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55% Avg. Ben Test


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Is it permissable to use a modified compensation definition for this test? Can I reduce compensation for 125 & 401(k) deferrals?

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I don't think so. The 55% average benefits test applies only to the day care flex accounts in a cafeteria plan. IRC § 129(d)(8) provides that the definition of compensation be IRC § 414(q)(4), which keys it to the definition in IRC § 415©(3). IRC § 415©(3)(D) includes in that definition elective deferrals and deductions under IRC § § 125, 132(f)(4), 402(g)(3) and 457.

Note also that for cafeteria plan discrimination purposes, Prop Treas Reg § 1.125-7(a)(2) uses the IRC § 415©(3) definition as well.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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