401(k) Deferral on Net or Gross Compensation?

[Alex Daisy]

A employee makes $1,000 a week, with $100 deducted for medical on a Pretax basis.

The participant has elected that 10% of his pay be deducted for his 401(k) Employee Contribution.

Shoud the employer withold $100 for the EE deferral ($1,000 * 10%) or $90 ($900 * 10%)?

Is the deferral based on the Gross Comp or Net Comp after the $100 Medical deduction?

[QDROphile]

What do the plan terms and the election forms say? This is more a communication issue than a legal issue. The plan can define compensation to include salary reduction amounts for medical benefit. The plan can also define what sources will be charged for a deferral.

[Alex Daisy]

What do the plan terms and the election forms say? This is more a communication issue than a legal issue. The plan can define compensation to include salary reduction amounts for medical benefit. The plan can also define what sources will be charged for a deferral.

The Plan Document says W-2 Compensation should be used.

What if the company was using new comp for 2008 and just now realized it should be gross comp?

Does the IRS have a correction program for this?

[401king]

What do the plan terms and the election forms say? This is more a communication issue than a legal issue. The plan can define compensation to include salary reduction amounts for medical benefit. The plan can also define what sources will be charged for a deferral.

The Plan Document says W-2 Compensation should be used.

What if the company was using new comp for 2008 and just now realized it should be gross comp?

Does the IRS have a correction program for this?

Like QDROphile says, the plan document should state what compensation is eligible. There are multiple compensations listed on W2s, most of our plans use Box 5 "Medicare wages and tips" and is generally the largest comp #. Simply "W2 Comp." is usually not the language from my experience.

If you're just now realizing it that it was supposed to be Gross the whole time, my guess is that it's too late for 2008 as there are no more payrolls that an employee could defer from for 2008. You can work with the employees and see if they'd like the money allocated across 2009. Using the above example, if the employees had 10 weeks of being 'shorted' $10 in deferrals, you could just spread out the $100 over a certain period for 2009; of course this would only apply to 2009 deferrals. In the end, it's my opinion that you would need to work with the employees to see if they'd like to make up the difference.