Is a 401(k) Exempt from FICA?

Using a 401(k) plan can supercharge your retirement savings because of the range of tax benefits offered. For example, contributions to a 401(k) are exempt from state income tax and federal income tax. However, FICA taxes are calculated differently than income taxes, as FICA taxes only apply to your earned income during the year and don't permit the same deductions that you're allowed on your income taxes. For example, a contribution might qualify for a 401(k) state income tax exclusion. The tax benefits for contributions might not extend to FICA taxes, depending on who is making the contribution.

When you opt to make contributions to your 401(k) plan, you may save on your income taxes, but you won’t save any money on FICA taxes because a 401(k) isn't exempt from FICA. For example, if your paycheck is $1,000 and you elect to contribute $200 to your traditional 401(k) plan, your employer will withhold FICA taxes on the full $1,000 even though only $800 is subject to income taxes. The same rules for FICA taxes apply regardless of whether you make your contribution to a traditional 401(k) or a Roth 401(k).

The rules are different when your employer is the one making contributions to your 401(k) plan on your behalf. Employer contributions to your 401(k) plan are not subject to either the Social Security tax or the Medicare tax on earned income. For example, if your employer makes a matching contribution of $1,000 to your 401(k) plan on your behalf, you won’t pay any extra in FICA taxes.

The Medicare portion of FICA taxes applies to all of your income, but the Social Security portion only applies to a maximum amount of income each year. This amount is known as the Social Security contribution and benefit base, and it fluctuates each year with inflation. Any earned income in excess of the contribution and benefit base isn’t subject to the Social Security portion of FICA taxes, regardless of whether you contribute it to a 401(k) plan or not. In 2018, the Social Security contribution and benefit base increased to $128,400. In addition, the maximum annual 401(k) contribution limit increased to $18,500 for employees and $55,000 for total employer and employee contributions.

The tax law for 401(k) contributions and FICA taxes is the same in 2017 as it is in 2018. However, both the Social Security contribution and benefit base and the maximum annual 401(k) contribution limit were slightly lower. In 2017, the Social Security base was $127,200, and the 401(k) employee contribution limit was $18,000 for employees and $54,000 for both employer and employee contributions.