401k definition of Compensation help needed

[MD-Benefits Guy]

Just started with a new company and in reviewing their 401k plan, I am seeing that it is a safe harbor plan through Fidelity.   Compensation is currently defined as "Code Section 3401(a) wages definition as described in 2.01(k)(1)(B)" with the only exclusion listed as "Reimbursements or other expense allowances, fringe benefits (cash and non-cash),
moving expenses, all deferred compensation, and welfare benefits."  The plan does add back in pre-tax deductions per the summary plan document.

The company recently went public, so I think it now makes sense to exclude "The value of restricted stock or of a qualified or a non-qualified stock option granted to an Employee by the Employer to the extent such value is includable in the Employee's taxable income."  There is no intent or desire to withhold or match on compensation that results from Stock Option exercises/RSUs.

With that said, if we check the box on the adoption agreement to exclude equity transactions as a 3401(a) plan, I think that opens us up to 414(s) testing.  While it is is unlikely that this would result in a failure, it could happen if the Highly Comped Employees hold onto their equity and the Non-Highly Comped Employees are exercising.

If I modify the plan to use the 415(c)(3) definition, I think this by default would exclude equity compensation.  Given that we are only excluding "Reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, all deferred compensation, and welfare benefits" would it make sense to switch the definition to 415?  What are the downsides/risks?

Thank in advance. 

[Peter Gulia]

About your questions relating to the plan’s definition of compensation and how it might affect coverage and nondiscrimination, and other plan provisions, consider this:

The company you describe might have resources to support finding, evaluating, and defending interpretations of the Internal Revenue Code beyond those expressed in the Treasury’s rules, some of which are not legislative rules. Also, some parts or elements in the § 414(s) regulations might be ambiguous and so open to interpretation.

Further, the company might consider how the retirement plan’s provisions relate to securities laws.

[BG5150]

The ERISA Outline book has a compensation grid that shows what's included in the 3 main comp bases:  415, W2, 3401(a)2.

For 3401(a)2, it says "Statutory stock options - grant or exercise; disposition of stock acquired under statutory stock option" is EXCLUDED.

But "Nonstatutory stock option includible in income in year granted" and "Nonstatutory stock option - income includible in year of exercise" are INCLUDED.

[MD-Benefits Guy]

If a plan uses the simplified definition of section 415, how is regular sick pay handled when run through company payroll?  I am seeing some sources that say sick pay is to be excluded, but I am also seeing:

Active Employee Sick Pay: Treas. Reg. § 1.415(c)-2(b)(1) defines those standard includible items as the employee's "wages, salaries, fees for professional services, and other amounts received... for personal services actually rendered in the course of employment". Regular sick pay taken while actively employed is classified as regular wage continuation, making it includible under this core definition of wages and salaries.

[BG5150]

FWIW, here is the comp grid from the EOB. I only changed the header columns.  Everything else was cut and pasted.  Even the hyperlinks came through.  All rights reserved by the copyright holders of the current editions of the ERISA Outline Book.New Comp Grid.xlsx

[BG5150]

Note:  the file title is "New Comp Grid", but it has nothing to do with New Comparability, LOL.  It's just that this one replaced my older version.  The last one I had I lifted from the EOB maybe 15 years ago.

[MD-Benefits Guy]

Thanks BG5150.

I have this chart and that's what is driving the question regarding sick pay.  Seems like Treas. Reg. § 1.415(c)-2(b)(1) may be providing instructions to include based on standard sick pay (paid by the employer) being classified as wages, yet there is a specific category on the chart/comp grid that says to exclude sick pay.