Compensation

[thepensionmaven]

We administer a new 401k plan that defines compensation as W2 plus 401k plus 125.  Client pays 75% of employees individual health insurance premiums, employee pays 25% which idps deducted from pay.

Client does not sponsor a cafeteria plan.

Since this is pre-tax as is the 401k contribution, is the employee premium included in the calculation for the safe harbor non-elective contribution?

[GMK]

Without a cafeteria plan, the employee pays the premium (25% of the total premium) with after tax money, right?  That means that the payment is part of the taxable total comp on the W2, no?

In other words, if you had a 125 plan, you would subtract the 25% amount from taxable comp, but there's no 125, so you haven't subtracted it ... or have you?

Maybe I don't understand the situation ...

[QDROphile]

Clarification about the health premium is required because the 25 percent could be a mandatory payment that is a compensation reduction rather than a payroll deduction.  It is more likely an after-tax deduction as GMK describes because health coverage choices are usually offered under a section 125 arrangement.

The employer may also be mistaken about the appropriate tax treatment of the deduction, so the arrangement may have to be evaluated independently based on the facts rather than from the employer's conclusory statement. 

[thepensionmaven]

I agree, but maybe I'm not explaining the situation fully.

Client tells me they do not have a 125 cafeteria plan; but they pay 75% of the employees health insurance, participant pays the 25% via payroll deduction.

Would the employee deduction from pay for the health insurance be added to Box 1 of W-2 just like the 401(k) contribution is, for the definition of compensation for plan purposes?

Plan defines compensation to include 401(k) as well as 125.

I think (and could be incorrect) that if the client does not have a 125 plan (plan document), the amount the employee pays is not add back in??

[GMK]

If the 25% is paid with after tax money, you do not add it back into the W-2 taxable amount, because it wasn't subtracted from total comp in the first place.

Take total comp and subtract 401(k). Does this leave the W-2 taxable amount?

[hr for me]

One thing to check is if they have a POP (premium only plan - a simplified 125 plan that is very common with small businesses ) that allows for those health insurance premiums to be pre-tax without having a full 125 plan.  That's about the only way I can think of outside of full 125 that would allow the premiums to be pre-tax deductions.  It is possible they aren't calling it a Section 125 plan or say they are sponsoring a "125 plan" because they don't have other choices such as FSA attached, but it is still a 125.

[ESOP Guy]

Do the math like GMK says.  It is one of our standard census checks we do with all our client's census data.  We ask them for gross compensation, 401(K), Roth 401(k), 125 and so forth and we ask them for W-2 taxable wages.  Our system will take gross and subtract the pre-tax amounts and see if it equals what the client is reporting for W-2 taxable.  If not we stop and talk it out with the client if so we move on to our other census checks/scrubs to see if we think we have good data. 

 

This will answer your question it would seem like.  You will know you have a good understanding of gross and W-2 taxable. 

If the client can't get you gross wages or W-2 taxable I would stop and have a talk with them.  There accounting/payroll system has to have both of those numbers some place.  Their system has to have the various deductions since they can produce check on a regular basis. 

[QDROphile]

The premium payment can reduce taxable income outside of a section 125 arrangement, but such arrangements are unusual. It the employer has an unusual arrangement, the employer should be able to tell you, but employers are often clueless, especially a few years after adoption.  GMK's suggestion to check the W-2 presentation probably would resolve the questions.