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State Mandated Short-Term Disability Benefits - Impact on Compensation Definition

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I received an interesting question on whether state mandated short-term disability benefit payments should offset a qualified plan's definition of compensation. My gut feeling is that since most compensation for such purposes is driven by employer-provided payments via its payroll system, and such amounts are or are not subject to federal income tax withholding, that the state mandated disability benefit payment should not even enter into the compensation definition in any way and therefore, should not offset the employee's other compensation which is taken into account for qualified plan purposes.  I know that the mandated benefit is taxable to the employee to the extent that the employer paid the premiums for the benefit.  However, this should not affect my conclusion on whether such payments should offset the employee's compensation for qualified plan purposes, or am I missing something?

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What do you by offset? Included or excluded?

if they are part of W-2 compensation then start with the plan's definition of compensation and go from there. IRS website and 401k Answer Book (see below) have good resources in that regard.

If not included in W-2, then exclude, but if included in W-2 then the plan's compensation definition will say how to treat. If you use W-2, 3401(a) or one of two 415 pay definitions w/o adjustments then I think you have to include (can't "offset").

Oddly, DOL hour of service rules say you don't have to credit hours for state mandated STD, WC, etc.

Compensation Definitions.pdf

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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