457(f) deferred comp - self employment income?

[jacoavlu]

A hospital has a call pay program, in the form of contributions to a 457(f) deferred compensation plan.

Contributions vest after 3 years and become taxable, whether withdrawn from the plan or not. So then each year results in a 1099 to the physician from the hospital for the vested amount.

Would such 1099 income count as self employment income and allow contribution to a solo 401k on the basis of this income?

[spiritrider]

457f are rather unique plans with weird rules. This is not something I am very familiar with, but I was pretty sure that distributions of non-qualified compensation would never be reported on Form 1099-MISC Box 7 and eligible as self-employment income.

Reading Form 1099-MISC instructions, the only time this would be reported on Form 1099-MISC would be in Box 3 as a deceased employee's unpaid wages.

This caused me to look in the General Instructions for Forms W-2 and W-3. Under Box 1—Wages, tips, other compensation, bullet, 15. Amounts includible in income under section 457(f) because the amounts are no longer subject to a substantial risk of forfeiture.

The 457f vesting causes the removal of a substantial risk of forfeiture. This is then a triggering event that causes the ordinary income taxation, which I believe based on the W-2 instructions subjects the vested amount to W-2 wage reporting on boxes 1,3 and 5 and the appropriate taxation.

While not 100% certain, this is my quick review.

 

 

[jacoavlu]

Thanks much for the researched answer.

Long story short despite taking probably 1,000 days call for the hospital, next year will be the first year in which I have contributions become vested. So I haven’t seen a 1099, or other tax form.

But I have partners and colleagues who have, so I will confirm exactly how this is reported to them, and report back.

I’m pretty sure it’s on a 1099, because colleagues have established and made 20% employer contributions to SEP-IRAs at the recommendation of a CPA, to defer tax on some of their call pay income.

[jacoavlu]

I am waiting to hear from a colleague.

I went to read the W2 general instructions section @spiritrider referenced.

To begin the section is the following:

Box 1—Wages, tips, other compensation. Show the total taxable wages, tips, and other compensation that you paid to your employee during the year. However, do not include elective deferrals (such as employee contributions to a section 401(k) or 403(b) plan) except section 501(c) (18) contributions. Include the following.

and bullet point 15 discusses the 457f.

So then I wonder if I qualify as an “employee” of the hospital. If I’m not an “employee” then none of this applies to me.

Edit: and I should add, I am in private practice. I am otherwise not an employee of the hospital.

[jacoavlu]

So, it turns out the amount is reported on a 1099-MISC but in Box 6. Medical and Health Care Payments

I have no clue as to whether this is appropriate in this case. The applicable language per the 1099 instructions:

Box 6. Medical and Health Care Payments
Enter payments of $600 or more made in the course of your
trade or business to each physician or other supplier or
provider of medical or health care services...

I think it would certainly be appropriate if the 457f were not in the picture. It is the same 1099 Box 6 where payments from the hospital are reported for items such as committee participation, chart review, etc which are paid on an ongoing basis. And it would seem applicable for physician call pay. Except with the 457f arrangement I've no clue.

[spiritrider]

Deferred compensation can only be for employees. Even if you are no longer associated with the employer, I believe any 457f deferred compensation no longer at substantial risk of forfeiture would have to be paid as W-2 wages.

This has all been much further clarified by Section 409A regulations and guidance issued in the last couple of years. With a substantial amount of focus on rules for non-compliant plans to take corrective steps for compliance. This indicates a substantial percentage of plans were/are not in compliance.

I don't see any way that 457f deferred compensation should properly be reported in Form 1099-MISC Box 6. With that said, this is probably an employer compliance issue. Form 1099-MISC Box 6 can be considered self-employment income that should be reflected as self-employment income on Schedule C and the resulting net self-employment earnings can be used as the basis for retirement contributions.

However, you are ending up paying the employer share of the SE tax. Which is probably the hospitals way of avoiding paying FICA on what is clearly employee compensation. The rules are pay me now or pay me later. Sometimes the deferred compensation is subject to FICA and only the income taxes are deferred and sometimes it is not subject to either and both are deferred.

1099-MISC Instructions say nothing about 457f in Box 6, but the W-2 Instructions clearly state they are to be reported on boxes, 1/2, 3/4 and 5/6. This would not be the first time that non-profits play fast and lose with the tax rules. Colleges and Universities continue to report  scholarship and fellowship grants on Form 1099-MISC despite decades of IRS guidance to report them on Form W-2.

[jacoavlu]

Hmm, so, what to do... just go on and accept 1099 as is, or pursue this with higher ups at hospital, or pursue this with the third party people consulting for the call pay plan?

Wouldn’t being classified as an “employee” with W2 comp (albeit deferred) open another can of worms? I don’t get any additional benefits that other employees do get.

[spiritrider]

I would just go with the flow. You are certainly only getting hit with an extra 1.45% in the SE tax.

There is always the possibility I am totally wrong.

[jacoavlu]

I haven’t found any specific discussion regarding 457(f) contributions and independent contractors and 1099 reporting. But there is mention of both employees and independent contractors in the regulations.

I did hesitantly wade into the 457 sub forum on benefitslink.com and pose the question, we’ll see if I get a response. There are discussions there about reporting income on a W-2 for past employees even if the vesting and distribution occurs after separation from the employer. The point being that the character of the employment (as an employee) at the time of the applicable contribution mandates the future reporting on a W-2. So perhaps the correlary of independent contractor status-1099 reporting is also correct.

It probably also matters that the firm that administers the plan seems to be a fairly big outfit that has a niche doing these 457f plans. The plan documents that I found note that income will be reported on a W-2 or a 1099, but doesn’t go any further into that distinction. But they probably know what they’re doing.

[jacoavlu]

And in truth I would prefer the 1099 reporting. Because the plan has been to mega backdoor Roth those dollars via after-tax solo 401k -> in plan Roth rollover.

[spiritrider]

jacoavlu wrote:

I haven’t found any specific discussion regarding 457(f) contributions and independent contractors and 1099 reporting. But there is mention of both employees and independent contractors in the regulations.

I did hesitantly wade into the 457 sub forum on benefitslink.com and pose the question, we’ll see if I get a response. There are discussions there about reporting income on a W-2 for past employees even if the vesting and distribution occurs after separation from the employer. The point being that the character of the employment (as an employee) at the time of the applicable contribution mandates the future reporting on a W-2. So perhaps the correlary of independent contractor status-1099 reporting is also correct.

It probably also matters that the firm that administers the plan seems to be a fairly big outfit that has a niche doing these 457f plans. The plan documents that I found note that income will be reported on a W-2 or a 1099, but doesn’t go any further into that distinction. But they probably know what they’re doing.

Click to expand...

I told you I was not familiar with 457f plans and later that I could be totally wrong and it looks like I am.

Doing a deeper dive into the 409A regulations, clearly an independent contractor can receive deferred compensation. Although you are the first person I have run into.

Doing a little deeper dive from the response to your post on Benefitlinks. I found Notice 2005-1 Q&A 35. However, I don't think there is any real problem with the hospital instead reporting this in Box 6 instead of 7, as that is more specific.

The bottom line answer to your original question is; yes, this is self-employment income and can be used as the basis for one-participant 401k plan contributions. Learn something new everyday.

Q-35 How should a payer report to a nonemployee amounts includible in gross income under § 409A and not treated as wages under § 3401(a) as required by § 6041(g)(2)? think

A-35 A payer should report the amounts includible in gross income under § 409A and not treated as wages under § 3401(a) in box 7 (nonemployee compensation) of Form 1099-MISC. Additionally, a payer should report such amounts in box 15b of Form 1099-MISC. The amount reported in box 15b should include only the amounts includible in gross income under § 409A and not included in wages under § 3401(a). The instructions for Form 1099-MISC provide additional information relating to this reporting requirement.

 

[jacoavlu]

Thanks so much!

You saw the response on benefitslink before I did and a good thing because I’ve no clue about the “short-term deferral” and “409A violation” stuff.

I’ll happily buy you a beer or your beverage of choice if I ever have the chance!

[spiritrider]

The short-term deferral "stuff" is extra-ordinary IRS speak with many conditions and exceptions that I have no idea if it may or may not apply to your situation.

If it would apply to your situation, I "speculate" it "could" require the distribution of your deferred compensation within 2 1/2 months after the end of the year any amount vested.

How is that for a weasel-worded response.

[jacoavlu]

Well, for participants electing a class year vesting method (most do; there is also a cliff vesting method with a 5 year minimum) funds vest on 12/31 of the second year after the relevant year of the call. So contributions for 2016 work vest on 12/31/18. And vested funds are lump sum distributed 3/15 of the next year. So 2 1/2 months after the end of the year any amount vested...