Plan Entry Comp

[DocumentDiva]

I have a plan that deposits their 3% SHNE per payroll.  Due to prior year calculation errors and numerous turnover at the plan sponsor they have asked me to check their deposits quarterly for accuracy. 

While reviewing the 2nd quarter deposits there was a participant that entered the plan on 4/1/2019.  I did the SHNE calc based on the comp provided from 4/1 - 6/30.  When I advised the client that  there was a true-up due I was told that the calc was incorrect because the comp that was provided to me included pay that was earned from 3/17 - 3/30, but paid on 4/5/2019 and should not be included because it was earned before they were eligible on 4/1 even though it was paid on the 4/5 paycheck after the participant was eligible.  I've never ran into this before because we have always asked plan sponsor to provide us comp from date of participations since we are a balance forward TPA and not daily val.  The client contact wants something in writing from the document that tells her specifically what compensation to use.  If I read the document under Adjustments to compensation is says that "compensation paid while not a participant in the component of the plan for which compensation is being used will be excluded".  This reads to me that it should be calculated on compensation "paid" after the participants entry date and not "earned".   Coming from a daily val TPA firm previously we did everything based on paycheck date so now I'm questioning what the right answer is.  Has anyone else ran into this and can provide any advice or site from the Regs to help me appease the client?

Any thoughts would be appreciated.  Thank you!

[justanotheradmin]

What is the plan's definition of compensation in the document? If compensation is on a W-2 basis, it should be easy to explain since compensation for W-2 purposes is based on when PAID, not when earned. 
So partial year compensation would similarly be based on the period in which it was paid, not when the hours were actually worked. 

[DocumentDiva]

Great point.  The plan's definition of compensation is 415 safe harbor comp

[ESOP Guy]

To me you had it in your original comment.  It says comp paid while not a participant.   Your description of the facts says it was paid while a participant.   It doesn't say earned but paid.  

[rr_sphr]

agree with the others that all plans i've ever seen or worked on use pay date, not earned dates. And I'm old enough to have worked on both balance forward and dailies!

[imchipbrown]

Similar (but actual) question.  Client has three month wait for 3% SHNE.  Employee hired 2/8/19.  Three months is 5/8/19.  Entry is 1st of month following, or 6/1/19.  Employee quits 6/10/19.

Employer pays on Fridays.  He would pay 6/7/19 and not again until 6/14/19.  So "paid" is 7 days or 10 days?  Plan's definition of Compensation is W-2.  I don't have the Paychex, Inc. Basic Plan Document #03 for a more in-depth reading of Compensation "paid / earned".

[Tom Poje]

I would argue this is the issue of payroll periods are paid after the fact, and the logic of 'the first few weeks" rule applies. 

Instead of the dates posted above change them to the end of the year and assume the last paycheck was in the following year. or change the dates below to "ee quit in March and received a last pay check in April"

2009 ASPPA Conference, Q and A 48...

1 of 6. An employee terminates in December 2009. A final payment of salary due for services is made in January 2010. The plan does not use the “first few weeks” rule in the IRC §415 regulations to treat the January payment as made in 2009. The plan year is the calendar year. The plan includes a section 401(k) arrangement that defines compensation eligible for deferral to be section 415 compensation. Is the individual included in the 2010 ADP test, even though he terminated employment in the 2009 plan year Yes. Since he could defer out of the compensation paid in January 2010, he is an eligible employee under the 401(k) arrangement for the 2010 plan year. The 401(k) regulations do not treat active and former employees differently

3 of 6. Suppose instead that the plan is a safe harbor plan that provides the safe harbor nonelective contribution. Is this individual entitled to that contribution?

Yes. Since, as discussed in Q-1, the individual is treated as an eligible employee for 2010, he is entitled to a safe harbor contribution. However, if this individual is an HCE, and the plan does not provide the safe harbor contribution to HCEs, then no safe harbor contribution is made on his behalf. The same answer would apply to a safe harbor match if the individual made elective deferrals out of the 2010 compensation

 

[RatherBeGolfing]

13 hours ago, imchipbrown said:

I don't have the Paychex, Inc. Basic Plan Document #03 for a more in-depth reading of Compensation "paid / earned".

I will bet anything that the paychex document does not distinguish between earned/paid.  I don't think paid  or earned matters for yor purposes though.  He earned 6/1-6/10, he will get paid on 6/7 and 6/14.  The last paycheck hits after he terminates its still payed and earned while a participant (just not active anymore)

 

20 minutes ago, Tom Poje said:

Instead of the dates posted above change them to the end of the year and assume the last paycheck was in the following year. or change the dates below to "ee quit in March and received a last pay check in April"

I have seen many variations on this question but it usually questions whether its eligible comp for the next year even though there are no hours of service.  Its earned in 2018, paid in 2019 (on the 2019 w-2), but since the employee terminated in 2018 he/she will have 0 hours of service for 2019.  Even with that variation the answer is always yes it counts.