Compensation question

[fiona1]

An employer wants to set up a shared leave program - where an employee can donate some of their vacation time to a pool so others (who are out of vacation time) can pull from the pool.

For example, employee A has 100 hours of vacation. He donates 16 hours to the pool. Employee B has no vacation and becomes ill. They take 16 hours from the pool and are able to take 16 hours of paid time off.

The employer does NOT want employee B to be able to defer from this 16 hours of pay they received from employee A. Can they exclude this pay from their definition of compensation in their 401k plan?

[austin3515]

Yes, for certain purposes (assuming the document is amended):

Yes, for eligibility to make 401k contributions (which was your question);

Yes, to allocate profit sharing and/or matching contributions;

No, for nondiscrimination testing (including the ADP test) UNLESS the plan's definition of comp. satisfies 414(s) ratio test (because the definition is not a safe harbor), which, if we're talking about a VERY small percentage of pay for the employee group as a whole, should not be a problem. The implications are pretty broad as far as PS contriubtions go if the definition of comp is not 414(s) (i.e., reate group testing is required, etc).