Back Pay

Curious how folks are handling the situation of a participant who receives back pay for prior years.  Are you making corrective contributions for missed deferral opportunities and any employer contributions with respect to the back pay?

Treas. Reg. § 1.415(c)-2(g)(8) provides that it is generally taken into account for the limitation year to which it relates.  So for 415 (and 414(s) testing comp) purposes, it would be included for the prior year(s) to which it relates.  However, back pay is reported on Form W-2 for the year of receipt.  So, if a plan uses a W-2 definition of comp, it seems that the back pay would be picked up in the year of payment, even if the individual doesn’t have 415/414(s) comp to support it.  It seems odd to me that the timing would differ, but I suppose not everything in the wonderful world of ERISA makes sense.

BTG, I think this depends on what the backpay settlement or award says. If it says that the employee or employee class is to receive the employer contributions or accrued plan benefit that they would have received, if they had been paid the right amount in earlier years, then you treat it as paid in the prior years and this would override a literal application of the plan's W-2 definition of compensation. If the settlement agreement or award is silent on this and just requires a cash payment of an amount to the plaintiff or plaintiff class, then I think you should probably just treat it as regular current W-2 comp.