Trying to figure out the rationale for a program that was set up. The persons who originally set the plan up are retired and no longer with the organization. There is a 403(b) and a MPP plan. The MPP is setup to hold a fixed contribution and also a matching contribution which is based on the 403b deferrals. Both plans have PYE 6/30. The comp limit is measured on a plan year basis. When someone hits the comp limit they no longer receive the fixed MPP contribution or the match. However, the amounts that they should have received continue to be tracked by payroll, but are not sent to the trustee for investment. Instead, at the end of the plan the aggregate amount of of what was accumulated is invested in taxable personal annuities at TIAA-CREF. Before the funds are sent to T-C the amount is run back through payroll and treated essentially as wages. Federal, state, and FICA taxes are withheld. The employee does not receive any of this money it is sent to T-C for investment. Questions are, is this something that should be done? Should taxes be withheld from these amounts? It is not deferred compensation. The employee still receives the full amount of their compensation over the comp limit. The amounts that are taxed are what the employer would have contributed to the plan in a fixed and match contribution had there been no comp limit to restric the employee. Has anyone ever heard of such a situation?

Sounds like the employer wanted (wants) the employees to get their full share of the contributions in some form, even when the comp limit is hit. Just guessing, but it may have started back in 1994 when the comp limit was slashed from $235K+ to $150K, and it resulted in a real reduction in total pay.

It all sounds legit from a tax standpoint.

Thanks for the reply.

A follow up question. What is the rationale for taxing the 'extra' payments (is there something specific in the IRC that requires this)? Are they supposed to be then treated as actual wages? Which is why fed, state, and and fica is withheld?

I don't think you have much choice, it's compensation. Unless you're going to try to do it in a non-qualified plan, and they probably didn't want to be bothered.