Appellate Court Backs IRS 403(b) FICA Ruling

March 3, 2009 (PLANSPONSOR) - The University of Chicago has lost another round in its ongoing legal battle over whether a 403(b) plan sponsor is required to collect FICA taxes on deferrals withheld per an employee salary reduction agreement.

The 7 th U.S. Circuit Court of Appeals upheld a trial judge’s decision rejecting the university’s argument that Internal Revenue Service (IRS) rules requiring the withholding from deferrals made as part of a salary reduction agreement should not apply because the university required employees to contribute to the 403(b) and sign a salary reduction agreement.

Lawyers for the university argued that IRS use of the term “agreement” implied – incorrectly in the university’s case – that university employees’ participation in the salary reduction agreement was voluntary.

The case began when the university challenged the decision to assess the university for unpaid employment   taxes, failure-to-deposit penalties, and interest for 2000 to 2003.

U.S. District Judge George W. Lindberg of the U.S. District Court for the Northern District of Illinois ruled that if Congressional lawmakers had intended the IRS provision to only kick in in the case of voluntary individual salary reduction agreements, they would have added language to that effect. Appellate judges agreed.

Appellate judges also held that the failure-to-pay penalties were properly imposed as allowed unless the nonpayment was due to reasonable cause and not willful neglect.

The 7 th  Circuit ruling is available  here .