Definition of Compensation

[Guest Bob Collins]

It is unclear if the definition of includible compensation in IRC 403(B)(3)would allow a disabled employee to use the rate of compensation described in 415©(3)©. It seems that for 415 compensation the answer would be that the disabled employee may use a projected compensation assuming that he/she was still working, but for calculating the exclusion allowance in 403(B)(2)(A)the employee could only use W-4 increased by any deferrals. Is this true?

If the disabled employee could use the compensation rate for the exclusion allowance, it there any non-Code explaination available?

[Carol V. Calhoun]

As far as I can make out, the 415 definition of compensation does not apply for purposes of the maximum exclusion allowance. However, you have to remember that the period in which the compensation is measured is different for 403(B) purposes than for 415 purposes.

For section 415, the period used to calculate compensation is the limitation year. For the maximum exclusion allowance, it is the most recent one-year period of service. The regulations make clear that if someone has ceased working, you would look back to the most recent period when they did work to determine includible compensation. Indeed, if the person had part-time service, e.g., 50% time, you would add the most recent two years of compensation together to calculate includible compensation.

As a result, absent the 415©(3)© rule, a disabled person would have no compensation at all in any year after the year of disability. However, a disabled person would go on having includible compensation for maximum exclusion allowance purposes indefinitely.

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