Category: Compensation & Employee Benefits; Individuals
Subject: FICA Tax
Title: FICA Liability for Disability Payments
IRC Sections: 3121(a)(4)
Filename: 1231.html
Date Produced: 05/95

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Background
Employee was paid disability income both by the taxpayer employer (approximately $100,000) and a third party insurance company (approximately $20,000). The employee was issued a Form W-2 from the insurance company as well as the regular employer.

Issue
The total paid to this employee from both sources exceeds the FICA maximum. Does the amount paid by the insurance company count as part of the employer's maximum FICA amount?

Answer
First, the law subjects disability payments, irrespective of who pays them, to FICA only for a certain period of time (6 months after the employee last worked). The amounts involved in this case lead me to question whether that limitation has been taken into account.

Second, if the 6-month limitation has been observed, all the employer amounts in this case are treated as that of the employer taxpayer. In other words, there is only one aggregate FICA limit, not two separate ones.

Discussion
Section 312(a)(4) exempts disability or sick pay from FICA with respect to any amounts paid after the expiration of the period ending six months after the employee last worked for the employer. It seems to me that an aggregate payment of $120,000 would represent more than six months of compensation for most employees. Accordingly, this alone may be dispositive of the issue at hand.

Third-party disability arrangements come in several varieties: a) the third party is the taxpayer's agent; b) the third party (usually an insurance company) is not the taxpayer's agent and agrees to bear the FICA costs; or c) the third party is not the taxpayer's agent and has transferred the liability for FICA to the employer.

The description of this case lead me to wonder whether it is Option B or Option C we are seeing in this case. This should be confirmed. On balance, it seems to me that Option C is probably the operative set of facts.

If the third party is not the employer's agent and has transferred FICA liability to the employer (Option C), the employer is the nominal employer for payroll tax purposes. Rev. Proc. 82-20. Incidentally, the third party transfers liability to the employer simply by notifying the employer of the employee share of FICA withheld and deposited. In my experience, this is generally what happens with an insurance company, and the employer simply includes amounts paid through the insurance company along with all other wages paid by the employer.

In my experience, the insurance company does not normally issue a W-2. This seems more consistent with Option B in which the third party has not transferred liability back to the employer and the third party is responsible for FICA taxes. If that is really the case, the third party is treated as a separate employer and there would actually be two separate FICA limits in play.