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Pet peeve: Someone asks if something can be done or how to treat something and it gets side tracked into "why does the client want to do such a thing anyway"? If I wanted to know WHY a client wanted to do something, I wouldn't ask you all - I would ask the client! Laughing as I'm typing but had to vent...

Haven't seen a client do it, but I agree they need to amend their plan, not because it is a fringe benefit, but because it needs to be excluded elsewhere if that is what they want to do. From a payroll/timekeeping side, it seems like it could become a nightmare of epic proportions unless they have a very clean streamlined PTO system with very few edits. I am not sure I would argue TxFrBnfts, but I would ask the "why do they want to exclude compensation during PTO?" question to see if there is a solution there. Is it because they want to lower their employer match? Do they stop other benefits during PTO (health insurance coverage, life insurance, Workers Comp, STD/LTD)? I suspect all those answers are NO. So why this one?

Vacation pay is ordinary income, subject to OASDI taxation, etc. How could it possibly be treated as a fringe benefit for tax and pension purposes?

Thee possible options: 1) Tell them to confirm their opinion with their accountant and legal counsel. 2) Point them to Publication 15B Employer's Tax Guide to Fringe Benefits and ask them where it addresses compensation for vacation as a taxable fringe benefit. 3) Tell them that if they want to exclude compensation for vacation that they should amend the plan document to do so and inform them that they would be subject to 414(s) testing.

1.414(v)-1(d)(3)(I) Catch-up contributions with respect for the current year are not taken into account for purposes of section 416. however, catch-up contributions for prior years are taken into account for purposes of section 416. thus, catch up contributions for prior years are included in the account balances that are used in determining whether the plan is top-heavy under section 416. so, on the one hand, you say "Yes based on account balances included prior catch up contributions the plan is top heavy. Now, how much did the HCE receive during the year? nothing because it is all catch up