incentives have been
offered since -------- Have they been offered continuously - or offered for substantially consecutive limited
periods of time? If these are recurring window benefits, then they are considered NQDC, and should be
subject to FICA upon retirement (the employer should take the present value of the future benefit into
account for FICA purposes upon retirement under section 3121(v)(2)). I hope this is helpful. Let me
know if I can be of further assistance.

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