MMC Benefits Handbook
How the Grandfathered BEP Benefit is Taxed
The Grandfathered BEP Benefit is subject to FICA tax (tax imposed by the federal government on both employees and employers to fund Social Security and Medicare) in addition to regular income tax.
In order to satisfy the FICA obligations with respect to Grandfathered BEP Benefit:
- The entire FICA tax obligation on the Grandfathered BEP Benefit that is not secured by a purchased annuity will be satisfied at the time when the benefit commences. A single sum distribution sufficient to satisfy the entire FICA tax obligation on your Grandfathered BEP Benefit as well as income tax on the portion of your Grandfathered BEP Benefit distributed to satisfy the FICA obligation is made from your Grandfathered BEP Benefit and remitted to the appropriate tax authorities. No further FICA tax will be due on your Grandfathered BEP Benefit.
- Your monthly benefit in the form of payment you elected (or your single sum, if available), will be reduced to take into account the single sum distribution used to satisfy your FICA tax obligations as well as the income tax withholding on that amount.
Income Taxes on Payments Other Than Purchased Annuities
- Payments from the BEP other than payments from purchased annuities are taxed as ordinary income when they are received. Generally, state and local taxes, if any, are withheld based on your state of residency when you receive payment.
- If your benefit is one million dollars or less and is paid to you in a single sum, a 25% flat tax rate will apply.
- If your benefit is over one million dollars and is paid to you in a single sum, a 35% flat tax rate will apply.
Taxes Attributable to Purchased Annuities
Tax Impact of the Annuity Purchase
- According to IRS regulations, amounts used to purchase the annuity were considered taxable W-2 income to you in the year in which the purchase was made. At the time the annuity was purchased, the Company paid the tax authorities an amount sufficient to cover the full estimated tax liability (i.e., both the tax on the annuity purchase, and the tax on the Company's payment of the tax on your behalf.)
- Your benefit under the annuity is adjusted to its after-tax equivalent to be comparable to what you would have received net of taxes under the BEP if no annuity had been purchased.
Taxes on Annuity Payments
- Because the Company paid the taxes on the annuity when it was purchased, a portion of your benefit is not taxable to you when benefits are paid. You are responsible, though, for taxes on the portion of your benefit payment that derives from growth in the value of the annuity contract since it was purchased.
- Additionally, since the tax paid when the annuity was purchased was based on your life expectancy, any benefit payments that may be made after your expected lifetime are fully taxable.
Taxes Reported Once Benefits from the Annuity Purchase Commence
The taxable portion of your monthly annuity payment and withholding amounts are reported on an IRS form 1099-R once your benefits commence. This form is mailed to you annually no later than the January 31st following the end of the previous calendar year.