compensation conundrum

[K2retire]

We are TPA for a client that has a number of commission only employees. They allow deferrals from all W-2 compensation, but exclude commissions from the match calculation due to budget constraints.

Apparently various state wage and hour laws require them to pay a minimum base hourly wage that is later offset by commissions earned.

Should that nominal base hourly wage be included in the match calculation even though it is deducted from the commissions paid?

[Tom Poje]

to clear things in my mind (or maybe thinking out loud), you could have a person who makes commissions only so can defer for match he would get 'something' because of the base minimum that is offset by the commissions.

so if you ran a comp test on the match portion you could have someone receiving a contribution but no comp if you exclude all commissions?

[K2retire]

That's what we're trying to figure out. Here's an example.

A newly hired person is paid $2,000 in what the client calls "recoverable wages" before earning any commissions. Once the commissions start coming in, they earn $100,000 in commissions, but are only paid $98,000 additional. Their W-2 wages are $100,000. The plan excludes commissions for match calculation. They are asking if this person has no match comp, or $2,000, or the base hourly rate times the full year's hours (Since the wage and hours laws would require some minimum comp all year.)

[Belgarath]

I can only give you my gut feeling: if the plan excludes commissions from the definition of compensation for match purposes, and the "recoverable wage" of $2,000 is later offset by commissions, then it wouldn't count for plan purposes. Only way it would count is if there weren't enough commissions to offset it.

I've not (knowingly, at least) encountered a state minimum wage law that says a commissioned salesperson must receive at least minimum wage. But let's suppose that under that regime, a salesperson works 2000 hours, yet only generates $3,000 in commissions. Minimum wage is - whatever - say $10.00 per hour. So the employer must pay the salesperson $17,000 in additional minimum wage. In that case, I'd say there is plan compensation of $17,000 for match purposes.

[ESOP Guy]

I know this doesn't help you right now but this strikes me as a good future amendment to clear things up going forward.

I can't cite anything but my first reaction is the same as Belgarath.

[hr for me]

It might partially depend on whether a minimum wage/OT exemption is being used and if the person is truly an "outside salesman" and gets that exemption or retail sales using the FLSA section 7(I) exemption. Otherwise Min wage/OT are required (but can be offset by commission earned). So yes, there are some states that require it if the person doesn't fall under the exemption. But that is more of a payroll issue.

I honestly think the definition is wonky if you have commissioned employees where commission is a large part of their pay....and they can defer but not get match? Might think of fixing the situation by lowering their commission rates to net the match in their compensation budgeting -- might be easier than trying to figure it out through the 401k plan.

[K2retire]

I honestly think the definition is wonky if you have commissioned employees where commission is a large part of their pay....and they can defer but not get match? Might think of fixing the situation by lowering their commission rates to net the match in their compensation budgeting -- might be easier than trying to figure it out through the 401k plan.

I agree, but so far I have not had any luck persuading the client!

They have other wonky rules. Because they are so concerned about their budget, all match is capped at $2,500 regardless of compensation. They fail testing, but won't implement auto enrollment or safe harbor because they don't think they can afford it. And this is not a small struggling office -- it's a bank with branches in 5 states and almost 1300 employees.