Moving Expenses

[Guest benefitsanalyst]

We have recently implemented a relocation policy. I know moving expenses are excludable income under 401k plans, but I believe it is only certain moving expenses. Do you know which types are excludable? I think it might be moving expenses that are reportable in a certain box on the W2.

[John Feldt ERPA CPC QPA]

For qualified plans, moving expenses are part of a category usually called "fringe benefits" which includes taxable reimbursements or other expense allowances, fringe benefits (whether taxable or not), moving expenses, deferred compensation and welfare benefits.

The 401(k) plan document will (must) dictate whether or not these items are included or excluded for plan compensation purposes for making contribution allocations. However, for certain tests, these items might be included anyway (like 415 limit testing).

Your plan document might specify exactly which moving expenses are excluded. If so, it might only exclude the "qualfied"moving expenses (see next paragraph). It may also be written to exclude all amounts paid as described in the company's relocation policy. Again, for contribution allocation purposes, it depends on the language in the plan document, the laws/regulations/etc do not require plan sponsors to include or exclude certain items. Overall, the compensation used for allocation purposes needs to be considered nondiscriminatory (not designed in favor of the Highly Compensated Employees).

With regards to moving expenses overall, depending on how your company's plan is structured, my memory recalls that moving expenses are included on the employee's W-2 as income (and they are subject to FICA). The employee then reduces their income on the front of their Form 1040 by completing Form 3903 and deducting the "qualified" moving expenses. By "qualified" moving expenses, I mean only those amounts that fit in box 1 and 2 of the Form 3903. All of the other moving-related costs, like temporary housing, meal allowances, etc. should appear as taxable wages (also subject to FICA) in box 1 of the W-2.

I'm no CPA, so you should check out the info from that last paragraph with a qualified professional.