Excess life insurance included in definition of compensation?

[kwalified]

a SH 401 plan's def of comp is W-2 wages including 401(k), 125, 132(f),414(h)pickup) only excludes comp while not a participant in the plan. The plan sponsor has not included excess life insurance amounts in the definition of comp due to the fact that the employee does not receive any cash. However, it is footnoted for inclusion in the employee's taxable income. The auditor thinks that it MAY be subject to deferral and match calculations. If so, I suspect a retroactive amendment could exclude such benefit using SCP? The plan utilizes the basic SH match formula.

[ETA Consulting LLC]

a SH 401 plan's def of comp is W-2 wages including 401(k), 125, 132(f),414(h)pickup) only excludes comp while not a participant in the plan. The plan sponsor has not included excess life insurance amounts in the definition of comp due to the fact that the employee does not receive any cash. However, it is footnoted for inclusion in the employee's taxable income. The auditor thinks that it MAY be subject to deferral and match calculations. If so, I suspect a retroactive amendment could exclude such benefit using SCP? The plan utilizes the basic SH match formula.

On a different point, 414(h) contributions that are 'picked up' by a governmental employer's plan are considered nonelective contributions. Until they are picked up, then they are treated as employee contributions that are not elective deferrals. My question, then, becomes whether the plan's definition is just W-2, or is it adding language? I'm asking, because, my immediate impression is that 414(h) contributions that aren't picked up would be considered pre-tax W-2 (that is basically income for FICA purposes, but it not an elective deferral).

He should be careful in verifying the exact definition of Compensation before attempting to correct.

Good Luck!

[masteff]

My answer would be: The plan has been operated this way since its inception and this is the established administrative interpretation of how imputed income is to be treated.

If you ultimately went the amendment route, I think your basis would be Reg 1.414(s)-1©(3). See page 21 of this document: http://www.irs.gov/pub/irs-tege/epchd304.pdf

However, first, I'd closely inspect your plan language that says what benefits are included in your definition of comp... if it says something like "w-2 only including benefits under these code sections", I'd argue the "only including" (or similar such words) means other excludable benefits are in fact excluded. I'd even argue it if the word "only" (or similar) was missing; it's implied.

At a former employer, we had a wet behind the ears auditor try to tell us that the wrong compensaton had been used to calc some frozen benefits 10 years prior (despite being blessed by a dozen or more actuaries and other auditors). Which is to say, most auditors w/out plan experience have no understanding what their checklist means, which puts it on us to have to educate them.

[KED]

A VCP with a retroactive amendment may be needed based on the IRS position. See Q&A 12:

http://www.americanbar.org/content/dam/aba...uthcheckdam.pdf

I also think that the IRS has covered this issue in its yearly teleconference on EPCRS in the discusson regarding common compensation issues. You can usually find the transcripts from these sessions using Google.

[kwalified]

My answer would be: The plan has been operated this way since its inception and this is the established administrative interpretation of how imputed income is to be treated.

If you ultimately went the amendment route, I think your basis would be Reg 1.414(s)-1©(3). See page 21 of this document: http://www.irs.gov/pub/irs-tege/epchd304.pdf

However, first, I'd closely inspect your plan language that says what benefits are included in your definition of comp... if it says something like "w-2 only including benefits under these code sections", I'd argue the "only including" (or similar such words) means other excludable benefits are in fact excluded. I'd even argue it if the word "only" (or similar) was missing; it's implied.

At a former employer, we had a wet behind the ears auditor try to tell us that the wrong compensaton had been used to calc some frozen benefits 10 years prior (despite being blessed by a dozen or more actuaries and other auditors). Which is to say, most auditors w/out plan experience have no understanding what their checklist means, which puts it on us to have to educate them.

Masteff, if they ultimately elected to amend using 1.414 basis, would they also be required to elect 415 safe harbor comp instead of their current W-2? Incidentally their W-2 wages are wages under Sec. 6041, 6051 and 6052. Wages within the meaning of 3401(a)