W-2 Comp w/Sec125

[TPApril]

Can W-2 Compensation ever include Section 125 pre tax medical/cafeteria contributions?

If I understand correctly, Sec125 Comp is exempt from Fed/FICA taxes so is not reported at all in Box 1, 3, 5.

However, a plan doc I'm looking at says in the definition of Total Comp that Total Comp = W-2 Comp, which includes elective deferrals and Sec 125 pretax contributions.

Mid day confusion here.

[CuseFan]

125 contributions are pre-tax and not subject to FICA/Medicare as you note. Typically, a W2 compensation definition will specifically say, somewhere and somehow, that 125 and all sorts of other pre-tax deferrals are included (or excluded). Are you looking at an IDP? If pre-approved, look at the BPD, and you may need to bounce around for definitions within definitions. There are also some plans that intentionally use W2 taxable wages, although not common.

[Artie M]

W-2 Comp  has different meanings depending on whether you are looking at this from a qualified plan perspective or from a payroll perspective.

If looking at it for payroll purposes, what is included as wages for purposes of reporting on a Form W-2 is determined under § 3401 (income tax withholding), i.e., wages, tips and other compensation reported in Box 1, which do not include Section 125 deductions. Because Section 125 plans allow employees to pay for certain benefits—such as health insurance premiums—with pre-tax dollars, these amounts are subtracted from their gross pay before their taxable wages are calculated.  Since these deductions are taken out pre-tax, they are not subject to federal income tax, Social Security tax  or Medicare tax (§§ 3101-3128).  Note that some employers report Section 125 contributions in Box 14.

However for qualified plan purposes the definition of W-2 Wages is defined under § 415.  Under § 415, elective deferrals—including pre-tax contributions to a § 125 plan—are included as compensation.   Though these amounts are excluded from taxable wages reported in Box 1 of Form W-2, they are specifically required to be added back when calculating compensation for § 415 purposes.  When a qualified plan uses a "W-2 wages" for its definition of compensation, it must explicitly include § 125 deferrals to satisfy § 415 requirements. If the plan uses the "415 Safe Harbor" definition directly, these amounts are already included by definition.  The reasoning behind this is because § 415 provides the limits for the total annual additions to a participant's account in a defined contribution plan, and including § 125 deferrals ensures that employees are not penalized for participating in pre-tax benefit programs (it is view as a more accurate reflection of total compensation for qualified plan limit testing).