Social Security Taxable Wage Base Increases for First Time Since 2009

For the first time since 2009, the Social Security taxable wage base has increased: For 2012, it will be $110,100, up from $106,800. The Social Security Administration attributes this to the increase in average wages.

In 2012, employers must withhold Social Security taxes on each employee’s first $110,100 of compensation. This means that the employer and employee must pay up to $6,826.20 each. Compensation above the $110,100 limit is not subject to Social Security taxes.

The taxable wage base caps the amount of employee compensation subject to the 6.2-percent Social Security tax rate imposed on both employers and employees. Unlike the Social Security tax rate, the 1.45-percent Medicare tax rate imposed on both employers and employees applies to all of an employee’s compensation, without a wage base cap.

Together, the Social Security and Medicare taxes form the 7.65-percent Federal Income Contributions Act (FICA) payroll tax on wages (15.3 percent when the employer’s and employee’s percentages are combined).

Impact on Employee Benefit Plans

Because Code Section 3121(a) exempts some employee benefits from the definition of wages subject to FICA taxes, the inflation-adjusted Social Security taxable wage base for 2012 generally will not affect their tax treatment. These include the following:

• accident, health and disability insurance, and medical expense coverage provided under Code Section 105;
• excludable group term life insurance benefits provided under Code Section 79;
• dependent care assistance benefits provided under Code Section 129;
• educational assistance benefits provided under Code Section 127;
• scholarships and other tuition assistance provided under Code Section 117;
• fringe benefits provided under Code Section 132; and
• achievement awards provided under Code Section 74.

If these benefits do not satisfy the various tax qualification requirements, including any applicable nondiscrimination provisions, then employers must treat them as income to their employees, subject to FICA taxes.

However, for most key employees receiving discriminatory group term life insurance benefits, Social Security tax withholding probably will be unnecessary. The tax code allows employers to defer such withholding until the end of the calendar year. By then, most key employees will have earned other wages exceeding the Social Security taxable wage base cap, leaving group term life insurance benefits subject only to Medicare taxes.

Application to Cafeteria Plans

For employees with annual compensation below the Social Security taxable wage base, Social Security taxes will decrease as a result of any elective deferrals made to Code Section 125 cafeteria plans. Because such deferrals reduce the employee’s (and the employer’s) portion of Social Security taxes, they also could reduce the employee’s

Social Security benefits upon retirement. For most employees, however, this benefit reduction is minimal and is usually offset by the income tax savings and earnings potential on their deferrals.