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Level 1

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

I always thought that money paid by an employee into his 401k was not subject to CA SDI.  If I am wrong about this, I have underpaid CA SDI for years!!!!! See attached file from CA EDD.

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Best answer 12-10-2018

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Anonymous
Not applicable

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

A 401k deduction reduces wages for federal income tax and most state income tax withholding.

It impacts very few other taxes.  When you set up a 401k item you can see the default tax-ability on the tax slide.  CA-Disability Employee is not selected, which means the deduction does not impact the tax.  If you select that tax, you've given a warning, stating it's probably wrong.  Which it is.

CA SDI has a wage limit of about $100,000 and has for years, so unless your employee all made at least that amount you have under-withheld and under-paid the tax.

Call CA and ask them what you should do. You can't very well take the additional tax from your employees now for prior years, but you may need to refile these years and pay up in order for your employees to have the benefit they should have if they become disabled.

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11 Comments
Highlighted
Anonymous
Not applicable

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

A 401k deduction reduces wages for federal income tax and most state income tax withholding.

It impacts very few other taxes.  When you set up a 401k item you can see the default tax-ability on the tax slide.  CA-Disability Employee is not selected, which means the deduction does not impact the tax.  If you select that tax, you've given a warning, stating it's probably wrong.  Which it is.

CA SDI has a wage limit of about $100,000 and has for years, so unless your employee all made at least that amount you have under-withheld and under-paid the tax.

Call CA and ask them what you should do. You can't very well take the additional tax from your employees now for prior years, but you may need to refile these years and pay up in order for your employees to have the benefit they should have if they become disabled.

View solution in original post

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Level 1

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

Based on the information in the attached file, it says clearly employee's salary reduction to 401K plan is not subject to UI/ETT,SDI and PIT. So confused and frustrated with these states...
Highlighted
Anonymous
Not applicable

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

Not subject to means does not change the benefit.  Wages are subject to the benefit.  Taxes and most other deductions are not, meaning they do not change it.
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Level 1

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

Big Reds original answer is often (not always) correct.  But the last comment is incorrect.  Regarding the question--Here may be your confusion. A 401k reduction is NOT subject to SDI if it's part of a cafeteria plan.  It IS subject to SDI if not under the umbrella of a cafeteria plan (which many are not).  Maybe that's how you got confused--because it's two different answers in two different places.
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Level 1

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

Thank you for your explanation! The part confused me is what makes a 401K plan different whether it's part of a cafeteria plan or not. Literally, I understand what the CA rule says in DE 231EB, but does that really make sense? Basically it's like saying a 401k plan is not a 401k plan because it's not part of a cafeteria plan so we can't treat it pre-tax for SDI. But if a 401k plan is part of a cafeteria plan than it's a 401k plan and we can grant the tax advantage. The point is that a cafeteria plan does not change the essence of a 401k plan.
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Level 15

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

In QB Payroll, you have two different perspectives when you Edit a Payroll item, for how it is set up. You will see that specific pay items are "subject to" and you will see that specific tax items are "affected by."
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Level 15

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

"it says clearly employee's salary reduction to 401K plan is not subject to UI/ETT,SDI and PIT."

I see this line on that attached table, copied here:

"Employee salary reduction contributions to a qualified plan (unless under cafeteria plan, see page 2.)"

And the applicable status for UI/ETT; SDI; and PIT as follows:

UI/ETT = Subject

SDI = Subject

Income tax = Not Subject




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Level 1

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

Oh I see! Thank you very much! I did not notice that. But what is the difference of a Cafeteria plan and Non-Cafeteria plan contribution? Thanks!!
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Level 15

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

"what other conditions are required to make it a qualified Cafeteria Plan contribution?"

You would have a "125 Cafeteria plan" (IRS Code). That's how you Know if it falls under a Cafeteria plan.

"Also, same issues about health insurance contributions."

You should make an appointment to review all of this with your own CPA and/or a Benefit Plans administrator. On this QB forum, no one can review all of the possible Tax Regulation provisions, nor help you know if something does or does not apply for this employer.



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Level 15

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

"But what is the difference of a Cafeteria plan and Non-Cafeteria plan contribution?"

They have different conditions. Did you look at the Cafeteria section, instead of the Retirement section, of that table?



Highlighted
Level 1

In CA, for an employee who pays into a 401k plan, is SDI based on earnings before the 401k reduction or after??

Yes, I read both Cafeteria section and Retirement section and that is why I got confused. For example, if an employee makes contribution to a 401(K) plan from paycheck, what other conditions are required to make it a qualified Cafeteria Plan contribution? Otherwise, it will be considered a qualified plan but not a cafeteria plan and will be taxable. Also, same issues about health insurance contributions. Thanks!!!

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