414(s) Safe Harbor Exclusions from Compensation

[401 Chaos]

1.414(s)-1c(3) provides a safe harbor alternative definition of compensation excluding certain fringe benefits and other special compensation items, including "welfare benefits." Is the term "welfare benefits" for such purposes defined anywhere? If not, is it generally interpreted to mean benefits provided under an employee welfare benefit plan?

More to the point, how should short term disability benefits be viewed in plans that exclude "welfare benefits" under the safe harbor alternative definition? I notice that several common reference charts comparing the various definitions of compensation note that short term disability payments will be excluded from compensation under this provision only if they constitute a "welfare benefit." However, I have found very little explaining when short term disability benefits constitute a "welfare benefit." I assume that short term disability benefits will be considered "welfare benefits" if they are provided under an insured short term disability plan or program such that they are considered to be provided under an ERISA employee welfare benefit plan. On the other hand, I assume short term disability benefits provided under a self-funded short term disability or sick pay program which is regarded as a payroll practice rather than ERISA welfare benefit plan might not be considered a "welfare benefit"? Does that sound correct?

[401 Chaos]

Another thought has occurred to me--should the term "welfare benefits" be considered in light of the terminology under 419A? If so, would that impact how insured short-term disability benefits are handled?

[E as in ERISA]

The IRS' training materials don't provide much help but here it is http://www.irs.gov/pub/irs-tege/epchd304.pdf They mention disability, scholarship, unemployment, legal assistance and severance as welfare benefits.

[401 Chaos]

E,

Thanks for forwarding the IRS materials.

The materials specifically refer to "certain benefits provided by the employer such as disability insurance." I think one could make a reasonable argument that the inclusion of the word "insurance" in the discussion rather than simply referring to "disability benefits" or the like means that short term disability benefits paid by a third-party insurer should be exempted from the definition but self-funded short-term disability benefits provided through a payroll practice of the employer would not be excluded. I suppose that would make sense from a W-2 reporting perspective as well although if the company pays the insurance premiums for the short-term disability coverage the amounts would still be taxable to the participants.

[401 Chaos]

Another related question. Several references including the IRS training materials cited by E as in ERISA note that both cash and non-cash fringe benefits are excluded under the fringe benefit exclusion. The IRS materials go on to note that "these are any taxable "extras" such as the personal use of a company car, educational assistance, etc."

Can anybody point me in the right direction as to where the IRS draws the line with respect to what is a taxable extra for such purposes. For example, would a car "allowance" paid under a non-accountable plan be considered a taxable fringe benefit or should that be more properly thought of as general wages. Similarly, what about large cash employee awards or bonuses as opposed to small achievement type awards. I assume the smaller and less frequent the amounts the more likely these are to be thought of as taxable fringes rather than wages but I am trying to determine where the line should be drawn, especially for amounts that are fairly predictable and easily tracked and accounted for.

Thanks for any thoughts or assistance.

[401 Chaos]

I wanted to bump this thread up in hopes that somebody might be able to provide a definitive answer as to whether or not self-funded short term disability benefits (i.e., basically a salary continuation plan or payroll practice for ERISA purposes) is considered a "welfare benefit" for purposes of the 414(s) exclusions from the definition of compensation. The reference in the IRS's training materials to "disability insurance" rasises some concerns in my mind as to whether such payroll practices can indeed be considered "welfare benefits" and thus excluded under this provision.

I feel as if I'm missing some critical piece of guidance here--seems this is too frequent a concern not to be squarely addrssed. If it really is unclear, I would appreciate thoughts on how others commonly handle. Thanks.

[Guest allisonperry]

Did Chaos ever figure out how to treat self-funded short-term disability payments? How do others treat such payments?

[J Simmons]

I would think that to separate out STD benefits from mere sick pay, a determination of disability is required. That would seem to require the type of discretionary determination by a 'plan administrator' that ERISA was designed to govern.

[Guest allisonperry]

To clarify my question, is sick pay paid by a third party agent of the employer (third party is paid on a cost plus fee basis) "compensation" for 401(k) plan purposes under a 414(s) safe harbor definition of compensation based on W-2 income?

[Guest Sieve]

Don't know if this is the proper approach, but why not look to ERISA Section 3(1) & DOL Reg. Section 2510.3-1 for guidance? That would include as a welfare benefit payments on account of disability (DOL Reg. Section 2510.3-1(a)(2)), but would exclude from welfare benefits (and therefore include as compensation under the defintion questioned in the OP) the payroll practice of paying disability benefits out of the employer's general assets (DOL Reg. Section 2510.2-1(b)(2)).

[BTG]

Hoping to revive this topic to see if anyone was able to find a definitive answer.  This issue seems to be coming up for a lot of clients lately.  I think the approaches taken in this thread are well-reasoned, but it would be nice to have a definitive answer.

[Puffinator]

I, too, am hoping to revive this topic...  A definitive answer would be most welcome!