QUESTION: If employees don’t have to pay federal income tax on a fringe benefit because the benefit isn’t treated as income under the Code, does that mean they don’t have to pay FICA taxes on it either?

ANSWER: Not always. Though it may seem like that should be true—either both income and FICA taxes should apply, or neither should apply, it isn’t quite that simple. While fringe benefits that are excluded from income for federal income tax purposes are usually exempt from the taxes funding Social Security and Medicare (collectively, FICA taxes), this is not always the case. (The same is true for federal unemployment tax (FUTA) and railroad retirement tax (RRTA).) Adoption assistance benefits are one example—the Code excludes amounts paid by an employer for qualified adoption expenses under an adoption assistance program from an employee’s income, subject to the applicable dollar and income limits, but those amounts are still subject to FICA taxes. Pre-tax contributions to 401(k) plans are another well-known example in the retirement plan context.