On April 11, the IRS released Chief Counsel Advice (CCA) on Internal Revenue Code Section 4960 (see CCA 202515014) clarifying that the definition of remuneration does not include an employee’s elective Section 403(b) deferrals or contributions to Section 125 cafeteria plans.
Section 4960 imposes a 21% excise tax on remuneration paid in excess of $1,000,000 to employees of applicable tax-exempt organizations that meet certain criteria. Remuneration is defined as wages under Section 3401(a) with certain exceptions. Under Section 3401(a), wages include amounts paid by an employer for services performed by an employee, including the cash value of any benefits paid in a medium other than cash. Generally, employers are required to deduct and withhold tax on these wages under Section 3402.
While contributions to a Section 403(b) plan and salary reduction payments to a Section 125 cafeteria plan are not explicitly excluded from Section 3401(a) wages, IRS guidance provides that these benefits are excluded from income tax withholding under Section 3402 to the extent they are excludible from gross income. Section 403(b) contributions are excluded from an employee’s gross income and therefore not subject to income tax withholding to the extent annuity premiums and vested annual additions do not exceed the annual contribution limits ($23,500 in 2025, with catch-up contributions allowed for some individuals). Amounts in excess of those limits would be includible in an employee’s gross income and subject to income tax withholding. Section 125 cafeteria plan contributions are excludable from gross income and income tax withholding if the funds are used to purchase qualified health insurance benefits.
In the CCA, the IRS held that the exclusion from income tax withholding under Sections 3401 and 3402 should be treated as extending to the Section 4960 definition of renumeration. Therefore, for purposes of calculating the excise tax due under Section 4960, remuneration should not be treated as including Section 403(b) elective deferral payments or salary reduction amounts under a Section 125 cafeteria plan to purchase qualified health insurance benefits and other health benefits to the extent each of these benefits are excluded from gross income and wages subject to income tax withholding.
About Schneider Downs
Schneider Downs is a Top 60 independent Certified Public Accounting (CPA) firm providing accounting, tax, audit and consulting services to public and private companies, not-for-profit organizations and global companies. We also offer risk advisory, transaction advisory, digital consulting, wealth management, retirement plan solutions and investment banking services. Schneider Downs serves individuals and companies in Pennsylvania (PA), Ohio (OH), West Virginia (WV), New York (NY), Maryland (MD), metropolitan Washington (DC) and additional states in the United States with offices in Pittsburgh, PA, Columbus, OH, and McLean, VA.
