Code Section 105(h)(5)--definition of compensation/"paid" for highly compensated individuals.

[Guest jac]

I've been looking at Code section 105(h)(5) and the definition of highly compensated individual. Subsection © says "among the highest paid 25 percent of all employees..."

The question I have is how to define "paid." I can't find anything in the regs that defines compensation or pay for this purpose.

Can someone tell me how you define compensation for these purposes?

Thanks.

[oriecat]

I would use gross wages.

[Ron Snyder]

The Regs. add the following clarification:

"* * * (3) Among the highest paid 25 percent of all employees (including the 5 highest paid officers, but not including employees excludable under paragraph ©(2)(iii) of this section who are not participants in any self-insured medical reimbursement plan of the employer, whether or not designated as a single plan under paragraph ©(4) of this section, or in a health maintenance organization plan).

The status of an employee as an officer or stockholder is determined with respect to a particular benefit on the basis of the employee's officer status or stock ownership at the time during the plan year at which the benefit is provided. In calculating the highest paid 25 percent of all employees, the number of employees included will be rounded to the next highest number. For example, if there are 5 employees, the top two are in the highest paid 25 percent. The level of an employee's compensation is determined on the basis of the employee's compensation for the plan year. For purposes of the preceding sentence, fiscal year plans may determine employee compensation on the basis of the calendar year ending within the plan year."

[GBurns]

From vebaguru's post, I would conclude that "paid" is synonymous to "compensation". Compensation then might be more than "gross wages".

[Guest jac]

GBurns and Vebaguru--

That's the catch. Compensation may be more than wages, but what is it? After some digging, I found a treatise that says this is one of the few (three, I recall the treatise saying) places where the Code and regs fail to define compensation. There is no cross-reference to another section defining compensation.

In the situation I was reviewing, we concluded that the employee was in the top paid 25%.

Thanks.

[g8r]

I believe there are a few other areas where it's not clear as well (such as discrimination as to eligibility for IRC 125 - a highly compensated employee is someone who is highly compensated).

What's interesting here is that the has come up at all. I presume you are either excluding a group of employees from the health plan or are providing different levels of benefits for different groups.

[GBurns]

For purposes of defining "paid" you might first want to look at IRC section 61(a). The definition of "Gross Income" covers almost everything.

Then look up the IRC section on "constructive receipt". I am not able to cite it at this time, so if anyone else can, please do so.

Together the definitions should adequately answer your questions of compensation and "paid".