Does a recordkeeper have an indicator for whether a participant is an employee or is a self-employed individual?

Of the many tax-qualification conditions and other rules a recordkeeper’s system hopes to help a retirement plan’s administrator apply, a few might turn on whether a participant is an employee or is a self-employed individual (who might be treated as a deemed employee).

Among these, a § 414(v)(7) restriction against non-Roth catch-up deferrals does not apply to a participant who is a self-employed individual (who has no FICA wages).

I’ve seen in recordkeepers’ systems Yes-or-No indicators for whether a participant is: union-represented, treated as an insider for trading in employer securities, an officer of the employer, or a super-officer.

Does a recordkeeper have an indicator for whether a participant is an employee or is a self-employed individual?

(I recognize a use of this depends on the census information furnished to the recordkeeper.)

A sort for participants who might be § 414(v)(7)-affected might look for those with compensation that suggests that FICA wages for a relevant year might exceed $145,000/$150,000. But without a further sort, that might result in “false positives” by including deemed employees who have compensation but no FICA wages. (Imagine a professional-services business in which hundreds of workers are partners.)

Could an employee-or-self indicator sort out this out?

If a recordkeeper lacks such an indicator but has a field for ownership percentage, might one use that as a way to classify a self-employed individual? For example, if a worker’s ownership percentage is less than 1% (so it doesn’t trigger other rules) and perhaps as little as 0.0001, could that classify the participant as one who can’t be § 414(v)(7)-affected?

(I’m mindful that an employer has the facts, and could control the plan administrator’s communications. But I seek to learn about what communications a recordkeeper can do without the employer/administrator’s effort.)

7 hours ago, Peter Gulia said:

Does a recordkeeper have an indicator for whether a participant is an employee or is a self-employed individual?

 

I have never seen an indicator like that, but I imagine they could build one if needed. But I would argue it is not needed if the context of your question is solely regarding the mandatory Roth catch-up provisions. All the recordkeepers I have spoken with have indicated they will build a new code which flags the required Roth catch-up individuals. The employer is responsible to provide a list to the recordkeeper of participants who earned in excess of $145k (indexed) in FICA wages. Therefore, a partner should not be on that upload list if she did not earn +$145k in FICA wages, eliminating the need for any sort of cross check.

7 hours ago, Peter Gulia said:

A sort for participants who might be § 414(v)(7)-affected might look for those with compensation that suggests that FICA wages for a relevant year might exceed $145,000/$150,000. But without a further sort, that might result in “false positives” by including deemed employees who have compensation but no FICA wages. (Imagine a professional-services business in which hundreds of workers are partners.)

I don't think this should be happening, there is no need to look at total wages for a suggestion of who may be over the FICA wage limit. The employer should go straight to the source, find actual FICA wages and provide that list to the recordkeeper and payroll provider (unless the payroll provider can figure that out on their own).  

Keep in mind the law as it was written says FICA wages, and self employed individuals will not have FICA wages, so they are not subject to the mandatory ROTH catch up.

WCC, thank you for your reminder that recordkeepers are building an indicator that’s particular to § 414(v)(7) treatment.

(None of the recordkeepers I’ve talked with has yet completed its build of that indicator, even to receive a preliminary data feed.)

My query isn’t about applying the provision for 2026 and later years; it’s about sorting, now, for which participants get September 2025 and follow-up communications informing one about choices that might be required for next year’s deferrals. (And about a default election to be applied when the without-catch-up limit is exhausted, which could be as soon as January for some § 414(v)(7)-affected employees.)

The employer seeks a sort for participants who might be § 414(v)(7)-affected, and hopes the recordkeeper could do that work without any effort from the employer. For example, a sort for participants with regular compensation > $120,000 and an indicator showing not self-employed.

I see that their hope is too much. The employer will need to sort and drive the communications.

2 hours ago, Peter Gulia said:

The employer seeks a sort for participants who might be § 414(v)(7)-affected, and hopes the recordkeeper could do that work without any effort from the employer. For example, a sort for participants with regular compensation > $120,000 and an indicator showing not self-employed.

I see that their hope is too much. The employer will need to sort and drive the communications.

@Peter Gulia  Who does the admin on the plan?  If there is a TPA involved, they would most likely be able to make that determination.  We are already working on this determination for our clients.  Our RK system does not have the self-employed indicator (as far as i know), but our testing/admin system does.

RatherBeGolfing, thank you; that's helpful information about another way.

Keep in mind that by the time a recordkeeper sees a deferral, that deferral already has been processed by payroll.  A recordkeeper can only react to whether payroll has applied the catch-up rule correctly.

Generally, payroll for self-employed individuals is run separately from payroll for common law employees.  The self-employed payroll commonly pays a draw and processes some deductions for fringe benefits or insurance, but does not apply payroll taxes.  The self-employed individuals are responsible for making estimated tax payments directly with the IRS or through their tax accountants.

It is not uncommon for a payroll interface file sent to the recordkeeper to combine the two separate payroll runs into a single file.

If either payroll or the recordkeeper keeps an indicator for self-employed individuals, the indicator will need to be able more sophisticated than just a "yes/no" indicator.  For example, the recordkeeper will need to be able to discern when an employee changed between being a common law employee and a self-employed employee in the prior year, or need to know how much compensation in the prior was FICA wages and how much was self-employment income.

Maintenance of an indicator likely will fall on the employer, regardless whether the indicator is in the payroll system or the recordkeeping system.

I expect when these provisions go live, a full-contact game of hot potato will break out between payroll and the recordkeeper with each side saying "it's your job, not mine."

Paul I, thank you for thoughtful information. Your observations about payroll operations, and about coordinations among a plan’s participating employers, each’s paymaster, each paymaster’s service provider or software supplier, the retirement plan’s administrator, and its service providers are helpful.

For a big-enough plan (or for a good relationship), some services with a recordkeeper are negotiable.

For actual administration in 2026 and later years, my clients will feed, each year, the recordkeeper’s § 414(v)(7) indicator.

But for communications before that indicator is usable, I welcome RatherBeGolfing’s idea if an employer prefers to pay someone else to do a sort about which workers get a communication suggesting one consider changing her deferral elections before December ends.