The amounts deferred at the employee's option are in reality deductions from the employee's
salary and thus are wages for Social Security purposes at the time of deferral. (See
Even if payments into these plans are made with employer funds, they are wages because
no wage exclusion in the Social Security Act applies.
Do not consider the amounts deferred as gross income for income tax purposes until
they are distributed to the employee under the conditions of the plan.
This example illustrates the application of Social Security and Medicare tax: State
R’s 457(b) plan provides for elective deferrals from current salary, as well as a
one percent of salary non-elective contribution for each employee who participates
in the plan and who is employed with State R during the plan year. All employees who
participate in the plan are covered by a Section 218 Agreement. All deferrals and
contributions, including the state’s contribution, are fully and immediately vested.
Because these contributions are not subject to a substantial risk of forfeiture (and
the services have already been performed), the elective deferrals and the state’s
non-elective contributions are required to be taken into account as wages for purposes
of the Social Security and Medicare tax.