Compensation

[Guest kgsingletary]

An employee receives $300 per month as "Car Allowance" - can they make deferral contributions on this money that is included in their regular paycheck.

The plan document defines compensation as

"...shall mean wages within the meaning of Section 3401(a) and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code (wages, tips and other compensation as reported on Form W-2).

Compensation must be determined without regard to any rules under Section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment of the services performed.

Compensation shall also include elective contributions made on behalf of a Participant to this Plan or salary reduction contribution made pursuant to a plan described in Section 125 of the Code."

I'm not sure if this would fall under the "working condition benefit" mentioned in the ERISA Outline Book, which is non-taxable.

Thanks for any input!

[Guest Harry O]

Is the employer reporting the $300 allowance as wages on the W-2? If the employee is substantiating his business use of the car, the allowance should not be reported on the W-2 and would not be eligible compensation.

P.S. This is a crazy definition of pay for 401(k) deferral purposes! There are all sorts of things that are reportable on the W-2 but do not involve a cash payment from the employer to the employee that can be used to make 401(k) contributions -- imputed income from group-term life, split dollar imputed income, taxable relocation reimbursements, income from stock option exercises, etc. How are these types of payments handled under the plan? You usually see W-2 compensation used for compliance testing purposes (section 415, ADP/ACP, 401(a)(4)) not for determining what is eligible pay for plan contribution purposes.

[AmyR]

I have a question somewhat related to this post. Anyone have an opinion on whether an employer is required to include the taxable personal use of a business vehicle in section 3401(a) compensation (the definition of compensation used to calculate contributions under the plan)? Or if they have made the election not to withhold on this income, would they have the option to say that because it is not subject to withholding, it therefore is not included in comp under this defn? Thanks in advance for any comments.