Generally, contributions to a 457(B) plan are subject to FICA and FUTA taxes when the contributions are deferred (not when distributed from the plan to the participant). But, suppose an employer fails to withhold payroll taxes at the time the contributions are made. Is there a way for the employer to correct this now -- e.g., go back and calculate the amount that should have been withheld and pay this amount to the IRS now? I'm thinking of course that the employer would pay its share from its general assets, but would take the employee's share out of his or her account. Any thoughts, comments? Thanks.

Is the assumption here that only by paying the taxes for the year in which the amounts were deferred can the participant be exempt from FICA on all the amounts distributed, and from income tax on all but the earnings? I seem to recall at least some Tax Court authority to the effect that even if a mistake is made in an earlier year, it would not cause more taxes to be due in a later year--that the sole remedy of the IRS would be to audit the earlier year, if it were still within the statute of limitations. If my memory is correct, it would appear that the taxpayer might have the best of both worlds by not trying to correct the earlier year, but merely by claiming in the later year that no tax was due.

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[This message has been edited by CVCalhoun (edited 01-08-99).]