In this article, Marianna Dyson and Anthony Provenzano discuss the implications of the Davidson v. Henkel Corp., decision which held an employer liable under ERISA for failing to correctly apply the special timing rule for FICA taxation of deferred compensation.
The authors suggest that employers should be wary because the district court decision outlines an obligation that may not have been clear previously. "Simply providing the promised benefit to a participating employee may be insufficient to extinguish the employer's obligation to that employee if the employer fails to administer the plan in a manner that produces the most beneficial tax treatment," they said.
The article lists other decisions that have addressed the issue of employer carelessness leading to negative tax consequences. Dyson and Provenzano conclude that Henkel is an important case for employers and suggests that they review the tax terms of their deferred compensation plans as well as operational compliance. "The application of FICA taxes in conjunction with a nonqualified arrangement is typically much more complex than many realize, and errors can occur," they said.