VS definition of compensation

[WCC]

A volume submitter document defines compensation as W2 wages. The only exclusion listed are fringe benefits. The document does not elaborate or provide any additional details of what a fringe benefit is. IRS Publication 15-B and IRC 132 provide some assistance.

A plan sponsor pays non-statutory stock options during 2020. This is clearly taxable income reportable on Form W2. The taxable compensation was not taken into account for deferrals and/or employer contributions. 

Question: IRS Publication 15-B mentions stock options as a fringe benefit. Usually we specifically exclude stock to avoid any confusion, but with this plan, other circumstances caused the exclusion not to be written in. Can we rely on the 15-B to define non-statutory stock as excluded pay as a fringe benefit? 

If we can't consider it a fringe benefit, we are looking at VCP and asking the IRS to approve a retro active amendment.

Thank you

[Belgarath]

I'm FAR from expert on this, but I'll put in my thoughts, FWIW. First, is it certain that they are taxable? I seem to recall that if the exercise price is equal to (or higher than?) the fair market value at the time the options are granted, then they are not currently taxable.

Assuming that they are in fact currently taxable, then I'd be very inclined to agree with you that they qualify as a fringe benefit.

[WCC]

9 minutes ago, Belgarath said:

First, is it certain that they are taxable?

Yes, in this case we are 100% certain the stock transaction created taxable income. Thank you for your input. 

[CuseFan]

If you have the 401k Answer Book there is a great table showing various compensation definitions (W-2, 3401a, 415) inclusions, exclusions and permitted safe harbor exclusions (i.e., fringe benefits). This may have been pulled from an IRS website, so you might find there as well.

NQ options, Section 83 elections et al are included in W-2 and not noted as among the 414(s) safe harbor exclusions.

A lot of our public clients that have stock based compensation - options and restricted stock - specifically exclude stock-related income from their compensation definitions in their plan documents (many, but not all, are IDP rather than VS) which further leads me to opine such is not a fringe benefit in the statutory sense.

However, if the plan (AA and/or BPD) simply say "fringe benefits" without any further clarification or code reference, then maybe the Plan Administrator makes an interpretation of a vague provision and takes the position that these are fringe benefits and excluded, which may be defensible if consistently applied and primarily (if not exclusively) affecting HCEs. Then for clarity, add specifically to the next restatement.

[Luke Bailey]

9 hours ago, CuseFan said:

However, if the plan (AA and/or BPD) simply say "fringe benefits" without any further clarification or code reference, then maybe the Plan Administrator makes an interpretation of a vague provision and takes the position that these are fringe benefits and excluded, which may be defensible if consistently applied and primarily (if not exclusively) affecting HCEs. Then for clarity, add specifically to the next restatement.

I agree with CuseFan. I actually had this situation years ago. The arguable "fringe benefit" was even less likely to be what most folks would consider a "fringe benefit" than stock option exercise income (I assume what you had, WCC, was an exercise of nonqualified stock options), but we wrote the employer an opinion letter that the auditor (CPA for 5500, not IRS) accepted. (The auditor had caught the apparent discrepancy between W-2 income and comp for plan purposes as calculated by employer.) There is no official federal income tax definition of "fringe benefit," which helps. There is a really strong 7th Cir. case, Judge Posner opinion, if I remember correctly, maybe from 1990's involving an oil company DB plan's definition of compensation, that basically said if (a) the employer's interpretation is not hopelessly in conflict with the plan document, (b) it is not an irrational interpretation of the term, and (c) the employer consistently applied its interpretation, at all times, then the employer/plan administrator had the right to interpret the document as it thought appropriate. For the opinion I pretty easily found language in the plan document saying that the plan administrator's interpretations were final, binding, etc. You might want to look for the case.

[WCC]

Thank you all. I really appreciate you sharing your expertise.