Wrong definition of compensation used to calculate deferrals in multiple employer plan

[KaJay]

Background:

• 403(b)(9) non-electing church plan
• Multiple employer plan
• The plan (not the 700 individual participating employers) sets the definition of compensation when it comes to calculating contributions based on a percentage.
• This one employer used the wrong definition of comp and consequently shorted deferral contributions for the employee since 2021 (yikes)

I am unsure what correction method is appropriate and didn't find anything specific in Rev. Proc. 2021-30. I also read a page on the IRS website that states the plan can amend the definition of compensation, but that does not seem reasonable with a multiple employer plan where there is one definition for all employers to follow.

How does the employer fix this? Can the employer provide an employer contribution for 50% of missed deferral portion? Is there something clear cut I am missing?

TIA for your responses.

[Peter Gulia]

You’re likely right that, for a church plan with 700 participating employers, it seems unlikely the convening plan sponsor (or the plan trustees or the plan administrator, if either has a power or other authority) would amend the plan because one or a few of the 700 misapplied an otherwise satisfactory definition of compensation.

About what correction to pursue, other BenefitsLink neighbors know much more than I know about how to point you to a fitting or defensible correction.

Just curious, which element of compensation did a participating employer neglect to count in its measure of compensation on which to apply a deferral percentage?

[KaJay]

@Peter Gulia The plan's definition of compensation for the purpose of calculating contributions based on a percentage includes housing allowance. Because the employer did not include the pastor's housing allowance as part of his comp, the calculation resulted in a much lower contribution.

[Peter Gulia]

For more than a few church employers, neglecting or miscounting a § 107 parsonage allowance is an error.

Might the minister too have believed her specified deferral percentage would apply only to her pay other than the parsonage allowance?

If so, might the parties reform their salary-reduction agreement or the participant’s elective-deferral instruction to provide what the minister would have requested had both the employer and the minister known that the plan’s definition of compensation includes a parsonage allowance? Had the minister known, she might have elected a lower percentage of the higher compensation.

If so, might both parties ratify what happened as a reasonable approximation of what such a reformed agreement provided?

Consider that the minister’s acceptance of pay, and of wage reports, with no objection might support a ratification.

This is not advice to anyone.

[John Feldt ERPA CPC QPA]

Tangentially related, perhaps: my understanding that a housing allowance paid is not counted for 415 compensation purposes and a deferral cannot be withheld from such a payment (it’s already not subject to income tax). Deferrals are withheld from income.

My preference is to have the section 107 “minister of the gospel” elect a fixed dollar deferral amount.

And because the eventual retirement payment from the plan can also be counted as housing allowance (up to the limits allowed) and thus not subject to income tax, perhaps they be especially careful about electing Roth, as that could result in paying unnecessary income taxes.

[KaJay]

@John Feldt ERPA CPC QPA That is the approach most of the ministers take. However, some elect a portion of their deferrals as Roth to mitigate the tax burden on beneficiaries and the future possibility of the housing allowance exclusion being repealed.

[KaJay]

@Peter Gulia This is a creative approach worth exploring.

On 12/4/2025 at 10:08 AM, Peter Gulia said:

For more than a few church employers, neglecting or miscounting a § 107 parsonage allowance is an error.

Might the minister too have believed her specified deferral percentage would apply only to her pay other than the parsonage allowance?

If so, might the parties reform their salary-reduction agreement or the participant’s elective-deferral instruction to provide what the minister would have requested had both the employer and the minister known that the plan’s definition of compensation includes a parsonage allowance? Had the minister known, she might have elected a lower percentage of the higher compensation.

If so, might both parties ratify what happened as a reasonable approximation of what such a reformed agreement provided?

Consider that the minister’s acceptance of pay, and of wage reports, with no objection might support a ratification.

This is not advice to anyone.

 

[KaJay]

A new development in all this...

The plan's definition for calculating contributions (both employer and deferrals) includes housing allowance. The plan has received challenge that including housing allowance in the deferral contribution calculation is not allowed. I have found mixed information on this topic, but nothing clear. Does anyone have a related citation specific to church retirement plans and limitations on how they define compensation for this purpose? 

(On a side note, the plan does not include housing allowance when considering available comp for the 415(c) limits)

[Peter Gulia]

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.