W2 compensation

[Guest ppapdx]

Newbie here. If an employer's 401(k) plan defines compensation as W2, then (correct me if I'm wrong) - but there could be compensation amounts that will not be on an employee's paystub - but could be reported on the W2. In other words, the amount reflected on an employee's last payroll statement of the year may not necessarily equal the W2 plan compensation amount.

I believe the primary difference is the taxable amount of items not paid in cash. Does anyone have any examples?

So if John is paid $5,000 monthly (gross) - his last payroll statement will show $60,000. If he deducts 3% of of pay to his 401(k), then each paycheck will see $150 contributed as an elective deferral, for a year-end total of $1,800. (3% of $60,000 is $1,800).

But what if his W2 compensation is $66,000? I believe his deferrals should be $1,980 for the year. How does an employer typically account for this in their payroll?

[QDROphile]

Your observation is perceptive. The solution for many plans is to overlook or disregard the uncommon compensation and rely (usually unconsciously) on lack of enforcement.

Another solution is to have an election that applies only to regular cash compensation, such as salary and wages, perhaps with special elections for bonuses. The plan definition of compensation remains the same for technical purposes. The solution avoids involves the related communication problem with employees. In your example, did the employee really want the deferral of $1,980 rather than $1,800, especially if if meant that there would be extraordinary reduction of take home pay to cover the extra? You will have to be sure that plan terms do not interfere with the administrative solution.

[Guest ppapdx]

Thanks for the reply. My example was hypothetical - so we'll say that John doesn't really care how much is deducted - as long as it's right. I'm also going on the basis that the plan defines W2 as compensation eligible for deferrals (hence, no exclusions).

I see your point about an election agreeement that may specify that it only applies to regular cash - but I'm assuming that the employer wants to deduct from the correct compensation amount as outlined in the plan (W2).

I guess my question revolves around how an employer (or their payroll company) applies a deduction to pay types that are reported on the W2, but not on a paycheck. So in the example above, is it common to deduct the extra $180 on the last paycheck of the year?

I believe some TPA's would recommend using 3401(a) as the definition of compensation - just for this very reason.

[david rigby]

Often, the definition is closer to W-2 plus (both 401k and 125) deferrals.

May also exclude "fringe benefit costs" normally included in W-2, such as imputed value of life insurance.