Fringe benefit definition

[DLavigne]

A plan we administer for a governmental entity has a definition of compensation that is W-2 wages, including deferrals and "excluding reimbursements or other expense allowances, fringe benefits (cash or non cash), moving expenses, deferred compensation and welfare benefits".

They allow their employees to opt out of the health insurance they offer if the employee is already covered by a spouse's insurance and instead receive $5,000 in lieu of the medical coverage. They run the $5,000 through payroll and it is taxed. They do not want to include it as compensation for the 401(k) plan. According to their definition of plan compensation, can it be excluded? Does it make any difference that it's a governmental entity?

Thanks.

[QDROphile]

A government entity cannot maintain a 401(k) plan unless it is a grandfathered plan.

For federal tax purposes a governmental plan can calculate benefits pretty much however it chooses, so it can exclude whatever compensation it chooses. Rather than worry about interpretations, amend the plan to be clear about what is excluded.

For section 415 compliance, special terms are required for plans that allow cash in lieu of nontaxable benefits only for employees who can show alternate covereage.

A government plan must comply with applicable state law, so the federal tax law is not the only concern.