Compensation Limit under 415

[ac]

We work on a plan that covers two 50% owners of a corporation, no other employees. One owner has not paid himself W-2 compensation in the last two years.

In calculating the 415 compensation limit, should he receive credit for these two years of service in which he was not paid. He worked, but chose not to take compensation.

In other words:

415 compensation limit = 10% x 3-year Average Comp x years of service

Should years of service include the two years in which he did not receive compensation?

Thanks!

[Hojo]

How does the plan define years of service? Is it based on hours, elapsed time?

[Andy the Actuary]

Perhaps, here's where the words in the DOL definition of hour of service come in: "each hour for which an employee is paid, or entitled to payment, for the performance of duties . . .

[ac]

The definition of years of service is based on a 1000 hour rule, no equivalency. Also, the definition of hours of service uses the standard DOL language referred to in Andy's reply.

In my opinion, the owner was entitled to compensation for the hours he worked and he did work. Just curious if anyone has had an issue like this with the IRS?

[Lou S.]

Informally from the podium of several conferences I have heard IRS representitives expess the opinion that no compensation = no service. I'm not saying I agree with that opinion but I have heard it on more than one occasion.

[K2retire]

Informally from the podium of several conferences I have heard IRS representitives expess the opinion that no compensation = no service. I'm not saying I agree with that opinion but I have heard it on more than one occasion.

That's because IRS employees cannot fathom a situation where someone would be willing to work without being paid! It is foreign to their world view.

[Andy the Actuary]

It's surprising that the IRS wouldn't impute income. Presumably, the nonrecipient is receiving dividends and not just working for le joi de vivre?

[Lou S.]

If they impute income, do they get to impute taxes too?

[JAY21]

To me they are separate issues. In the old actuarial audit cases of the late 1980s the IRS tried to take a similar position with spouses of owners who did not have compensation but had the 10k de minimus benefit under IRC 415. I believe they lost the issue (no comp required) but you had to be able to show other supportive facts that they worked the hours. That's probably not too hard to do if others can confirm the boss shows up every day to work. I think "compensation" is probably the best supportive fact, but not the only one.