Compensation for Top Haevy Benefit

[flosfur]

For computing TH benefits, does the compsenstion "have to" include 401(k) deferrals (specifically 401(k) deferrals)?

For TH rules, compensation is defined in Q&A T-21 of Reg 1.416-1 as:

..... Compensation used is as defined in 1.415-2(d).... [1.415-2(d)(2)(i)] excludes ....... amounts contributed to a plan of deferred compensation. Alternatively, Compensation that would be stated on an employee's Form W-2...

____________________

Although, S415 was changed to include 401(k) deferrals from 1997 (?) or so, the regs 1.415-2(d) and 1.416-1 Q&A T-21 have not been amended.

Also, S415 changes had no impact on W-2 compensation in this respect or did it?

The question is, if desired, can one exclude 401(k) deferrals from Comp when defining Comp for TH benefits (or define it as W-2 compoensation)?

[mwyatt]

Not sure on regs, but as you mention, this change was made back in 1997 by SBJPA '96. Hope this isn't a night before audit posting...

[flosfur]

Found the answer.

One of of Volume Submitter documents (selected at random) I looked at allows an option of selecting between "415 Comp" and W-2 for Top Heavy benefits (I did not research other Volume docs I have access to).

So, I would say, yes, W-2 comp can be used for Top Heavy benefits.

[mwyatt]

Hey Flosfur:

Just pulled out a GUST2 Relius Volume Submitter DB document and the checklist. I note that Relius has several options for defining compensation for benefit purposes; however, for top heavy purposes under the Relius VS document, the TH benefit (outlined in Section 5.2 - if you know Relius/Corbel, this is the section) is determined using "415 Compensation". You then turn to the definition of 415 Compensation in Article I, which states:

"415 Compensation" with respect to any Participant means such Participant's wages for the Fiscal Year ending with or within the Plan Year within the meaning of Section 3401(a) (for the purposes of income tax withholding at the source) but determined without regard to any rules that limit the renumeration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)).

For Plan Years beginning after December 31, 1997, for purposes of this Section, the determination of "415 Compensation" shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in the gross income of the Participant by reason of Code Sections 125, 132(f)(4) or 457.

I've gone all through the Relius checklist, and I'm really not seeing where there are any options to specify the measure of comp for TH purposes, only for regular plan purposes. So, at least by Relius, you would definitely not be able to argue that the lag between modified Code and final regs issued prior to SBJPA would allow you to continue to strike out deferrals for IRC 416 purposes.

Further edit (once the Message Boards came back up): coded in a Plan with compensation defined as 1.415 reg comp and excluding deferrals from consideration; "415 Compensation" still comes up in the document as:

"415 Compensation" with respect to any Participant means such Participant's wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan as described in Regulation 1.62-2©) for a Plan Year.

"415 Compensation" shall exclude (a)(1) contributions made by the Employer to a plan of deferred compensation to the extent that, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed, (2) Employer contributions made on behalf of an Employee to a simplified employee pension plan described in Code Section 408(k) to the extent such contributions are excludable from the Employee's gross income, (3) any distributions from a plan of deferred compensation; (b) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; © amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) other amounts which receive special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of any annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee).

For purposes of this Section, the determination of "415 Compensation" shall include any elective deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in the gross income of the Participant by reason of Code Sections 125, 132(f)(4) or 457.

Note that the last paragraph adding back in deferrals still is generating in the document, so I think that you're not going to get by with excluding deferrals, at least under this tack.

[Blinky the 3-eyed Fish]

Don't go by a choice in a document, but by what the law reads. TH must use 415 compensation.

[mwyatt]

Hey Blink:

A little curious; noone is debating that TH uses 415 Compensation. SBJPA made changes so that deferrals are to be included in the compensation used for TH purposes. Flosfur's point is that this is a Code change, but has not been reflected in final regs for 415 compensation. His point is that one could argue that you could still use the 415 reg compensation (excluding deferrals) for TH purposes since the final regs (which clearly were issued prior to SBJPA) still exclude deferrals.

My point in illustrating with Relius language, since he was looking at VS docs for guidance, is that the document explicitly is adding in language that you include deferrals for TH purposes. Where do you stand on Flosfur's argument; would you include deferrals or take the approach that you wouldn't until such time as the final regs are modified?

[Blinky the 3-eyed Fish]

Include

[mwyatt]

thx