Guest Pitch78 Posted June 16, 2014 Posted June 16, 2014 The plan uses W-2 Wages for its definition of compensation. It excludes, however, bonuses. The employer also pays leave cash outs for unused vacation. My inclination is that these are a form of bonus and thus also excluded, but can see the opposite argument. I can find no authority either way.
david rigby Posted June 16, 2014 Posted June 16, 2014 If your question is whether to include them in the plan's definition of comp, it might be helpful to examine your relationship to the plan. If you are the TPA, do you have any authority to make a plan interpretation? Do you know about any potential examples of how this question was addressed in the past (ie, precedent)? In general, before making any plan interpretation, it's a good idea to identify who has the authority to do so. I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
Guest Pitch78 Posted June 16, 2014 Posted June 16, 2014 We have the authority to make the interpretation. The leave cash outs have been excluded in the past, but I am not sure it was a concious decision. The auditors raised the question. I was just wanting to know if there was any definitive authority on the issue from the IRS or otherwise.
ESOP Guy Posted June 16, 2014 Posted June 16, 2014 The plan uses W-2 Wages for its definition of compensation. It excludes, however, bonuses. The employer also pays leave cash outs for unused vacation. My inclination is that these are a form of bonus and thus also excluded, but can see the opposite argument. I can find no authority either way. What is a "leave cash outs for unused vacation"? Is this where a person gets cash for unused vacation days when they terminate or do they get cash at the end of the year if they have unused vacation days or something else? If it is one of the two above I have a hard time seeing how it is a bonus which tends to be paid for above average performance either at the individual level or the company level.
GMK Posted June 16, 2014 Posted June 16, 2014 I agree with ESOP Guy. Generally, vacation pay accrues at a defined rate while you put in time working. It isn't like a bonus that may or may not be paid and that may be based on factors that do not apply to determining vacation pay. Is the amount of the cash out for unused vacation included in taxable wages on the W-2?
Guest Pitch78 Posted June 16, 2014 Posted June 16, 2014 At the end of each year the employee receives payment for unused vacation pay (there are caps and maximums that are not relevant here). The definition of bonus according to the dictionary is "Additional compensation given to an employee above his/her normal wage." Many employers have a use it or lose it policy. And those that actually use their vacation do not receive the payment. In these scenarios, one can certainly argue that it fits the dictionary definition of bonus. Yes, they are included on the W-2.
My 2 cents Posted June 16, 2014 Posted June 16, 2014 Wouldn't the run-of-the-mill bonus always be reported on the W-2? Being reported on the W-2 does not make bonuses count for plan purposes. Are bonuses the only exclusion under the plan? Always check with your actuary first!
Guest Pitch78 Posted June 16, 2014 Posted June 16, 2014 My 2 cents - I agree with you and that is the genesis of my question. Commissions, Fringe Benefits and Tips are also excluded.
GMK Posted June 16, 2014 Posted June 16, 2014 Right. Sorry for the question. My typing got ahead of my brain (easy to do). Only question might be whether vacation pay that is paid when one goes on vacation should also be excluded, the same as vacation pay that is paid at the end of the year if unused. In both cases, it's a benefit the employees accrue while working during the year (additional compensation above the normal wage), all of which they will receive by the end of the year, regardless of whether they take any time off. I couldn't find any relevant pronouncements.
Guest Pitch78 Posted June 16, 2014 Posted June 16, 2014 Thanks. I found none either and was wondering if I missed anything. As for your scenario, both employees were paid for the week. Just one took vacation. So, it is something additional I would think.
jjaatirs Posted June 16, 2014 Posted June 16, 2014 We have had the same question come up and have determined that the payment for unused vacation time is not a bonus--it is regular deferral and match-eligible compensation. A related question (that just came up today, so this thread was conveniently relevant) is whether or not the employer can do something more plan-specific with the unused vacation/sick time payout. Ultimately, the plan sponsor would like to contribute the unused vacation/sick time payout to the plan for the affected participants, rather than paying them in cash. We do not believe that that is directly possible--it cannot be a profit sharing contribution (even if the plan were cross-tested) since the participants essentially have discretion over whether or not such an amount would be contributed (i.e., by not taking all their vacation time), and it wouldn't be a deferral since the participants wouldn't be given the option to receive the payment in cash. Any suggestions on a plan design that would accomplish the employer's goal of getting this money into the plan, rather than paying it directly to the employees? One idea that came up was to give the employees the option of a payout of 50% of their unused vacation/sick time or a contribution of 75% of that amount to the plan as an incentive to get them to put the money in the plan (the percentages here are just for example--other options could work). Two potential problems immediately come to mind: 1) since this money would be deferrals, this solution doesn't help anyone who is already deferring the max, and 2) isn't this just a fancy way of saying that their choice is a 50% payout but, if they put it in the plan, then they get a 50% match on it, in which case it just adds ACP issues? Any thoughts on plan design would be greatly appreciated. Thanks!
Guest Pitch78 Posted June 17, 2014 Posted June 17, 2014 You should check out Rev Rul. 2009-31 What was the basis of your determination that the payment for unused vacation time is not a bonus? Thanks for the reply.
david rigby Posted June 17, 2014 Posted June 17, 2014 http://www.irs.gov/pub/irs-irbs/irb09-39.pdf I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
jjaatirs Posted June 17, 2014 Posted June 17, 2014 Thank you both for your reference to 2009-31; it has been very helpful. Our determination that the payment for unused vacation time is not a bonus is based on the concept that it is compensation that the employee would otherwise receive, regardless of their individual performance or the company's performance. Using the definition that a bonus is payable for performance above expectations or above goals, vacation payouts would not be bonuses. That being said, the definition of a bonus you quoted earlier as simply "Additional compensation given to an employee above his/her normal wage" definitely adds some grey area to the discussion, as vacation payouts would most likely meet that definition. I'll stick with the not-a-bonus definition for now, although I am open to arguments to convince me otherwise. Thanks again for your input.
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