TaxNewsFlash-Exempt Organizations

November 4, 2008
No. 2008-108

PRINTABLE VERSION

Seventh Circuit Finds University Liable for FICA Tax with Respect to Payments Made Under Employee Retirement Plans

The U.S. Court of Appeals for the Seventh Circuit recently affirmed a federal district court’s grant of summary judgment for the government in a case concerning whether a university was liable for FICA tax, interest, and penalties on contributions made on its employees’ behalf under the university’s retirement plans. The Seventh Circuit agreed with the IRS and the federal district court that the contributions were pursuant to a “salary reduction agreement” despite the fact that the contributions were mandatory. University of Chicago v. United States, No. 07-3686 (7th Cir. October 29, 2008).

For an electronic version of the 27-page decision: University of Chicago

Summary

The University of Chicago maintains section 403(b) retirement plans for its employees. As a condition of employment, all employees are required to participate in, and contribute to, the plan that is applicable to their respective positions. The University also contributes to the plans, but only the employee contributions were at issue.

Under section 3121(a)(5)(D), employee contributions to a section 403(b) plan are excluded from wages subject to FICA unless the payments are made by reason of a salary reduction agreement. The Seventh Circuit held that the employee contributions were made by reason of a salary reduction agreement despite the fact that the employees did not voluntarily elect to make them because the statutory language makes no distinction between an elective and non-elective salary reduction agreement.

For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or rspeizma@kpmg.com

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