415 Definition of Compensation

[ERISA25]

Section 415 regulations require a plan to include as compensation any payments made by the later of 2 ½ months after severance from employment or the end of the limitation year that includes the date of severance from employment if such payment would have been paid to the employee prior to a severance from employment if the employee had continued employment with the employer and are regular compensation for services during the employee’s regular working hours, compensation for services outside the employee’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments.

If our plan excludes bonuses, commissions, shift premiums, allowances, fringe benefits and all other types of remuneration from regular compensation, do we have to include it if it fits within the 415 language above? I’m having a difficult time reconciling the two.

[Blinky the 3-eyed Fish]

415 compensation is only mandated for certain purposes. Compensation used for plan purposes does not have to be 415 compensation. There is your distinction. Be careful though; the standard 415 amendment language I have seen will default to linking the same adjustments to the 415 definition of compensation to the plan definition of compensation. So you might have defaulted your way to some plan compensation adjustments.

On a different note, if you have a compensation definition as you described, that is not a safe harbor definition and you must run the compensation ratio test or a general test using a 414(s) definition.

[Guest Sieve]

To follow-up on Blinky's comment . . .

With Corbel, for example--prototype & IDP (volume submitter)--after you have defaulted into a 415 definition of compensation (if that's what you wish), that default definition carries over to all other definitions of compensation UNLESS you elect, for specific purposes, to change from the default definition to something else (such as PS allocation, or match allocation, etc.). So, at least Corbel gives you the option to default for Section 415 but not to default for other uses of compensation.

[PLAN MAN]

If the plan's definition of compensation otherwise satisfies 414(s), does electing to exclude all post-severance compensation for salary deferrals, match and/or profit sharing contribution purposes take the definition out of safe harbor and require nondiscrimination testing of compensation?

[Guest Sieve]

I'd say that 414(s) non-discrimination testing is not necessary since, for 401(a)(4) purposes and ADP purposes (both of which use the 414(s) definition of compensation), compensation can exclude amounts paid while the individual is not a participant/eligible employee in the plan. (Treas. Reg. Section 1.401(a)(4)-12, plan year compensation (4), and 1.401(k)-6, compensation.) And compensation paid after termination of employment is exactly that (just as is compensation before participant status is attained).