Self-Employment Earned Income for Pension Purposes

[YankeeFan]

A self-employed individual maintains a qualified retirement plan and receives director's fees from XYZ Inc. In addition, this individual also exercises stock options received from XYZ Inc. Lets assume the director's fees total $150,000 for the year while the exercising of the stock options amounts to $100,000 for the year. Lets also assume this individual did not have any business expenses for the year. The individual's accountant prepares a Schedule C for the year reflecting net profits of $250,000. The income shown on Schedule SE is also $250,000 which is the amount subject to self-employment taxes.

The accountant's inclusion of the $100,000 on the Schedule C and Schedule SE would indicate that the stock option exercise is Earned Income since it's subject to self-employment taxes. My understanding is that a self-employed individual's Earned Income for pension plan purposes is the income on which self-employment tax is paid (i.e. the amount shown on Schedule SE of Form 1040).

Are the amounts received as a result of the stock option exercise considered Earned Income for pension purposes? Should the Earned Income amount equal $150,000 or $250,000?

[Andy the Actuary]

How does the plan define compensation? Is this in conflict with IRC 1402(a)?

[flosfur]

Under the law, it would be $250k. And if your plan defines the earned income as defined in IRC 40100©(2) [and I don't see any reason for defining it otherwise), then it would be $250k.