Definition of Compensation

[MarZDoates]

I realize this is probably a stupid question, but are plan sponsors still permitted to exclude Section 125 (etc.) deferrals from compensation? Thanks.

[Belgarath]

Yes, BUT - you have to be careful. For example, if you have a cross-tested plan, you can use 414(s) compensation (which would allow you to exclude the 125 deferrals) for the 1/3 test, but you cannot do this for the 5% test. For the 5% test, you have to use total compensation which would satisfy 415©(3), which would require inclusion of such deferrals.

[jaemmons]

However, the 125 contributions may need to be taken out of 415©(3) compensation if they are part of an automatic enrollment (negative election) in which an employee can opt out ONLY with certification of alternative health coverage. Rev Ruling 2002-27 allowed for the use of negative elections within 125 plans but there may need to be an adjustment to 415 comp.