Temporary, seasonal and part-time employees are a critical workforce resource, yet are excluded from many full-time employee benefits.
If you are in business administration, you’re aware of the taxes that employers and employees pay. However (and believe it or not), Uncle Sam does provide us with a few opportunities to, at the very least, lower tax burden. One of these opportunities comes in the form of FICA Alternative 3121 Plans.
Perhaps the only thing more surprising than the United States government lowering tax obligation, is that so many employers are not familiar with FICA Alternative 3121 Plans, and the advantages of this opportunity.
Okay, I understand that the US Tax Code can be confusing and, yes… of course, not paying taxes is too good to be true. Let’s take a step back and explain a few of Uncle Sam’s tax laws and then look at how a FICA Alternative 3121 Plan can save you on those taxes.
The Federal Insurance Contributions Act, more commonly known as “FICA”, requires payroll taxes from both employer and employees to fund both Social Security and Medicare … are we having fun yet? … so, what does that mean exactly? In a nutshell, Uncle Sam can tax (take) roughly 7% of an annual wage base out of your employees’ paychecks. (That 7% consists of 6.2% for Social Security tax and 1.45% for Medicare tax. ) There are, however, some exceptions to who must pay into Social Security.
You may be surprised to learn that not all employees pay Social Security tax…. I know, life is not fair. Though, if you’re a school district administrator, this might be familiar. In some states, teachers pay into Social Security; in some they don’t. And, to add to the confusion, in other states a teacher might pay in Social Security, or not! Teachers aren’t the only exception to the FICA rule. In 1990, the US government provided us with yet another exception.
The Omnibus Budget Reconciliation Act of 1990 provides the option to offer an alternative, the FICA Alternative 3121 Plan for temporary, seasonal and part-time employees. (Remember, FICA is the law that requires pay into Social Security and Medicare.) With FICA Alternative 3121 Plans, employers and employees have an “alternative” to paying the Social Security part of that tax.
If you have the ability to offer your employees a FICA Alternative plan it works like this:
Employees enrolled in a FICA Alternative 3121 Plans do not pay 6.2% to Social Security. Instead, they contribute roughly 7% pre-taxed to the FICA 3121 Alternative Plans (since the 7% is pre-taxed it only takes 6.2% out their paycheck). The benefit works out to be twofold.
- Employees receive more take home pay… and an immediate vested interest in a retirement savings plan.
- Employers eliminate their requirement to pay FICA contributions for those employees.
Employer benefits
- Offer Part-time Service (PTS) employees a retirement plan benefit.
- Annual budget savings by eliminating 6.2% Social Security contributions on PTS payroll.
- Available to employers without costs or fees.*
Employee benefits
- Employees are always 100% vested, meaning all their contributions belong to them.
- Funds in the FICA Alternative Plan earn guaranteed interest and never lose a penny during down markets.
- Upon separation from service, employees can withdraw the money or leave it in their accounts.*
Employees should be aware that by participating in a FICA Alternative Plan they will not be contributing to their Social Security Benefit.
Already have a FICA Alternative Plan in place?
Consider National Life Group to manage your existing plan. We offer a comprehensive platform with no fees to the employees and a guaranteed crediting rate. Employees will never lose a penny due to a downturn in the market.
If you are interested in learning more, contact your National Life Group Agent or National Life Group directly.
* Interest is guaranteed to the plan. Participants will need to check with the plan administrator for information about any plan-related fees or restrictions.
Group Annuity, forms 20602(0119) and 20603(0119), is issued by Life Insurance Company of the Southwest.
TC125704(0322)1
