Salary-Reduction Contribution

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Salary-Reduction Contribution

A contribution to an employer-sponsored plan whereby the employee does not receive a check for his/her entire salary. Rather, the employer puts a portion of the salary into the plan directly; the contribution is automatically invested for the employee's retirement. A salary reduction contribution may come before or after the employee's taxes. This determines whether or not the withdrawals after retirement are taxable. See also: IRA, 401(k).
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The Act also caps the maximum salary reduction contribution to a health flexible spending arrangement at $2,500.
In addition, for participants age 50 or older, the maximum salary reduction contribution may be increased to $13,000 (in 2007, adjusted annually for cost of living increases).
Increased participation will lower the plan sponsor's payroll tax liabilities, because salary reduction contribution to health FSAs are not subject to Social Security, Medicare and Federal unemployment taxes.
Top-heavy rules applicable: The top-heavy 3% minimum contribution requirement is applicable to SEPs and SARSEPs, a commonly overlooked requirement in top-heavy "salary reduction only" SARSEPs when a 3% or more salary reduction contribution by a key employee triggers a minimum 3% "profit sharing" contribution.
The IRS treats these salary reduction contributions as employer contributions excluded from income under Sec.
Notice 2012-40 (12) addresses the $2,500 limit on employee salary reduction contributions to health FSAs.
The Internal Revenue Code generally prohibits withdrawals of 403(b) salary reduction contributions and earnings on such contributions prior to death, disability, age 59-1/2, severance of employment, or financial hardship (The amount available for hardship is limited to the lesser of the amount necessary to relieve the hardship, or the account value as of 12/31/1988 plus the amount of any salary reduction contributions made after 12/31/1988 (exclusive of any earnings)).
Salary reduction contributions are subject to Social Security, Medicare, and unemployment (FUTA) taxes.
Now the IRS will include such things as child care expenses and pre-tax medical costs - so-called salary reduction contributions - as compensation.
Under this change, compensation includes elective deferrals under 401(k) plans and similar arrangements, elective contributions to nonqualified deferred compensation plans of tax-exempt employers and state and local governments, and employee salary reduction contributions to a cafeteria plan.
Designed for businesses with 100 or fewer eligible employees, SIMPLE plans are funded by employer contributions and allow for employee elective salary reduction contributions.
In addition, under a transition rule, the IRS said that, although such changes normally require a prospective plan amendment, employers may permit employees to make pretax salary reduction contributions for accident or health benefits under a cafeteria plan for qualifying adult children effective March 30, 2010.