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SIMPLE Compensation and 125 plans


Guest DianeC
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I have a question on the definition of compensation used for calculating a match in a SIMPLE plan -- Do section 125 contributions reduce the compensation used to calculate the match?? When I follow the references from 408(p)defining compensation I cannot find any place that authorizes us to add back Section 125 contributions. Can you help??

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Compensation does not include amounts deferred under a Section 125 plan. [see SIMPLE LRM--Listing of Required Modifications and Information Release Package, Section 6-7.

Notice 98-4, C-4 states:

"For purposes of the SIMPLE IRA Plan rules, in the case of an individual who is not a self-employed individual, compensation means the amount described in section 6051(a)(3) (wages, tips, and other compensation from the employer subject to income tax withholding under section 3401(a)), and amounts described in section 6051(a)(8), including elective contributions made under a SIMPLE IRA Plan, and compensation deferred under a section 457 plan. For purposes of applying the 100-employee limitation, and in determining whether an employee is eligible to participate in a SIMPLE IRA Plan (i.e., whether the employee had $5,000 in compensation for any 2 preceding years), an employee's compensation also includes the employee's elective deferrals under a section 401(k) plan, a salary reduction SEP and a section 403(B) annuity contract."

This differs somewhat from the definition contained in the 1994 See SIMPLE LRM--Listing of Required Modifications and Information Release Package (see Section 7)which allows compensation under a Section 125 plan to be included. That being said, the Note to reviewer provides that it "is optional." Thus, it does not have to be included. So where does that leave you? You must check the document's definition. Model documents do not include 125 deferrals. Hope this helps, Gary.

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