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BG5150

Compensation while an excluded employee count?

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Plan excludes employees who are part of Division C.  Employees of Divisions A & B are included.  Compensation for each division is tracked separately, though everything is on one W2.  Plans definition of comp is W2, no exclusions.

Several people do work for A or B as well as C.  Some do work for all three.

For profit sharing purposes, can/should we exclude the income from C?

Example:  He entered the plan in, say 2014, as an employee for Division A.  Jim makes $60,000 for 2018.  However, $20,000 was for work he did as an employee for Division C.

What is his compensation for PS purposes?  $60,000 or $40,000?

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Double check your definition of compensation in the plan document.  Most of mine are pretty clear on this point.  It says something to the effect you exclude compensation if in an excluded class or group.  

If it is silent on this point it is going to get more difficult so I would start there.  

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I found an example of what I am talking about in one of my client's documents.

Quote

Compensation. in addition, any amount received under the following circumstances will not be considered Compensation for purposes of this paragraph: ( I) amounts received prior to the date the Employee becomes a Participant in the Plan; (2) amounts received by an Employee while an Employee is a member of an ineligible class of Employees; (3) amounts set forth in Regulation §l.4 14(s)-l(c)(3) (i.e., reimbursements or other expense allowances, including fringe benefits (cash and non-cash), moving expenses, deferred compensation and welfare benefits, even if includible in gross income); and (4) Post Severance Compensation.

 

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I think I found it.  Under Plan Compensation instead of Total Compensation.

Now to just convinced the auditors...CPAs, not IRS.

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The auditor is coming back and saying that people cannot simultaneously be eligible and not eligible at the same time.

They believe since the people are being paid with a pay code of Division C, and Division C's pay is not excluded in definition of compensation, then it should be included for PS.

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Interesting. Auditor may have a point, depending upon the specific plan language and interpretation of that language. If I were doing a document in this situation, I'd do a specific exclusion for compensation paid for hours/work performed for division C, or whatever works to appropriately specify the excluded comp.

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This is going to get into the finer points of words is my guess.   When a person does work for Division C are they employee of Division C or is there merely a cost transfer being made for that person?   I think it is possible for a person to transfer from C to A or B on a day or even hour by hour basis but that is just an opinion. 

Does the plan say exclude pay while an Employee of Division C or merely paid by Division C?  

You might have to go back the client to work out exactly are they employees of Division C when working for it or is there merely a cost transfer on their books for their pay?  

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Generally, compensation includes all earnings while eligible in the controlled group.  In this instance, 1 W-2 would mean 1 employer and 1 compensation including all divisions.  However, if the Plan Administrator interprets the compensation definition to exclude division C, the plan excludes division C compensation for all participants, and the plan allows & passes the compensation ratio test -- you should be OK.

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