401(k) contribution limits and health benefits

[Guest paytaxesforusa]

I have Fidelity Self-Employed 401(k) account. I am the owner and sole employee of the S-corporation. My W-2 salary has some components that show only up in box 1 but not in box 3 (e.g. health insurance premiums, HSA health savings account contributions), and some components that only show up in box 3 but not in box 1 (employee elective deferrals).

I can contribute 25% of my annual "compensation".

I know that the elective deferrals count towards "compensation".

Question: Do the health insurance and HSA contributions, that are taxable but excluded from social security tax, count toward "compensation"?

Attached are excerpts from publication 560 and the Plan document, but I can't figure out under which category the health insurance and HSA contributions fall, whether they are fringe benefits, deferred compensation, ..., if "taxable" means income-taxable and/or social security taxable, etc.

Compensation for plan allocations is the pay a participant received from you for personal services for a year. You can generally define compensation as including all the following payments.

1. Wages and salaries.

2. Fees for professional services.

3. Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items.

1. Commissions and tips.

2. Fringe benefits.

3. Bonuses.

However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4.

Other options. In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation.

* The employee's wages as defined for income tax withholding purposes.

* The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement.

* The employee's social security wages (including elective deferrals).

Compensation generally cannot include either of the following items.

* Reimbursements or other expense allowances (unless paid under a nonaccountable plan).

* Deferred compensation (either amounts going in or amounts coming out) other than certain elective deferrals unless you choose not to include those elective deferrals in compensation.

Fidelity Basic Plan Document:

"For an Employee who is not a Self-Employed Individual, “Compensation”

means, subject to the limits of this Section 2.9, wages, tips and other

compensation paid by the Employer and reportable on Internal Revenue

Service Form W-2, excluding deferred compensation, but (for Plan Years

beginning after December 31, 1997) increased by amounts withheld

under a salary reduction agreement in connection with a cash or deferred

plan under Code section 401(k), a SIMPLE retirement account under

Code section 408(p), a simplified employee pension under Code section

408(k), or a tax-deferred annuity under Code section 403(b), and any

amount which is contributed by the Employer at the election of the

Participant and which is not includable in the gross income of the

Participant by reason of Code section 125 (cafeteria plans), Code section 132(f)(4) (qualified transportation fringe benefit programs) (for Plan Years beginning on or after January 1, 2001), or Code section 457 (deferred compensation plans of tax exempt organizations)."

[Guest helpmewithtaxes]

I did some more research myself and found that the same problem has been addressed in

http://benefitslink.com/boards/index.php?showtopic=31613

One of the things causing confusion seems to be the meaning of "W-2 wages". Since the form W-2 has many boxes with many different dollar amounts, it is stupid to use the notion "W-2 wages" for the calculation of contribution limits!!!!!

I would now say that both 401(k) contributions AND HSA/health insurance contributions can be included in "compensation", yielding a figure greater than both box 1 and box 3 on form W-2. My only concern is that the wording in publication 560...

(begin citation)

In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation.

* The employee's wages as defined for income tax withholding purposes.

* The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement.

* The employee's social security wages (including elective deferrals).

(end citation)

... could be interpreted that one has to choose between those options (and cannot add the different components that contribute to any of those three figures).

But then this is the wording of the publication and not the law.

The definition of compensation in the Fidelity plan document would include HSA contributions in the phrase "wages, tips, and other compensation", and says the 401(k) contributions explicitely to be added: "increased by amounts withheld under 401(k)...".

However, this is just my interpretation, and I would welcome any thoughts on this; also, what could happen in the worst case, if the IRS has a different opinion, say a few years later on a plan audit?? Would I have excess contributions and what could possibly happen?

Thanks!

[Guest mjb]

Under the IRC S Corp owners must include any health ins premiums or FSA amounts as taxable wages by the S corp. The owner deducts the health ins premium on line 29 of the 1040 to determine the AGI. (See instructions to 1040). The 401k contribution is excluded from w- 2 income because it is a pre tax deferral. The plan document determines which amounts are included as Compensation.

[GBurns]

I honestly do not see what problem you have. Compensation is as defined by your 401(k) Plan Document, W-2 figures are as defined by the IRS and as calculated by the W-2 preparer. You cannot change any of those 2 items, they are as they are.

Box 1 on your W-2 is not for salary, it is for all wages, tips, other compensation and includes any amount paid by the S Corporation for health insurance for 2% or more shareholders of the S Corp.

Box 3 is for wages, tips, other compensation subject to social security tax.

The computation of what is entered in Box 1 should have been done by the W-2 preparer in order to prepare the W-2. Health Insurance premiums paid is not something that is or can be added on by anyone after the fact.

See page 9 of the W-2 instructions.