From: Dear AFA

We have received a number of inquiries from Flight Attendants who have directed that their Profit Sharing proceeds be directed to a tax deferred 401(k) account and who are seeing a variety of taxes, including Federal Income taxes, being withheld. When comparing this year's Profit Sharing Pay Advice to last year's, they are noticing that taxes were not previously withheld and, given the tax deferred status of the accounts where the Profit Sharing was directed, are questioning why these taxes are being withheld.

By way of background information, based on Member feedback AFA-CWA sought a change to our Contract that would provide Flight Attendants with the ability to direct how the Profit Sharing payment would be made - either in cash or into a tax deferred 401(k) retirement account. This was a change from what had previously been decided by vote of the Membership to direct these proceeds into our 401(k) accounts. In obtaining this option, AFA-CWA was able to expand the initial selection from one of cash or 401(k) deferral to include the ability to direct contributions in any combination sought by the individual. This includes the options of cash, a contribution to a tax deferred 401(k) or Roth 401(k) or any combination of the three options. This Contract modification which provided Flight Attendants the ability to self-direct the Profit Sharing proceeds changed the nature of the Profit Sharing payment from an employer contribution to an employee contribution. This was not an insignificant change.

As a result, this money, when directed into the tax deferred 401(k) account, is subject to FICA (Social Security and Medicare) withholding, CA state disability withholding as well as some other State and Local taxes to the same extent as any other contribution to our 401(k).

The money withheld from the Profit Sharing payment to pay these FICA, state disability and other taxes is considered wages for the purposes of the Federal tax code. As a result, the money withheld from the Profit Sharing to pay these various tax and disability amounts is reported as wages and is further subject to Federal tax withholding. It is for this reason that you will see Federal Taxes withheld from the Profit Sharing proceeds that have been directed into the 401(k) accounts.

Should you have additional questions, please contact your Local Council office.