The definition of plan compensation.

[Lori H]

Forgive me if this has been a topic before.

If the adoption agreement election is "Wages, tips and other compensation on Form W-2" and Box 1 on the W-2 is just that "Wages, tips and other compensation", then if that box excludes deferrals, should you not always elect to "include salary deferrals" as an adjustment to compensation?

Example, if you earn $10,000 and elect to defer 10%, your Box 1 would be $9000. However, for plan purposes you would actually defer more than 10%.

[My 2 cents]

The election form and the plan definition of compensation should coordinate. I would imagine that a good 401(k) would define earnings in terms of taxable compensation plus salary deferrals (or prior to salary deferrals).

The intention in your example surely is that the person, who would, but for the salary deferrals, receive $10,000 and who elects to defer 10% would in fact wind up deferring $1,000, right? Make the plan document, the intention and actual administration all match up.

Are there 401(k) plans out there (I do not work on 401(k) plans) that do NOT include salary deferrals in the definition of earnings? At best, if deferrals are not counted in the definition of compensation, don't you wind up with some kind of recursive mess? Let's see: Pay before deferrals is $10,000, elects to defer 10%. That would be $1,000, but then earnings =$9,000, so 10% = $900, but then pay before deferrals is $9,100 so deferral is $910, but wait, then pay = $9,090 and deferral = aw forget it. Just make sure that the definition of pay includes deferrals.

[John Feldt ERPA CPC QPA]

The PPD documents I've seen, for example, define W-2 as already including the deferrals unless a separate election is made to have them excluded.

As an opposite example, the Corbel documents I've seen have deferrals excluded by default from the W-2 definition unless a separate election is made to include them.

Both documents of course are produced by the same company.

Ah, and for purposes of deferrals, the basic document for PPD allows a lot of discretion for the employer to make a policy regarding what counts as compensation for deferral purposes.

[Bird]

"W-2 compensation" doesn't necessarily mean "Box 1 of W-2." Our (Ft. Wm) document defines it as:

W-2. Wages within the meaning of Code section 3401(a) and all other payments of compensation paid to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code sections 6041(d), 6051(a)(3), and 6052.

There is a subsequent question asking if deferrals are included or not.

Of course if your definition is "Wages, tips and other compensation on Form W-2"...well, I don't know! I would think there would be an option to include or exclude deferrals but as you note, it seems contrary to the definition itself if you include them. Funny how even the simplest things are complicated...