May a self-employed individual who had pay more than $145,000 choose non-Roth catch-up deferrals?

[Peter Gulia]

Here’s another statute-reading exercise for BenefitsLink mavens.

Internal Revenue Code § 414(v)(7)(A) restricts to Roth treatment a § 414(v)(1) catch-up deferral for “an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000[.]”

If a retirement plan’s participant who otherwise would have had wages more than $145,000 had no wages (but as a partner had net earnings from self-employment more than $145,000), may she choose non-Roth catch-up deferrals?

[Paul I]

Interesting question.  Technically, a self-employed individuals do not pay themselves wages.  The fact that net income from self-employment is taxed using income tax rates used by workers who receive a wage, and the self-employed individual must pay payroll taxes on self-employment income certainly clouds the issue.  Words do matter, as we all know when trying to nail down the various definitions of compensation that we find within retirement plans.

[RatherBeGolfing]

18 hours ago, Paul I said:

Words do matter...

but only until regulators focus on intent...

 

[Peter Gulia]

If the statute’s text were “wages” with no limiting or defining phrase, the Treasury department might interpret what the word “wages” means.

But to interpret “wages (as defined in section 3121(a))” there ought to be somewhat less room for an intentionalist or purposivist interpretation.

[Dare Johnson]

Code Section 3121(a)refers to the social security tax and how to calculate the self employment tax, so the self employed are snagged.

[Peter Gulia]

I have not read the subsection Internal Revenue Code § 414(v)(7)(A) refers to, and have not anything subsection 3121(a) refers to, directly or indirectly.

Does “wages (as defined in section 3121(a))” include a person's self-employment income?

 

[Paul I]

I searched 3121(a) and other referenced subsections for "self", "self-employed", "sole", "sole proprietor", "partner" and pretty much came up empty.  There is a reference to "individual" but the context is when someone else pays you a wage to do work for them like a housekeeper. 

The section focuses on withholding and remitting Social Security taxes from wages.  A self-employed individual is not subject to this requirement (they can take a draw without specifically withholding Social Security taxes).  The nuance comes in when the self-employed individual files a Form 1040 and files a Schedule SE to pay both the employee and employer Social Security taxes.  The individual pays the tax but is not required to withhold it from payments made during the year. 

If I had to place a bet on it, I would bet on the a self-employed individual with net earnings from self-employment of $145,000 or more will have to make Roth catch-up contributions.  But it remains an interesting question on the path that could be taken to lead to that conclusion.

[Nate S]

From 31.3121(a)-1(d):

(d) Generally the basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes wages. Thus, it may be paid on the basis of piecework, or a percentage of profits; and it may be paid hourly, daily, weekly, monthly, or annually. See, however, § 31.3121(a)(8)-1 which relates to the treatment of cash remuneration computed on a time basis for agricultural labor.

Most of 3121(a) is devoted to the idea of saying, "it doesn't matter what you call the payment, treat it as 'wages'".  Specific to this question, I think the "percentage of profits" will sweep up self-employment income.

 

One fun fact I found:  

31.3121(b)(17)-1 Services in employ of Communist organization.

The term “employment” does not include services performed in the employ of any organization in any calendar quarter beginning after June 30, 1956, and during any part of which such organization is registered, or there is in effect a final order of the Subversive Activities Control Board requiring such organization to register, under the Internal Security Act of 1950 (50 U.S.C. 781 et seq.), as amended, as a Communist-action organization, a Communist-front organization, or a Communist-infiltrated organization.

For all those who would say, that's not a thing anymore, you would be correct to the extent that the Board was abandoned after Nixon budgeted $0 to it in 1973(?).  However, it has never been dealt with legislatively and is technically still in existence.  I wonder if there are any of the registered organizations that still exist whose members should not be recognizing wages??? 

[Paul I]

Thanks for the fun fact.  Do we now have an example for when someone who was performing services in the employ of certain organizations was not employed?  Sounds like a riddle:  When is someone who is employed not employed?

[Nate S]

Good question!  I submitted a query to see if a listing of registered organizations is available, but I really doubt any current employer entity would have been registered.