Jump to content

Are Wages Exempt from Tax Withholding Plan Comp Under 3401(a)?


PensionPro

Recommended Posts

401(k) plan defines compensation as compensation under section 3401(a).  An employee claimed exemption from withholding on Form W-4.  The box 1 of their W-2 shows zero, and the amounts listed under box 14 for informational purpose.  These amounts are wages paid for services performed by the employee.  Are these amounts considered plan compensation?  Thanks.

PensionPro, CPC, TGPC

Link to comment
Share on other sites

Does the document itself contain a complete definition of compensation to use when 3401(a) is selected on the AA?  In particular, does the document include the following underlined language for the definition of 3401(a) compensation?  (The following language is derived from IRS model language for the definition of compensation when the 3401(a) definition is selected.)

 

Compensation means "...wages within the meaning of section 3401(a). However, any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed are disregarded for this purpose."

 

The underlined language is required in the case of determining 415 compensation, so I suspect that it is also used by the document for contribution purposes as well.  If it does contain the underlined language, then why is the participant claiming to be exempt from withholding?  If it is because of the nature or location of the employment or service performed (such as, for example, the exception for agricultural labor in section 3401(a)(2)) , then you would disregard the exemption from withholding and treat the entire reported amount as 3401(a) compensation, i.e., even if no federal tax withholding is required for that particular wage earner.  In other words, it would be plan compensation.

 

If the document doesn't define 3401(a) compensation (for contribution purposes) as described above, then you may need to follow up with the document provider as to whether the amount in Box 14 constitutes the definition of 3401(a) compensation under that particular document for purposes of contributions (as opposed to 415 purposes).

 

For 415 purposes, the document should also state that you need to include amounts that would be included in 3401(a) wages but for an election under IRC section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b)), and many plan documents will therefore automatically include such amounts within the meaning of 3401(a) compensation for contribution purposes (subject to an AA option to exclude such amounts).  Thus, the entire definition of 3401(a) compensation in the document needs to be examined to determine what amount to use for a particular participant for a plan that "uses 3401(a) compensation."

Link to comment
Share on other sites

Plan document contains that language.  Form W-4 exemption from withholding is not based on job location.  Here is information from the IRS site:

Quote

 

You can claim exemption from withholding for the current year only if both the following situations apply:

For the prior year, you had a right to a refund of all federal income tax withheld because you had no tax liability, and

For the current year, you expect a refund of all federal income tax withheld because you expect to have no tax liability.

 

 

PensionPro, CPC, TGPC

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...