By Jerry Geisel
WASHINGTON — Under newly proposed Internal Revenue Service regulations, colleges and universities would have to extend 403(b) retirement savings plans to more people who work there.
The regulations would narrow the definition of who is considered a student, which would have huge Social Security tax and savings plan ramifications for colleges and universities.
Under law, compensation earned by students working for educational institutions is exempt from the 7.65% Federal Insurance Contributions Act tax that is imposed on the first $87,900 of an employee's wages.
But by classifying more people — such as teaching assistants, who both work and study at schools — as employees and not students, colleges and universities would have to pay FICA taxes on individuals they never considered to be employees.
"They have narrowed the definition of who is considered a student too much," said Kelly Farmer, tax director of the University of Minnesota, Minneapolis.
Unlike 401(k) plans, salary deferrals made by 403(b) plan participants are not subject to non-discrimination testing. However, 403(b) plans that accept salary deferrals must be made available to all employees.
This availability requirement does not apply to students employed by schools and colleges, though, if their compensation is not subject to FICA taxes.
By stripping away the FICA tax exemption, colleges and universities would have to extend their 403(b) plans to people they never would have considered eligible before.
Jerry Geisel is editor-at-large of Business Insurance, a sister publication of Pensions & Investments.