How can a person defer on tip wages if base wages are lower than the d

[Guest Marie Velen]

How can a person defer on tip wages if their base wages are lower than the deferral amount? (the document definition of compensation is W-2 wages).

[Alf]

The deferral amount (a percentage of compensation) always has to be less than compensation, doesn't it?

If tips paid directly to the employee are included in compensation, the employee has to pay the deferral amount to the employer for it to go into the plan.

[Richard Anderson]

I don't think that tip money already in the employee's hand can be contributed to a 401(k) plan as a pre-tax deferral.

[Guest Marie Velen]

I agree. That is why I asked the question. I don't believe that money they have received in cash can be deferred. Is the only solution to exclude tips from wages in the document?

[Richard Anderson]

I think that the employee can give the employer tip money to cover other deductions such as federal withholding and SS.

Example: the employee has $500 in non-tip wages this pay period. Federal withholding and SS is $400. The 401(k) deferral is $350, but here is only $100 left after deducting federal and SS withholding. If the 401(k) deferral is deducted first, I think the employee can give the employer the money needed to make the federal and SS withholding deposits. Maybe someone else will confirm if this is OK. In the above example, the deferral could be any amount up to the total non-tip wages for the period.

Be carefull with excluding tips from compensation. If this is a safe harbor 401(k) you won't be able to exclude tips in the definition of comp, unless the definition can pass a non-discrimination test. It is unlikely to pass since the HCEs in the plan probably have no compensation from tips. Also, if the plan is not a safe harbor 401(k), if you exclude tips from the definition of comp for deferral purposes, you still must include tips in the defintion of comp used for ADP/ACP testing. Unless, the non-tip definition is non-discriminatory.

[Jon Chambers]

I had a client that used credit card tips as a source for deferrals. Since the employer collected from the credit card company and then forwarded the tip to the employee, they had the opportunity to withhold elected 401(k) amounts. Seemed to work pretty well.

[Linda]

The same type of issue can come up with a 125 plan. It was included in a published list of questions (from some national group) posed to the IRS awhile back, but I have not seen an IRS response.

[Medusa]

I have a safe harbor (match) 401(k) with this problem. Unfortunately, we can't use the solution proposed by Richard Anderson, since there are federal regulations stating that tax withholdings must be taken before any other deductions. Any other ideas? We expect that most of the individuals compensated by tips will not want deferrals taken from them. One thing we are thinking about is having separate elections for tip income and other income, in the same way that some plans have different elections for regular pay vs. bonuses. There may still be a few individuals who do want to defer from tips that we would have to make accommodation for. Does anyone see a problem with this approach?