Compensation for Deferrals include GTL?

[Kac1214]

I had an auditor call and ask if taxable income for group term life benefits is included in the deferral calculation and if not, how is it excluded in the document? He was at a recent seminar and the presenter scared everyone with an example where someone was wronged by this and missed out on a very small match ($2.00ish) and it cost a fortune to resolve.

For this plan, we use 3401 compensation, no exclusions. We do include the fringe amount for the life insurance in the PS allocation. The client does not include in the deferral calculation. Their logic is that GTL income is not compensation paid to the participant, it is just taxed and not compensation included in the deferral calculation. For example, one person makes $50,000 and $30 in GTL annually. 10% deferral is $5000 not $5003.00. Does this make sense and does 3401 without exclusions support this?

Thanks for any input 

[CuseFan]

GTL is excluded from 3401 compensation but included in W-2 compensation definitions unless specifically or categorically (with other fringes) excluded.

[Kac1214]

Great, thank you

[BG5150]

When ever I see 'GTL' I  think about 'Jersey Shore' the MTV show.

[Bri]

Personally, I think of GTR.  When the heart rules the mind....

[david rigby]

23 hours ago, Kac1214 said:

For this plan, we use 3401 compensation, no exclusions. We do include the fringe amount for the life insurance in the PS allocation. The client does not include in the deferral calculation. Their logic is that GTL income is not compensation paid to the participant, it is just taxed and not compensation included in the deferral calculation.

Well, what you "use" might not be what the plan says.  As often, the first answer to your question is "what does the plan say?"

[PensionPro]

On 6/22/2018 at 9:44 AM, Kac1214 said:

We do include the fringe amount for the life insurance in the PS allocation. The client does not include in the deferral calculation ... Does this make sense and does 3401 without exclusions support this?

This part does not make sense to me unless the plan uses different definitions of compensation for deferral and PS purposes.

[austin3515]

I didn't read everything written but Relius' Corbel VS prototype formatted document includes a blanket exclusion for non-cash taxable fringe.  I think it's worded more like "if the employer elects" as opposed to a hard and fast rule.  It's in Section 12 if you need it.

[Doc Ument]

I agree with what's already been stated: (1) the document controls, (2) the document most likely states that 3401(a) compensation is defined (with some tweaks not relevant to this issue) as income subject to federal income tax withholding, and thus would exclude the value of GTL (unless you make an adjustment in the plan's definition of compensation), and (3) that there needs to be authority in the plan to have a different definition of contribution for deferral purposes than for PS purposes (when that is to be the case), and (4) some plans allow the exclusion of "fringe" (non-cash) benefits (for deferral purposes only) via the boilerplate provisions.

 

Even if a plan allows you to operationally exclude non-cash ("fringe") benefits solely for deferral purposes, it would not appear to help you, since you have selected 3401(a) compensation rather than W-2 compensation as the starting point in defining compensation for deferral purposes.  I suspect that your document defines 3401(a) compensation using language substantially similar to IRS model language for that purpose (which follows the 415 regulation's definition of compensation), and if so, then the value of the GTL <must> be excluded for all contribution purposes unless you find a way to add it to 3401(a) compensation for PS purposes.

 

It sounds to me like this particular plan would ideally use W-2 compensation as the starting point for compensation for both deferrals and PS purposes, in which case the PS will be correctly calculated with GTL included, and you presumably have a document under which you can either explicitly adjust compensation on the AA for deferral purposes (to exclude GTL) or you can find language in the basic plan document (or AA) that allows you to exclude GTL operationally.  This assumes you do not have a document that allows you to start with W-2 for some sources and 3401(a) for others, which would be ideal (perhaps) for this employer.

 

Assuming that you conclude that you have a problem, the problem for you wouldn't be that the deferrals would be a little "off" (resulting in a matching contribution that was a little "off"), it would be that your PS contributions would be a little "off" from what the plan language (presumably) prescribes.  Even if you can pass the general nondiscrimination test (on a contributions basis) for the resulting PS allocations, if the employer is not following the terms of the document, it potentially has an expensive problem for that reason alone.

[PensionPro]

19 hours ago, austin3515 said:

I didn't read everything written but Relius' Corbel VS prototype formatted document includes a blanket exclusion for non-cash taxable fringe.  I think it's worded more like "if the employer elects" as opposed to a hard and fast rule.  It's in Section 12 if you need it.

Thanks for the information!