Most workers pay Social Security tax on their wages under the Federal Insurance Contribution Act, but there are exceptions. The Omnibus Budget Reconciliation Act of 1990 allows a substitute to Social Security tax for certain government employees. Instead, these workers contribute to a FICA alternative retirement plan.
Who Uses It
Temporary, seasonal and part-time employees can participate in FICA alternative plans, under Internal Revenue Service rules. For example, public colleges and universities use these plans rather than collecting and paying Social Security tax. Participating employees contribute to an individual account such as a 403(b) or 457(b) defined retirement annuity.
How It Works
Employees enrolled in a FICA alternative plan don't pay the normal 6.2 percent Social Security tax. Instead, they contribute pretax payroll deductions equal to 7.5 percent of their gross pay, as of 2013. Workers still pay the 1.45 percent Medicare tax. Because contributions are pretax, the impact on their net pay is roughly equivalent to the 6.2 percent Social Security tax. Employers can allow workers to contribute more than 7.5 percent of their pay, but they aren't required to.
How It Helps
Employees are always 100 percent vested, meaning their contributions belong to them. Funds in the FICA alternative plan are invested in an annuity with guaranteed interest, typically through an insurance company. Plans are also portable. Workers who leave their jobs can withdraw the money or leave it in their accounts.
How to Tap It
Employees can withdraw money from a FICA alternative plan after leaving a job. Withdrawals are subject to federal income taxes. Distributions can also be made starting at age 59 1/2, or if a worker becomes disabled. The IRS may charge a 10 percent penalty for withdrawals made before 59 1/2. Employees must begin required minimum distributions at 70 1/2. Money in a FICA alternative retirement plan can be rolled over into other retirement accounts such as a traditional IRA.