7806akp Posted January 16, 2014 Posted January 16, 2014 An IRS information data request regarding a 401(k) plan asks whether there have been any significant adjustments to compensation or any unreasonable compensation issues with respect to any plan participants. What is the request getting at, and what constitutes a "significant compensation adjustment"?
My 2 cents Posted January 16, 2014 Posted January 16, 2014 What does the IRS mean when they ask about "unreasonable compensation issues"? Aren't the 401(a)(17) limitation and the 401(k) and 415 limitations sufficient to prevent whatever it is they are concerned about? Always check with your actuary first!
ETA Consulting LLC Posted January 16, 2014 Posted January 16, 2014 As a rule, compensation must be reasonable. This is not necessarily a qualified plan rule, but does impact the plan. Let's suppose you have a Doctor whose spouse works for the company. Let's also assume the doctor has historically paid her husband ( ) $15,000 for performing routine duties around the office. Suddenly the doctor establishes a 401(k) plan and begins to pay her husband $150,000 each year to perform those same duties. This compensation, in turn, enables the husband to get his plan contributions higher without giving the bank away to the employees. The IRS "may" consider this to be unreasonable compensation. It's really more of a 'facts and circumstances' determination to see if compensation is being manipulated in an aggressive manner in order to achieve results elsewhere. Good Luck! CPC, QPA, QKA, TGPC, ERPA
masteff Posted January 16, 2014 Posted January 16, 2014 A number of articles on the topic in general... http://www.journalofaccountancy.com/Issues/2013/Sep/20137412.htm http://www.aicpa.org/publications/taxadviser/2013/november/pages/taxtrends_nov2013.aspx http://www.sirote.com/blog/tax-controversy/irs-unreasonable-compensation-challenges-likely-to-increae/ http://www.wolfandco.com/solutions/insights/645-colleges_universities_take_heed_the_irs_and/view Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra
7806akp Posted January 16, 2014 Author Posted January 16, 2014 Thanks for the helpful responses. I am not certain how to decide whether an increase in salary was significant for these purposes. I am fairly certain there have been no unreasonable compensation issues, but the "significant adjustment to compensation" language in the request is so subjective. ERISAtoolkit.com's example clearly involves a significant salary adjustment that could potentially raise unreasonable compensation issues, but what about a $30,000 pay hike for someone who previously made $100,000. Certainly significant to the individual, but I'm not sure if it is for IRS purposes. Should we look to the reason for the adjustment?
masteff Posted January 16, 2014 Posted January 16, 2014 Why not put it back on them to define their terms? Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra
7806akp Posted January 16, 2014 Author Posted January 16, 2014 The deadline is approaching, but we were considering it. I'd like to just be able to answer "no."
austin3515 Posted January 16, 2014 Posted January 16, 2014 Since the question is subjective, that seems like a reasonable answer absent anything glaring. If you gave someone a raise based on merit, that is not an unusual adjustment, IMHO. Austin Powers, CPA, QPA, ERPA
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