Nonqualified Plan Sponsor Loses Lawsuit over FICA Taxes

A group of nonqualifed retirement plan participants argue their employer reduced their retirement benefits by not paying FICA taxes on their accounts per the plan document.

A federal district court found that, rather than properly withholding nonqualified retirement plan participants’ Federal Income Contributions Act (FICA) taxes as required by the plan, Henkel Corp. caused participants to pay these taxes at the time of each benefit payment, effectively reducing their anticipated retirement benefits. 

The U.S. District Court for the Eastern District of Michigan noted that Henkel admitted in a letter to participants that it had not properly withheld taxes. This resulted in the participants owing more in FICA taxes than they would have owed had Henkel properly and timely paid taxes when they were due. The court granted summary judgment to the participants because Henkel failed to adhere to the purpose and terms of the plan, resulting in a reduced benefit to the participants. 

According to the court opinion, Section 4.4 of the plan reads:

“Taxes. For each Plan Year in which a Deferral is being withheld or a Match is credited to a Participant’s Account, the company shall ratably withhold from that portion of the Participant’s compensation that is not being deferred the Participant’s share of all applicable Federal, state or local taxes. If necessary, the Committee may reduce a Participant’s Deferral in order to comply with this Section.”

“Pursuant to the plan’s design and purpose, the defendants are required to properly and timely withhold the taxes on the funds of the plan participants while the funds were in the control of the defendants,” U.S. District Court Judge Gershwin A. Drain wrote in his opinion.