Back pay

[Guest ppapdx]

An employee is awarded back pay on 9/1/2013 in the amount of $2,000 - and it relates to a period in the 2011 plan/calendar year.

First - does anyone know if this amount will be reported on the 2013 W2, or will an amended 2011 W2 be required?

As for deferring on this pay - do you go by the employee's current election on file? Or do you go by the election that was in place for the period that the back pay relates?

[PensionPro]

For income tax purposes, the IRS treats all back pay as wages in the year paid., i.e. 2013 W-2. Statutory back pay is included in section 415 compensation for the limitation year to which the back pay relates. See Treas. Reg. §1.415©-2(g)(8).

[Guest ppapdx]

Thanks PPro. Any idea how an employee defers on this pay? Do you use the election on file at the time the back pay relates to? Or do you use the current election on file? I don't think there is any guidance on this that I'm familiar with....

[BG5150]

Do you have to redo ADP tests?

[PensionPro]

I am not aware of specific guidance. You may want to check the order/agreement and the plan document for guidance. I would treat this as 2011 plan compensation and make contributions as if the compensation was received in 2011 - deferrals, match, ps, gateway, etc. I would exclude this from 2013 plan compensation. It should not necessitate retesting. There may be other opinions out there as always. Or maybe someone is aware of in/formal guidance.

[ERISA1]

I think we would all agree that if deferrals are withheld from back pay they be included in ADP/ACP tests.

The only question is whether they should be tested as deferred in the year of deposit or the year to which the back pay relates. Given that the 415 regs require the comp to be counted "in the limitation year with respect to which the payments relate", it seems to me the deferrals must be included in the ADP/ACP tests for those years, and therefore, the tests must be re-run.

Back pay will also would impact HCE determinations. Given that the compensation test is based on 415 compensation, it is possible that some employees will become HCEs in the year following the one with respect to which the award is made.

[Belgarath]

Wow, interesting question. FWIW, I'd include it as compensation for 2013, use the 2013 deferral election, and ADP test it for 2013. (As an aside, many docs define the compensation for a plan year as W-2 for the determination year - the determination year being the plan year in the absence of any other election).

While I recognize the 415 issues that must be considered, I think the document language (if defined as above) provides sufficient justification not to re-do history going back possibly several years. It's also more "reasonable" as far as I'm concerned. The potential problems and expense involved in retesting, possibly failing, top heavy, HC determinations, etc - you name it, are so ridiculous that I'd absolutely avoid it if there's any reasonably justifiable alternative. In fact, even if the document language is silent, which seems unlikely to me, I think I'd still do it based on 2013.

That's my story and I'm sticking to it. Until I change my so-called mind...

P.S. - I sincerely hope I never have to deal with this in a real life situation!

[PensionPro]

Speaking of real life would your answer change if the employee terminated in the meantime say in 2012?

[Belgarath]

GROAN!!! Real life is a PIA.

I'm not certain without looking at all the facts and circumstances of a given situation - since paid in September, it is past the 2-1/2 months to be considered post-severance compensation, so I'd probably leave 2012 alone, and no deferrals or PS on it for 2013.

This certainly isn't etched in stone. I might change my opinion in a given situation - as I said, hopefully it will never rear its ugly head.

[Flyboyjohn]

We have a back pay situation extending over 4 years involving a substantial number of employees and substantial dollars.

Does anyone have experience or thoughts to add to the comments in this thread?