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.