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FWIW, my interpretation in the absence of specific document language would be all compensation for hours on which overtime pay is included. If you are getting overtime pay on all hours over 40, then to me, all of those hours are overtime, and you would exclude it all, not just the extra 50%.

Technically, it's not an '11(g)' corrective amendment so the rules of "providing a meaningful benefit' are no relevant. So, they may be zero vested and such amount may ultimately be forfeited. Just on the style observation, this entire scenario may equate to the 'tail wagging the dog' where you based an entire plan design on year one circumstances without any anticipation of future circumstances. I've, personally, done a little startup design work in the past in order to get a favorable year 1 while ensuring the ultimate design strategy was in place subsequent years. I just think it's worth mentioning the importance of knowing and incorporating the difference. Good Luck!

This would be my interpretation as well (in the absence of specific plan language or company policy) Agreed. They said overtime "pay" not overtime "premium" Good Luck!

This would be my interpretation as well (in the absence of specific plan language or company policy)

Bill - certainly not saying you are wrong. There's a good argument for that position being technically correct. But I will say this - in a prior life with an insurance company, that company and many, many others didn't agree with what we termed "The Holland approach." As far as I know, Holland's interpretation was never adopted as official policy by the IRS, and I never saw imposition of taxation in that situation on audit where the 2/5 rule had been utilized. Maybe just lucky... Of course, I've been out of that for a long time, and it may have changed. I thankfully no longer deal with these issues, and I don't miss it!!

The plan administrator is responsible for interpreting plan terms. If the question is limited to deferrals, for a practical answer, one should look at how the payroll system functions with respect to application of the deferral election to the compensation for the extra hours.

FWIW, we had an IRS audit of a 403(b) plan for the 2008 plan year where the agent tried to apply the current (2009) rules. His position was that someone who dropped below 1,000 hours became ineligible the following year and if you included them, regardless of the reason, you were no longer allowed to use this exclusion. At the time, this agent trained other agents in our region on 403(b) audits This conflict between the IRS 403(b) regs and ERISA is supposed to be resolved in the coming pre-approved 403(b) documents, but until then, the only advice I've heard from the IRS is don't use the <20 hours per week exclusion.

If you exceed the incidental limits, it's considered an in-service distribution and the entire premium is taxable.