Peter Gulia

That a plan’s administrator received a certified letter suggests it might be wise to lawyer-up. Even if ERISA § 104(b)(4) alone might not require furnishing an SPD earlier than “the latest updated summary[] plan description” and SMM, a fiduciary might want its lawyer’s advice about whether duties of loyalty and communication call the fiduciary to furnish an older SPD (if the administrator still has that document), and about whether it’s wise or unwise to furnish it. This is not advice to anyone.

Consider that a plan might provide several different measures of compensation with different purposes and uses. That § 415(c)(3) compensation for applying an annual-additions limit might exclude a parsonage allowance [see IRS Ltr. Rul. 2001-35-045 (issued June 7, 2001, released Sep. 2001) (interpreting then 26 C.F.R. § 1.415-2(d)(3)(iv), now 26 § 1.415(c)-2(c)(4)] does not by itself mean other measures exclude the parsonage allowance. A plan might use a distinct measure of compensation to determine allocations of a nonelective contribution. And might use a yet different measure to determine participant contributions. A plan’s definition of compensation that counts a parsonage allowance could not be contrary to ERISA’s title I because that law does not apply to a church plan that has not elected to be ERISA-governed. Although nothing commands a plan’s sponsor to state provisions that meet conditions for § 401(a) or § 403(b) tax treatment, a plan sponsor might prefer to do so. Some IRS guidance supports a definition of accrual compensation that includes a parsonage allowance as not contrary to § 401(a), assuming other conditions are met. Rev. Rul. 73-258, 1973-1 C.B. 194, CCH Pension Plan Guide Pre-1986 Revenue Rulings ¶ 19,233 (“[A]mounts that are excludible from a minister’s gross income under section 107 of the [Internal Revenue] Code are compensation for purposes of section 401(a), and their character as compensation is not changed by the fact that they are excludible from gross income.”); see also Revenue Ruling 73-381, 1973-2 C.B. 125 CCH Pension Plan Guide Pre-1986 Revenue Rulings ¶ 19,260 (“The fact that the value of meals and lodging may be excluded by statute from gross income does not alter its character as compensation upon which benefits may be based.”). Both those rulings are about church retirement plans. I have not checked whether those rulings remain the IRS’s interpretation. As ever, Read The Fabulous Document. This is not advice to anyone.

The few situations I’ve heard about use a service provider to confirm to an employer its employee’s student-loan repayments. I have not seen a form, whether website app or paper, for a participant’s self-certification.

Does the plan provide a § 72(t)(2)(I) emergency personal expense distribution? If not, might the plan sponsor consider an in-operation amendment (to be included in a SECURE 2019 & 2022 restatement)? The standard for an “emergency personal expense” is wider than for a hardship. A participant may certify that the claimed distribution is “for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” I.R.C. (26 U.S.C.) § 72(t)(2)(I)(iv). Although the $1,000 an emergency personal expense distribution might provide might meet only a portion of a tree-removal expense, $1,000 might be more useful than $0.

Chaz, might an element be missing from your simplified example? What is the fair-market value of the health coverage? Using your example, let’s put an illustrative amount on the value of the health coverage: Imagine $30,000. An employee who’s not offered an extra opt-out payment chooses health coverage, has $10,000 taken from her pay, and gets another $20,000 in value provided by the employer. (Assume this layer of choice is a proper § 125 plan, and does not discriminate.) Her Federal income tax wages is $90,000. (Her total compensation is $120,000.) The employee who is offered an extra opt-out chooses against health coverage, has $0 taken from her pay, and gets the $15,000 opt-out payment. If what I’ll describe as the “second” § 125 plan (the choice offered only to the one specified individual) discriminates, the offeree, if highly-compensated, is not relieved of constructive receipt of whatever she could have chosen. Looking to the greater-of, the $20,000 value of employer-provided health coverage counts in her gross income; it is $120,000, not $115,000. Might an employer’s or employee’s tax practitioner analyze it this way? If § 125 does not apply to the extra opt-out choice, must an employer recognize constructive receipt in its Form W-2 wage reporting?

Just as many BenefitsLink neighbors remind us to Read The Fabulous Document, if a question involves an annuity contract one might read Read The F*** Contract. Even if a contract is a group annuity contract, a contract might provide fewer or narrower rights than one imagines.

While an employer/administrator might prefer that a payroll service apply § 414(v)(7), not every customer has the purchasing power to get that service. Nor does every software licensee have a practical capability to get that software addition. Nothing compels an employer/administrator to furnish information to its recordkeeper. Rather, an employer/administrator gets an opportunity to identify the higher-wage participants. Some recordkeepers can deal with a potential mistaken deferral before it happens. With the plan’s administrator’s instruction, a recordkeeper applies the plan’s deemed Roth-contribution election. When the system shows a participant’s year-to-date before-tax deferrals have exhausted her without-catch-up deferral limit, the recordkeeper puts the next amount in the Roth subaccount (if the participant did not opt out from the deemed election). Also, many employers don’t initiate participant contribution amounts; an employer lets the recordkeeper tell the payroll manager the amount or amounts to take from a participant’s pay.

What does the recordkeeper’s service agreement provide? How, if at all, does the recordkeeper adjust its records if the contribution arrives much later than the expected pay date? How, if at all, does the recordkeeper adjust its records if the contribution never arrives? If the date a contribution is posted is sooner than the date the contribution purchases mutual fund shares or collective investment trust units, how would a participant check whether her account balance is correctly determined? If a contribution is invested before the trustee or custodian or its agent has money from the employer, is the service provider’s loan sufficiently documented to meet the prohibited-transaction exemption? Could the posted dates affect in which plan year a trustee or custodian reports and certifies a contribution amount? Could the posted dates affect in which limitation year the plan’s administrator assumes an amount is an annual addition? Did the plan’s administrator accept the recordkeeper’s service agreement without reading it?

Not every employer uses a contracted payroll service. Of those that do, many have not contracted for a service of applying § 414(v)(7) particularly, or even applying deferral limits generally. Not every payroll service offers a service for applying deferral limits. Even fewer offer a service for § 414(v)(7). Of employers that do payroll using software, often the software has nothing apply § 414(v)(7). And even when a payroll manager can, whether with a contracted service or software, apply deferral limits generally and § 414(v)(7) particularly, some employers and plan administrators prefer deliberately redundant services. For those and other business reasons, recordkeepers have built services for § 414(v)(7). Is there any big recordkeeper not using a Roth catch-up indicator?

To help customers apply § 414(v)(7)’s constraint that a higher-wage participant’s age-based catch-up deferral must be Roth contributions, recordkeepers are asking an employer to deliver—in January, following W-2 files—a computer file that shows, yes-or-no or on-or-off, whether a participant had in the preceding year Social Security wages more than $150,000. Everything I’ve heard so far suggests this is the mainstream method recordkeepers are doing. Is there any big recordkeeper not doing this?

I can imagine at least two ways the IRS might unravel the opt-out offer: If the opt-out offer is not expressed in a written plan, it can’t be a cafeteria plan. I.R.C. § 125(d)(1). If the opt-out offer is expressed in a written plan but offered only to one offeree who is highly-compensated, how would that plan “not discriminate in favor of highly compensated participants”? I.R.C. § 125(c). If the opt-out offer is no cafeteria plan at all or is a plan that discriminates, the highly-compensated offeree gets no § 125(a) exclusion for whatever results from having a choice between money wages and health coverage. The employer might want an IRS-recognized practitioner’s advice about reporting wages for Federal income tax and for Social Security and Medicare taxes. The individual might want advice to help her file an accurate tax return. For questions about professional conduct, one might look to a BenefitsLink discussion in which Chaz gave us an intriguing thought. https://benefitslink.com/boards/topic/73510-health-fsa-and-hsa-how-does-irs-know/#comment-344822 This is not advice to anyone.

If the employee will have about $195,000 in Social Security wages (box 3) on one 2025 Form W-2 wage report, that would make her a § 414(v)(7)-affected participant for 2026 (if she otherwise is eligible for an age-based catch-up). That a portion of the wages was from union labor does not by itself exclude that portion from § 414(v)(7)’s measure of Social Security wages. This is not advice to anyone.

If a participant has more than one common-law employer, 26 C.F.R. § 1.414(v)–2(b)(4) (not yet codified) sets detailed rules about whether one need not or may aggregate Social Security wages from two or more employers. https://www.govinfo.gov/content/pkg/FR-2025-09-16/pdf/2025-17865.pdf at pages 44549-44550 [pdf pages 23-24].

Does the employee get incremental compensation because she opted out of health coverage? To the extent the employee has a choice between health coverage and an increment of money wages, isn’t that a choice that must be properly made under a § 125 plan? Else, the employee has constructive receipt of the more valuable benefit she could have chosen. If an incremental choice between an increment of money wages and health coverage is available to less than all health-eligible employees, does that incremental plan meet § 125 nondiscrimination? If an opt-out amount might be added to what would be the employee’s portion of the health insurance premium, does that cause the employer’s offer of health coverage to be not affordable for one or more Affordable Care Act purposes (and related income tax and excise tax consequences)? Does an opt-out offer violate HIPAA nondiscrimination? Does an opt-out offer violate Medicare secondary-payer provisions? Beyond those and other questions: Is the employer’s opt-out offer a breach of the group health insurance contract? Or does the offer make false the application for the group health insurance contract. What are the legal consequences of such a breach or false inducement? If a false statement to the insurer is not corrected, is that a Federal crime, a State crime, or both? This is not advice to anyone.

Or a letter from a certified public accountant who is eligible to practice before the IRS.