Definition of Compensation

[Guest notapensiongeek]

We have a client that wants to exclude a certain type of reimbursement from the definition of compensation for allocation purposes. The reimbursement consists of funds paid to an employee (through payroll) that affirmatively elects out of receiving the company's health insurance that would have otherwise been paid by the employer towards the insurance premium. At this point there is only one NHCE that would fall into this category of receiving the reimbursement.

The plan is a 401(k) PSP on a prototype document, is top-heavy, and currently allocates the 3% safe harbor non-elective contribution each year. They generally do not do a profit sharing contribution (if they do it is allocated pro-rata).

Any thoughts on this?

Thanks!

[ERISAnut]

Must allocate the SHNEC on any compensation that satisfies 414(s). Your definition likely will. Because it is a Safe Harbor only plan, it is deem to satisfy top heavy.

Do not see a problem.

[Guest Sieve]

2 issues to consider:

• Does the prototype support such a definition of compensation (in other words, are you able to exclude just that comp., such as on an "other" line)? If it's a standardized prototype (& there are still some of those out there), you may not be able to do this. (As an aside, I don't think for deferral purposes that you must use a 414(s) compensation definition.)
  
• Top heavy contributions must be based on Section 415 compensation, which would include these amounts. If you make any PSP contributions in a year when you have elected to make a matching safe harbor contribution, that might come into play.
  

An aside -- Shouldn't the arrangement you describe be part of a cafeteria plan?: "You can have $1,200 annually, or else designate that the employer use the $$ to pay for health care premiums." Otherwise, those who elect health care will have to include the employer $$ used to pay premiums as income, right?