Compensation

David C. Schultz, APM, Esq.Product Manager

FIS ReliusDavid.Schultz@fisglobal.com

1

Agenda

• Introduction

• 415 Compensation

• Post-Severance Compensation

• 414(s) Compensation

• 401(a)(17) Limit

• Putting the Definitions to Work

• Earned Income for Self-Employed

• Correcting Compensation Errors

2

Understanding Compensation• Every plan has several potential definitions of compensation:

– Compensation for statutory purposes (e.g., HCE determination, key employee determination, IRC §415 limits)

• There are three different permissible definitions you can use for this

– Compensation for nondiscrimination testing purposes

• Most plans (including FIS document) permit considerable flexibility

– Compensation for allocation purposes

• Could theoretically use different compensation for different allocations

– Compensation for deferral purposes3

The Government Knows That This Is an Issue for Plan Sponsors

• Both the IRS and the DOL are scrutinizing plan compensation

– The IRS is looking for qualification errors

– The DOL is looking for missing deferral deposits

• Both have realized that compensation errors are low-hanging fruit

4

§415 COMPENSATION

The Foundation

415 Compensation Seemingly Includes Everything

• Amounts (whether or not paid in cash) paid for personal services actually rendered in the course of employment with the employer maintaining the plan, includible in gross income:

– Wages

– Salaries

– Fees for professional services

– Commissions to salesperson or on insurance premiums

– Compensation paid based on percentage of profits

– Tips

– Bonuses

– Fringe benefits

– Reimbursements under nonaccountable plan

Three Definitions• Alternatives:

– 415 Compensation (current income)

• Simplified version of 415 compensation

– Federal Income Tax Withholding

– W-2 Compensation

• Use gross compensation; add back elective deferrals to:

– 125 cafeteria plans

– 401(k) plans

– 403(b) plans

– SIMPLE

– SARSEP

– 457

– Qualified transportation fringe benefit plan

Definitional Differences

Current Income

(Simplified)

Income Tax

WithholdingW-2

Received from

unfunded

nonqualified

plan

Out* In In

Tips InGenerally In. Noncash Out. Tips <

$20/month Out.

Fringe benefits

includible in

income

In Mostly In In

Accident &

health plan (if

taxable)

Out*

Generally In.

Self-insured

medical Out.

In

Moving expense

reimbursementOut* Out if deductible. In*

More Differences

Current Income

(Simplified)

Income Tax

WithholdingW-2

Group term life

insurance > 50KIn Out In

Nonqualified stock

option exerciseOut In In

Qualified stock

option exerciseOut Out Out

Nonqualified

option when

granted

Out* In In

83(b) election Out* In In

Never Include in Compensation

• Employer contributions (other than elective deferrals) to deferred compensation plan or SEP

• 1099-R plan distributions

• “Passive” income

Can’t Count Accrued Compensation

• Since 1992, 415 compensation is based on amounts paid or made available. Cannot use accrued compensation.

• Plan can elect to include accrued compensation paid in first few weeks of following year.

• Includes compensation for entire year, regardless of length of participation.

Location Irrelevant

• Count all compensation:

– Regardless of where earned

– Regardless of form of payment

• Example:

– Multinational corporation pays workers in Japan in Yen

• Does not issue W-2

– It’s still compensation

POST-SEVERANCE COMPENSATION

Post-Severance Rule• 415 Compensation must be paid prior to severance of

employment with employer maintaining the plan

– Also 401(k)/457(b) definition

– Three exceptions

• 2½ month rule

• Military

• Disability

• Use 401(k) definition of severance

– But use 415(h) controlled group rules

Military Exception

• The rule on post-severance compensation doesn’t apply to payments to a former employee who enters the US military

– So long as the payments don’t exceed what the employee would have been paid as compensation had he or she remained employed

• This is optional

– You don’t have to count it for 415

• So you don’t have to count it for 414(s), etc.

HEART Definition: Differential Wage Payment

• HEART added rules for differential wage payments for years after 2008

• DWP: Employer’s payment to an individual with respect to service in the uniformed services

– Must be for active duty

– Minimum: 30 days

– All or a portion of the wages the individual wouldhave received from the employer if the individualcontinued to work for the employer

– Must be included in 415 Compensation

Employment Status

• Plan must treat employee receiving differential wage payments as still employed

– No severance

• But see distribution exception

– Employed on last day of year

– Post-severance compensation rules are irrelevant while employee receives differential wage payments

• Example: Employee receives renewal commission after two years in military

– It’s compensation for plan purposes

Differential Wage Payments Are Compensation

• “The differential wage payment shall be treated as compensation” by the retirement plan

• Notice 2010-15: Plan doesn’t have to count as allocation compensation

• What it seems to include:

415 Benefit/annual addition limit

416 Top-heavy

404 Deduction limit

414(q) HCE determination

414(v)(2) Catch-up contribution limit

Reg 1.401(a)(4)-8(b) Cross-testing gateways

Disability Exception

• Post-severance compensation rule optionally doesn’t apply to participant who is totally and permanently disabled

– Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected:

• To result in death or

• To last for a period of not less than 12 months

• Can count compensation employer would have paid if employee had stayed

– Contributions nonforfeitable

– Either

• Paid to NHCE (before disability)

• Disability compensation given to all disabled EEs

2½ Month Rule

• Compensation counts if two conditions are both met:

1. It is paid no later than the later of:

– 2½ months after severance of employment, or

– The last day of the limitation year of severance

2. Permitted purpose

– Wages for services

– To the extent otherwise counted as compensation and plan provides:

– Leave cash-out

– Unfunded deferred compensation payments

Wages for Services

• It is a payment that would have been made while the employee continued in employment as:

– Regular compensation for services during the employee’s regular working hours

– Compensation for services outside the employee’s regular working hours (such as overtime or shift differential)

– Commissions

– Bonuses

– Other similar compensation

Leave Cash-Out

• Payment for unused accrued bona fide sick, vacation, or other leave, but only if:

– The employee would have been able to use the leave if employment had continued

– The plan would have counted the payment as compensation if employment had continued

– The plan chooses to count it as 415 compensation

Unfunded Deferred Compensation

• Payments to employee from unfunded deferred compensation plan that satisfy all the following requirements:

– The plan would have counted the payment as compensation if employment had continued

– The payment is included in income

– Payment would have been made at same time if employee had continued in employment

– The plan chooses to count it as 415 compensation

Can’t Count Post-Severance

• The following are never compensation if paid after severance (even if within 2½ months)

– Severance pay

– Unfunded nonqualified deferred compensation (409A, 457(f)) except as above

– Parachute payments

Effect of Post-SeveranceCompensation Rules

• 415 compensation doesn’t include severance payments or payments after 2½ months/end of year

• Neither does nondiscriminatory compensation

• Plan can’t accept deferrals on post-severance compensation unless the compensation complies with the new rules

• Only post-severance compensation that plan MUST count for 415 purposes is normal payment for work done

Examples• Example 1:

– Heath was fired June 10, 2017

– He received his final paycheck June 15, 2017

• Includes

– His salary through June 10

– One week’s unused vacation

– Heath’s 415 compensation includes the June 15 check

• Example 2:

– Heath’s check also includes four weeks of severance pay

– Heath would not have been entitled to receive the severance pay had Jose continued working

– The severance pay is not 415 compensation, even though the rest of the check is

414(S) COMPENSATION

Nondiscriminatory

Used in Testing

414(s) Safe Harbors

• 415 compensation (any of the three definitions)

• Can be gross or net of elective deferrals

• Can exclude all of the following:

– Reimbursements or other expense allowances

– Fringe benefits (cash and noncash)

– Moving expenses

– Deferred compensation, and

– Welfare benefits

• Can exclude items just for HCEs

• Notice 2010-15: Can exclude differential wage payments

Consistency

• Plan must use same definition for all employees in applying a particular provision (e.g., nondiscrimination testing under 401(a)(4))

• Can change definition from year-to-year

• Can use different definitions in different plans

Alternative Definitions

• Must:

– Be reasonable

– Not discriminate by design in favor of HCEs

– Must pass compensation ratio test annually

Compensation Ratio Test

• Exclusions must “knock out” as much for the HCEs as they do for the NHCEs

• Compare the percentage of total compensation included for the NHCEs with the percentage included for the HCEs. The HCE percentage cannot exceed the NHCE percentage by more than a “de minimis” amount.

– What’s “de minimis?”

NHCE Ratio = 88.10% HCE Ratio = 89.74%

Status Total Comp Bonus Plan Comp Ratio

Kirk HCE $190,000 $20,000 $170,000 89.47%

Spock HCE $150,000 $15,000 $135,000 90.00%

McCoy NHCE $ 85,000 $10,000 $ 75,000 88.24%

Scotty NHCE $ 75,000 $10,000 $ 65,000 86.67%

Uhura NHCE $ 50,000 $ 5,000 $ 45,000 90.00%

Sulu NHCE $ 40,000 $ 5,000 $ 35,000 87.50%

• Definition of compensation passes compensation ratio test

NHCE Ratio = 88.10% HCE Ratio = 95.00%

Total Comp Bonus Plan Comp Ratio

Kirk $190,000 $0 $190,000 100.00%

Spock $150,000 $15,000 $135,000 90.00%

McCoy $ 85,000 $10,000 $ 75,000 88.24%

Scotty $ 75,000 $10,000 $ 65,000 86.67%

Uhura $ 50,000 $ 5,000 $ 45,000 90.00%

Sulu $ 40,000 $ 5,000 $ 35,000 87.50%

• Definition of compensation fails compensation ratio test: HCE ratio exceeds NHCE ratio by more than de minimis amount

De Minimis

• “Facts and circumstances”

• Informally less than three percent is de minimis

• Can look at prior periods to determine de minimis

• “An isolated instance of a more than de minimis difference between the compensation percentages that is due to an extraordinary unforeseeable event (such as overtime payments to employees of a public utility due to a major hurricane) will be disregarded if the amount of the difference in prior determination periods was de minimis”

401(a)(4) — Plan Year

• For nondiscrimination purposes, plan can base compensation for all employees on:

– 414(s) Compensation for plan year

– 414(s) Compensation for specified 12 months ending in plan year

– 414(s) Compensation while a participant

• Must follow this rule fairly consistently from year-to-year

• Can’t shift to benefit HCEs

401(k) Compensation

• For nondiscrimination purposes, plan can base compensation for all employees on:

– 414(s) Compensation for plan year

– 414(s) Compensation for calendar year ending in plan year

– 414(s) Compensation while a participant

• Safe-harbor compensation cannot exclude compensation over a limit other than 401(a)(17)

Example

Name Gross PayBonus /

OvertimeRegular pay

AllocationGross Pay

AllocationRegular pay

Hydi $200,000 $20,000 $180,000 $17,391 $17,408

Nate $30,000 $3,200 $26,800 $2,609 $2,592

• Discretionary PS plan

• ER considering amending allocation formula to exclude bonus and overtime

– Plan passes compensation ratio test

• Employer contributes $20,000

Safe-Harbor 401(k) Plan

• Compensation definition must be safe-harbor definition or it must satisfy compensation ratio test

– If it fails compensation ratio test, ER would need to amend retroactively

Compensation - Matching

• 401(k) plan matches on the basis of deferrals not on the basis of compensation

• Therefore, limits on compensation only will affect the amount of the match to the extent it affects matching limits

• In a discretionary matching formula, ER can achieve the same result by adjusting the contribution

Example

Name Gross Pay Regular pay DeferralMatch Gross

PayMatch

Regular pay

Hydi $200,000 $180,000 $12,000 $6,000 $5,400

Nate $30,000 $26,800 $1,200 $600 $600

• 401(k) plan with match

– 50 percent on the first six percent of compensation deferred

• ER considering amending allocation formula to exclude bonus and overtime

– Plan passes compensation ratio test

– Amending formula just hurts people deferring at or above the limit

401(A)(17) COMPENSATION LIMITATION

Compensation Limitation

Applies four ways:

1. Cannot base allocations or benefit accruals on compensation exceeding limit

2. Cannot use compensation above limit in doing nondiscrimination testing

3. Cannot use compensation above limit in computing 404 deduction limitation

4. Limits 415 compensation (per final regs)

Year Limit

2010 $245,000

2011 $245,000

2012 $250,000

2013 $255,000

2014 $260,000

2015 $265,000

2016 $265,000

2017 $270,000

2018 $275,000

Annual Limitation

• For fiscal year plan, use limitation in effect at beginning of year

• Applies on a year-by-year basis

• Example:

– DB plan bases benefits on high three years’ compensation

– John’s salary is $300,000 per year

– Plan year ends June 30

– For 2017-2018 plan year, plan bases John’s benefit on (265K + 265K + 270K)/3 = $266,667

Nondiscrimination Testing Limit

• 401(a)(17) limit applies:

– 401(a)(4), (5) nondiscrimination test

– 401(k) ADP; safe harbor

– 401(m) ACP; safe harbor

– 401(l) permitted disparity

– 403(b)(12) TSA nondiscrimination

– 404(a)(2) employee annuity

– 410(b) coverage (average benefit percentage test)

Limit Prorated for Short Years

• Example:

– Plan year ends September 30

– Employer decides to shift to calendar year

– Will have three-month plan year October 1, 2017 to December 31, 2017

– 401(a)(17) limit is $67,500 (= $270,000 ÷ 4)

• Do not have to prorate limit for a part-year participant if plan uses “compensation while a participant”

Apply Limit After Other Adjustments

• First determine “Compensation” without regard to limit

• Then apply the limit

• Example:

– Plan defines compensation as W-2 compensation minus bonus

– Mary’s gross pay was $300,000 and she had a $10,000 bonus

– Her 2017 plan compensation is the lesser of: $290,000 or $270,000

Compensation Limitation and the Compensation Ratio Test

• Limit applies both to total compensation and to plan compensation in doing compensation ratio

• Example:

– Plan defines compensation as W-2 minus bonus

– Mary’s gross pay was $300,000, with a $10,000 bonus

– For 2017 her total compensation and her plan compensation is $270,000

– Her compensation ratio is 100 percent

Compensation Limit Doesn’t Affect Deferrals

• 401(a)(17) compensation limit ($270,000 for 2017) applies now for §415

– Potentially big issue for DB, not 401(k)

• 401(k) can’t accept deferrals from funds that aren’t compensation

• So, suppose Sue has earns $50,000/month ($600,000)

– Can she defer after June (compensation to date $300K)?

• Preamble to final regs says YES; your deferrals don’t have to come from the first dollars in

PUTTING THE DEFINITIONS TO WORK

415 Compensation

• Gross, full-year compensation

• Used in:

– 415 limits

– 404 deduction limits

– 414(q) HCE determination

– 414(v) catch-up limit

– 416 top heavy minimums; key employee

– 401(a)(5)(D) defined benefit integration

– 409 ESOP allocation limits

– 414(n) safe-harbor leasing plan

414(s) Compensation

• Safe-harbor (gross or net) or alternative definition

– 401(a)(4),(5) nondiscrimination testing

– 401(k) ADP testing

– 401(m) ACP testing

– 401(k),(m) safe harbor (except cannot exclude compensation below threshold)

– 401(l) permitted disparity

Reasonable Definition

• 410(b) average benefit percentage test (doesn’t have to pass compensation ratio test but HCE disparity can’t be “significantly higher”)

• Safe-harbor match plan can limit compensation an employee can defer to a reasonable definition of compensation (no compensation ratio test)

Cross-Tested Gateways

• If plan uses five-percent gateway, then the plan must base the minimum contribution on gross 415 compensation

• If the plan uses the 1/3 gateway, then the plan can base the minimum contribution on the same definition used to compute the HCE allocation rates

• In either case, the plan can use compensation while a participant

Any Definition

• A plan can use any definitely determinable definition of compensation, including an unreasonable or clearly discriminatory definition, to allocate employer contributions. However, the plan must test for nondiscrimination based on a nondiscriminatory definition

Effect of Discriminatory Definition

• Fast-N-Loose Enterprise, Profit Sharing Plan defines compensation as W-2 compensation less overtime

• The plan allocates to each participant 20 percent of compensation as so determined

• Compensation ratio test results:

– Pass — Plan is uniform allocation safe-harbor plan

– Fail — Plan must pass general nondiscrimination test

Non-Uniform Allocation

Total

Comp Bonus

Plan

Comp

Comp.

Ratio Allocate

Alloc.

Rate

Kirk $190,000 $0 $190,000 100.00% $38,000 20.00%

Spock $150,000 $15,000 $135,000 90.00% $27,000 18.00%

McCoy $85,000 $10,000 $75,000 88.24% $15,000 17.65%

Scotty $75,000 $10,000 $65,000 86.67% $13,000 17.33%

Uhura $50,000 $5,000 $45,000 90.00% $9,000 18.00%

Sulu $40,000 $5,000 $35,000 87.50% $7,000 17.50%

• Every participant has a different allocation rate based on a nondiscriminatory definition of compensation

• So, plan fails uniform allocation safe-harbor and must perform general nondiscrimination test

• Plan will fail general nondiscrimination test

Complex Plan Definitions

415 414(s) Other

Determine HCEs Yes No No

Coverage (average benefit % test) Yes Yes Reasonable

Allocate 3% safe harbor QNEC Yes Yes No

Deferrable compensation Yes Yes Reasonable

Catch-up limit Yes No No

Allocate matching contributions Yes Yes No

ACP test Yes Yes No

Allocate cross-tested PS contribution Yes Yes Yes

Allocate minimum gateway Yes If 1/3 gw No

General nondiscrimination test Yes Yes No

Imputing permitted disparity Yes Yes No

415 limits Yes No No

Deduction limits Yes No No

Top heavy minimum contributions Yes No No

Other Plans

• SEPs

– 408(k)(2)(C) $500 coverage threshold based on 415

– 402(h) 25 percent of compensation limit based on 414(s)

– 408(k)(7) other SEP issues (such as nondiscrimination) based on 414(s)

• 403(b) nondiscrimination based on 414(s)

• 457 includible compensation based on 415

SIMPLE IRA Limits Choice

• Definition of compensation in SIMPLE IRA is federal income tax withholding compensation, grossed up for elective deferrals

– Other than cafeteria-plan deferrals

– No other options are available

EARNED INCOME FOR THE SELF-EMPLOYED

Earned Income ― Compensation For Owners Who Don’t Receive a W-2

• Applies to sole proprietors, partners, and owners of entities taxed as partnerships

• Foundation: Net Earnings from Self-Employment (NESE) from a trade or business in which the owner’s services are a material income-producing factor

Net Earnings from Self-Employment

• See Schedule SE for a trade or business

• Many exclusions

– Rental income not NESE unless services provided

– Interest and dividends aren’t NESE except for securities dealers

• There is no NESE from S Corporation K-1

– S Corporation shareholders are not self-employed individuals

Earned-Income Adjustments

• Earned income also includes gains and earnings (other than capital gain) from property sale or licensing, other than goodwill, by the individual who created that property, even if those gains would not ordinarily be considered NESE

• Reduce earned income by one-half SE tax

• Nontaxable income (and deductions relating thereto) aren’t NESE

• Reduce earned income by IRC §404 retirement plan deduction

• Gross up compensation for elective deferrals

414(s) and Earned Income

• Earned income is exclusive basis for 414(s) compensation of self-employed

– No alternative definition

• If the plan uses an alternative definition of compensation for “common law” employees to test nondiscrimination, plan must adjust earned income compensation

– Multiply earned income by NHCE compensation ratio

• Recommendation: Don’t use alternative compensation (e.g., base pay) definition to allocate match if you have self-employed

– Could result in discriminatory rate of match

Example: 414(s) Adjustment

NHCES Total Comp Bonus Plan Comp Ratio

McCoy $ 85,000 $10,000 $ 75,000 88.24%

Scotty $ 75,000 $10,000 $ 65,000 86.67%

Uhura $ 50,000 $ 5,000 $ 45,000 90.00%

Sulu $ 40,000 $ 5,000 $ 35,000 87.50%

Average compensation ratio 88.10%

HCEs Earned Income

Total comp Adjustment 414(s) Comp

Spock $175,000 $175,000 88.10% $154,175

Kirk $300,000 $260,000 88.10% $229,060

CORRECTING COMPENSATION ERRORS

Improper Compensation: Correction

ER contributes QNEC equal to:

Missed deferral opportunity (maybe)

Missed after-tax opportunity (maybe)

Missed match

Required safe-harbor contribution

QNEC is pretax (even if plan has Roth provision)

ER makes participant whole for nonelective contributions

Missed Deferral Opportunity

Missed deferral opportunity = 50 percent of missed deferrals

Missed deferrals =

Safe-harbor nonelective plan

Three percent of compensation

Safe-harbor match plan/403(b) plan

Greater of three percent of compensation or maximum deferral percentage with at least 100 percent match

Other 401(k) plan

ADP of HCEs or NHCEs times compensation

Use current-year numbers

Take plan limits into account

Also applies to Roth

Rev. Proc 2015-28: Plans with Automatic-Contribution Features

• Failure: Employee elective-deferral failure for plan with automatic-contribution feature:

– Failure to implement automatic-contribution feature

– Failure to implement affirmative election of employee otherwise subject to automatic-contribution feature

• Conditions:

– Rectified within 9½ months after end of plan year of failure

– Correct deferrals begin no later than first payday on or after 9½ months after plan year end or, if earlier, first payday for month after employee notifies employer

– Employer gives notice to employee within 45 days after correct deferrals begin

• Relief: No QNEC for Missed Deferrals (but must contribute Missed Match plus earnings within 2 years after end of plan year of failure)69

Rev. Proc. 2015-28: Notice Contents

• General information relating to the failure (e.g., percentage of compensation and date deferrals should have started)

• A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan or will soon

• A statement that corrective contributions relating to missed matching contributions have been or will be made

• An explanation that the affected participant may increase his or her deferral percentage to make up, subject to §402(g)

• Contact information

70

Jane and Jack

• Employer qualifies for this method because plan has automatic-contribution feature

– Even though automatic-contribution feature didn’t affect Jack

• Deadline to catch failure: 10/15/2016

• Correction:

– QNEC = $0

– Make corrective nonelective contribution = missed match

– Give notice within 45 days after correct deferrals start

– Tighten procedures

All 401(k)/403(b) Plans (Whether or Not Auto-Enrollment Applies): Three-Month Correction

• Failure: Employee Elective Deferral Failure

• Condition:

– Rectified within three months after failure first occurs for participant

– Correct deferrals begin no later than first payday on or after three months following when failure first occurs or, if earlier, first payday for month after employee notifies employer

– Employer gives notice to employee within 45 days after correct deferrals begin

• Relief: No QNEC for Missed Deferrals (but must contribute Missed Match plus earnings within two years after end of plan year of failure)

72

All 401(k)/403(b) Plans (Whether or Not Auto-Enrollment Applies): Two-Year Correction• Failure: Employee Elective Deferral Failure

• Condition:

– Rectified within two years after end of plan year in which failure occurs

– Correct deferrals begin no later than first payday on or after two years following plan year end or, if earlier, first payday for month after employee notifies employer

– Employer gives notice to employee within 45 days after correct deferrals begin

• Relief: 25 percent QNEC for Missed Deferrals (but must contribute Missed Match plus earnings within two years after end of plan year of failure)

73

Example

• Plan defines compensation as W-2

– Doris filed deferral election to defer six percent of pay

– Doris’ compensation was $100,000 + $20,000 bonus

– Plan applied election to regular compensation

– Missed deferral = $1,200

• QNEC = $600 + earnings – if corrected >two years after PY

• QNEC = $300 + earnings – if corrected <two years after PY

• QNEC = $0 – if corrected <three months after failure first occurred

Missed Match/Safe Harbor

Missed match = 100 percent of match participant would have received if the participant had contributed missed deferrals

Required safe-harbor contribution:

Safe-harbor match plan

Same as missed match above

Safe-harbor nonelective

Nonelective contribution required by plan

Correcting Missed PS Contribution

Two choices:

ER contributes so EE gets what other EEs got

Reallocate contribution between EEs

That will mean reducing allocations to other EEs to increase allocation to improperly excluded EE

Can’t take distributions back

ER must contribute the difference

Example

• Corporation X has discretionary nonintegrated PS Plan

– W-2 compensation

– For the past three years, the plan has allocated on the basis of regular compensation (exclude bonus and overtime)

• Correction options:

– Determine the participant with highest allocation percentage based on correct definition and ER makes make-up contribution to that level plus earnings

– Reallocate contributions based on correct compensation definition

Incorrect Deferral Withholding:Types, Prevention

Types

Withheld nothing for all or part of year

Now treated as improper exclusion

Withhold wrong amount

Perhaps because plan not applying compensation definition correctly

Prevention

Make sure those handling deferrals/payroll understand plan terms

Have systems in place to deal with deferral elections and changes

Consider administration when choosing plan provisions

Incorrect Deferral Withholding: Correction

Fix-it Guide example:

Plan says for purposes of deferrals and PS, compensation doesn’t include bonuses

Only HCEs had bonuses (not important)

Had higher deferrals and PS as a result

Suggested correction:

“Forfeit the profit-sharing allocations . . . plus earnings and place such allocations in an unallocated account to be used for profit-sharing allocations in future plan years”

Return improper deferrals plus earnings

Preventive Measures

• Make certain compensation definition is carefully considered

– Election in plan reflects ER’s intention

– Compensation in SPD matches the plan

– Make certain payroll applies plan definition

• Keep election simple so everyone understands definition

– Elaborate or unique definition are often misunderstood and misapplied

Questions?

Miss the 2018 Spring Virtual Conference?

Go to: https://ecommerce.asppa-net.org/Webcasts-Conferences/Meeting-Details/productId/8935914

Order the On-Demand Recording!

Member price: $299Nonmember price: $349

Worth 7.5 CE Credits!