Compensation Paid In Advance

I have a situation where a division of my company is proposing to pay an employee in 2022 for services rendered for the period 9/2022 through 6/2023.  Besides the obvious downsides involving how advance pay is reflected on the company's books, the risk if employment terminates before 6/2023, and possible problems with IRS caps on compensation and contributions, I recall there is some specific reason why qualified plans cannot consider accelerated compensation when determining compensation.  (We have a money purchase and a 401(k) plan.)  I have been searching but have not found anything but I recall this coming up with clients in my previous job.  Can anyone point me to a cite?  I'd be grateful!

Do we assume both plans’ benefit-accrual year, limitation year, nondiscrimination year, and other measurement periods all are calendar years?

What is the employer’s or service recipient’s tax-accounting year?

Are you confident the worker is an employee? Might she be a shareholder, partner, or member who is a deemed employee? Might she be a statutory employee?

Do any circumstances suggest the payment or a portion of it is a disguised dividend?

Is the pay unconditional? Does the worker keep the whole pay even if she does not perform services for the whole of the anticipated period?

Perhaps what leads you to think twice is this phrase in a rule about what counts in § 415 compensation: “amounts received . . . for personal services actually rendered in the course of employment[.]” 26 C.F.R. § 1.415(c)-2(b)(1) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(c)-2#p-1.415(c)-2(b)(1).

But might services rendered include availability? If the payee does not perform her services through June 2023, does she have an obligation to return some amount to the payer? If there is no such obligation, was the amount paid for services, including availability?

I don’t know an answer to that question; but it seems likely at least one BenefitsLink maven knows.

The benefit-accrual year, limitation year, nondiscrimination year, plan year all are calendar years.  The employer's fiscal year ends June 30 so on the employer's books the comp would be the same either way, but for Plan purposes it would be off.  

The employee is not highly-compensated, key, a shareholder, etc. but is a very high-status person in an employee classification that is accorded a lot of deference, and the employer often finds it difficult to say "no".  Hence I am spending much more time on this than necessary.

I am still trying to find the answer to the question of what happens if for some reason he is unable to perform services for the entire 12 months after being paid in advance.

Thank you for the cite--I had a vague memory of something in the regs that would argue against doing this and I think this cite is it.

On 7/16/2022 at 9:15 AM, Peter Gulia said:

Perhaps what leads you to think twice is this phrase in a rule about what counts in § 415 compensation: “amounts received . . . for personal services actually rendered in the course of employment[.]” 26 C.F.R. § 1.415(c)-2(b)(1) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(c)-2#p-1.415(c)-2(b)(1).

Most plans are going to use the W-2 or withholding safe harbor. I would say if it's on the employee's W-2 for 2022 and if it is currently subject to FICA and FITW, you should count it as comp.