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Mr Bagwell

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I hope to have an "easy answers" question, but I don't know....

Plan compensation is defined as W-2.  Exclude fringe benefits.

Auditors are picking apart the profit sharing calculation.

In the employers words "When the Profit Sharing was calculated, the Wage base included pretax deductions, Flex Spending and Health Insurance.  They(auditor)believe this is incorrect and those deductions should not be included for calculating the Profit Sharing".

With w-2 compensation per the document, I would expect the wage base plus pretax deductions, Flex spending to be included.  I have a question whether Health insurance deductions are included in compensation.

1.  I always thought Flex or Section 125 deductions were to be added to W-2 compensation.  Correct?

2.  Are Health Insurance deductions added to W-2 compensation?

Thanks

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The document should be very specific about that - whether pre-tax salary and 125 deferrals are included or not. If you have  an adoption agreement, it might be a check box or you may have to go to the basic document. Even an individually designed plan is supposed to specify that. Very rarely have I seen a plan compensation definition (for allocation purposes) that excludes those items.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Ditto.

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.

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49 minutes ago, Mr Bagwell said:

We are utilizing the Relius documents.  Can anyone site me the reference to include the 125

We use Relius docs (or FIS now I suppose) too, our adoption agreement has the following footnote on compensation, I suspect yours has a similar one

Quote

Plan Sections 1.18(d) and 1.40 provide that the base definition of Compensation includes deferrals that are not included in income due to Code §§401(k), 125, 132(f)(4), 403(b), 402(h)(1)(B)(SEP), 414(h)(2), & 457.

After the question about "Base compensation" in the document Q23 in our PS AA (probably a different number if 401(k) AA) there are some adjustments to base compensation questions. In order to exclude 125 deferrals from the calculation you would need to affirmatively elect it. In our AA that would be Q23(h)(1).

How these are answered should give you the answer to your question of what is and what is not included in the calculation.

Hope this helps point you in the right direction.

 

 

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Thanks for the help!

I'm just talking out loud to try to cement this in the brain....

The AA agreement for the particular employer show that W-2 Wages (plus Elective Deferrals) was chosen as definition of compensation.  The "(plus Elective Deferrals)" was not added by me, it is literally stated that way in the AA agreement.

This is the definition of Elective Deferrals per the Master Plan Document.

Elective Deferrals. Elective Deferrals means a Participant's Pre-Tax Deferrals, Roth Deferrals, Automatic Deferrals and, as the context requires, Catch-Up Deferrals under the Plan, and which the Employer contributes to the Plan at the Participant's election (or automatically) in lieu of cash compensation. As to other plans, as may be relevant to the Plan, Elective Deferrals means amounts excludible from the Employee's gross income under Code §§125, 132(f)(4), 402(e)(3), 402(h)(1)(B), 403(b), 408(p) or 457(b), and includes amounts included in the Employee's gross income under Code §402A, and contributed by the Employer, at the Employee's election, to a cafeteria plan, a qualified transportation fringe benefit plan, a 401(k) plan, a SARSEP, a tax-sheltered annuity, a SIMPLE plan or a Code §457(b) plan.

My emphasis in bold.

Based on the above, I have laid out a clear understanding that an employee's net taxable compensation must be "grossed up" by the pre-tax deferrals and section 125 deferrals to the Plan.

Am I able to conclude the pre-tax health insurance deductions are Elective Deferrals and add them back to net taxable compensation also?  Or are pre-tax insurance deductions just reducing compensation? 

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17 minutes ago, Mr Bagwell said:

Am I able to conclude the pre-tax health insurance deductions are Elective Deferrals and add them back to net taxable compensation also?  Or are pre-tax insurance deductions just reducing compensation? 

Aren't they typically pre-tax because they are part of a 125 plan?

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