Adjustments to "Total Compensation".

[Below Ground]

Background:

Plan document holds that Compensation means Section 3401(a) Wages and all other payments employer must furnish statement under IRC 6041(d), 6051(a)(3) and 6052. In addition, Compensation is adjusted to include any deferrals under 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), 403(b), 457(b) and 414(h)(2). Lastly, the Plan does allow testing (including ADP and ACP) to use 414(s) Compensation.

Potential Problem:

Compensation furnished by client is Medicare Wages (Box 5), increase by contributions for health insurance and disability (both presumed to be under 125), and reduce by the value of taxable (>50K coverage) group term life premium. Is this reduction a problem?

Circumstances:

Plan under audit and IRS Agent wants to know why Compensation used for Testing was not "Box 5 Value". I believe that the compensation used is fine under IRC 414(s), but is there a problem with other aspects of Plan (e.g. profit sharing allocation)?

Thanks for your input!

[GBurns]

Before it matters what you think, you should have a definitive statement from this auditor explaining what he/she thinks should be used and why. Anything else is irrelevant and futile.

[Below Ground]

The auditor has indicated that Box 5 should be used. That, of course, fails to address the 125 Contributions which must be added back. My question was on the exclusion of taxable group term life premiums. What problems could that create? In some of my research, it seemed to indicate that this exclusion was correct for both 3401(a) Wages and 414(s) Compensation. I was hoping that some one would be kind enough to share his or her opinion on this matter. Getting a second opinion is usually prudent.

I disagree that the only thing that matter is the auditor's opinion. I have seen a number of instances where an auditor was not correct, or not correctly applying the related regs. Regardless, I believe that I should review all research available (which includes the postings of this community), allowing for the best response to the auditor's concerns.

An example of where an auditor may not be correctly approaching an issue? We know that Box 5 does not include 125 Contributions. The Plan clearly states that these monies are included (see original post). Use of Box 5 alone would be incorrect.

Thank you for your comment. I infer from that you are suggesting a more "reactive strategy" for dealing with the auditor. I agree that sometimes, and quite possibly this time, that is the best choice. Even still, I would like to be prepared for all potential problems.

[GBurns]

How can you either disagree or agree with the auditor if his rationale is not first known ?

How can you either correct the auditor or correct you procedure if his rationale is not first known ?

If the auditor is wrong, How can you what he/she is wrong about without knowing why first?

In fact, How can you rationally respond to the situation if it is not first understood ?

The auditor says use Box 5, but Why ?

The auditor treats the issue differently than you do, again, Why ?

You have stated what the auditor said, but you have not indicated that the auditor gave any reason, rationale or support for the position taken. How can you do anything with knowing those things ?

Regardless of how any of us might have or would calculate anything would mean nothing to this auditor if his reasoning is coming from a different perspective right or wrong. And we do not know what that reasoning is.

[david rigby]

... (both presumed to be under 125)...

While doing your research, perhaps the presumption should be eliminated.

[Below Ground]

Mr. Burns, the auditor wants us to explain why we did not use Box 5 Compensation, without adjustment. We know that we must add in the 125 Contributions since Box 5 does not count those monies, and those monies must be counted (see OP). That accounts for most of the difference. My question was not how to deal with the auditor. I simply wanted to know if others thought the reduction applied for taxable group term life premiums was a problem, which is the balance of the difference.

Mr. Rigby, you raise a good point. In fact, my reason for the OP was to have as much insight as possible. When typing the original post, I was not sure if the the disability premium was also under 125. I knew the health premium was. I was waiting for confirmation on disability. I now know that both are under 125.

My question, which I had hoped the "benefit community" could respond to, was not "how should I approach the issue". It was simply does the exclusion of taxable group term life premium cause a problem when defining IRC 414(s) Compensation or 3401(a) Wages.

Anyway, I do thank you for your posts.

[Laura Harrington]

IRC §3401(a)(14) specifically excludes the value of group term life insurance on the life of the employee from compensation under this code section.

Since the §3401(a) definition qualifies as a 415 definition, and the starting point for §414(s) compensation is §415 compensation I think you were correct with regards to both the compensation used for testing and for benefits/allocations.

[Below Ground]

Thank you Laura! I really appreciate your reply.

My research reach that conclusion, but there seemed to be some question about when the premium is taxable. There was an answer in the Nondiscrimination Handbook that was somewhat unclear to me, on this specific topic.

Again, your direct answer to my original post was most appreciated. Have a great day!

[Laura Harrington]

I think what you are looking for with regards to when the premimum is taxable is found in IRC §79.

You have a great day too!

Laura

[GBurns]

Below Ground

I apologize for apparently upsetting or annoying you by not giving a "direct answer" to your original post. I was only trying to help you.

My assumption was, that like the vast majority of people, your experience with audits/examinations was limited, but that assumption is apparently wrong.

In my experience most people complicate audits by arguing about broad issues, and even issues not under question, instead of keeping the focus narrow and specific. This is probably why taxpayers under audit are advised by many legal people, to not personally attend meetings when possible, never speak directly, but to let their representative do the talking etc. An audit should be treated no differently to a court appearance. Let the lawyer/representative do their job.

All audits are by nature narrow, in that each item has specific applicable IRC, Treas Regs, procedures etc. Many issues might be covered but they are all narrow individual issues although some might be linked. They all have to be treated individually step by ste.

But, I should have known that you knew all this and had the benefit of experience, which was why you wanted to expand the issue beyond what the auditor was thinking/saying and make the "Potential Problem" in your OP the issue instead.

Again, I apologize.

[Below Ground]

Apology accepted. I appreciate your taking the time to do so.

May I suggest that it is always a good idea to read the person's post to see what that person is saying, and not assume the person is saying or asking something else. Of course, if I failed to clearly define the problem under the Potential Problem in the OP, then I apologize to you.

I believe that a reply to a post should reflect that the person doing the post is most likely using replies received as part of a "research project". While offering advice on how to approach a problem should be appreciate (even if not requested), a comment that simply "piles on" and serves no other purpose and should not be posted. All too often I see posts that serve no purpose toward the discussion. Anyway, I make these suggestion to you as you are labeled as a sitewide moderator.

Of course, those are just my opinions...

[WDIK]

All too often I see posts that serve no purpose toward the discussion.

Guilty as charged.

[GBurns]

In my opinion, it would be a great disservice to the reading community and to the OP to respond only to the question asked, and not expand as a responder sees fit. I can think of many many instances where the OP was either not clear or did not realize that they did not understand fully the issues surrounding their questions.

I do not think that there are many posters who are accomplished writers or experts in every issue. Those limitations plus limitations of space etc means that it is very unlikely that any question posted (or response) is complete or even completely thought out, hence the opportunity to "add on" by a responder anything that a responder thinks might be missing or helpful.

Responders are not professionals paid to give specific responses. Many like me are either trying to be helpful, trying to learn more, or both.

For example, if someone posts " A client wants to allow disability insurance premiums to be pre-taxed under the cafeteria plan. Can he do this?" A simple question with could be responded to with a simple one word answer. But not adding on comments asking about the taxation of the benefits would, IMHO, be a great disservice.

Aside from the above, in general since this is an open board, anyone is free to respond as they see fit. It is for the Forum Moderators to decide what is appropriate and what is not.

In the same way, even though I cannot recall anyone else with your expressed attitude, I will defend your right to express your opinion. It is your opinion whether I agree or not is of no consequence.