W-2 Comp & Health Insurance Wage Expense

ahhhh..the ever complex compensation determination.

Plan Comp is W-2 Comp.

W-2 Pay includes the following:

Box 1:

• Regular Pay of $70,000 (excludes 401(k)
• Health Insurance Expense of $20,000
• Total Box 1 = $90,000

Box 3, 5:

• Regular Pay of $70,000
• 401(k) of $30,000
• Total Box 3,5 = $100,000

I believe then for Plan purposes, pay is $100,000, but was hoping to confirm that the $20,000 is not added back into that.

even though it's also been reported on the W-2?  (I'm voting for 120K)

Compensation is among the most vexing topics for us all.  Part of the challenge starts with asking about "W-2 Comp".  Some adoption agreements use this term to refer to all income reportable on Form W-2 which can include items that are reportable under Code sections 6041(d), 6051(a)(3), and 6052. Other adoption agreements call this "Wages, tips and other compensation on Form W-2" or just "6041 and 6051 Compensation".

The another common term is "Section 3401(a) wages" or just "3401(a) Wages" which basically is wages that are paid to the employee in that paycheck.

Which brings us to the question of what does "Health Insurance Expense of $20,000" refer to?  This is a term that is a label used by this particular payroll for a payment made by the employer that is related to health insurance for the employee.

Given that the $20,000 is not included in Box 3 and Box 5 (and is such a large, round number), it was not subject to payroll taxes, and likely would not be included as 3401(a) compensation but would be included in 6041/6051 compensation.

It is worth asking the client or payroll provider for a description of that payroll item, reviewing the description against the plan definition of compensation, and confirming with the client and payroll how the amount should or should not used in administering the plan.

It is this type of situation the plan may, for example, include the amount in the definition of compensation for purposes of making elective deferrals, and everyone now finds out that payroll has never done so. 

May you have the good fortune that, even though no one may have asked the question before, everything has been done according to the plan document.

Thanks, some random responses:

The amounts are for example purposes only.

Payroll has no idea so has turned to us 'experts' who are hardly such experts.....

With these amounts, it doesn't mater for 401(k), but it could matter for PS, specifically the 25% deductability.

Here's some add'l info:

On the W-2, item 14 Other: It is identified as partial owner of the S-Corp.  Person in question is spouse of the owner.

4 hours ago, Bri said:

even though it's also been reported on the W-2?  (I'm voting for 120K)

I am voting for 120K as well, but please refer back to AA regarding inclusio/exclusion elements.

This may help.  See the last paragraph.  https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

The bottom line is the insurance is taxable to the the employee shareholder.  This begs the question of is the spouse is a more-than-2% shareholder?

It does not answer the question about the plan definition of compensation and in particular what compensation is used to calculate deferrals and contributions.  This begs the question of who turned payroll into plan experts?  Maybe payroll should read this: https://www.irs.gov/retirement-plans/avoiding-compensation-errors-in-retirement-plans

1 -identify the definition in the plan document.

2 - apply that definition.

Note - regardless of the definition of compensation in the plan document, it is almost never a number you can pluck from a box on the W2, especially when there are one or more pre-tax items and different pre/post-FICA/Medicare. That is, you almost always need to add multiple boxes and coded items to get the correct compensation.

If your issue here is the health insurance add for S-corp owners, see 1 & 2 above.

This illustrates the broad problem of compensation definitions, which are hardly if ever properly applied.

All the plans that i've seen will say whether the W-2 Comp definition should include or exclude deferrals to 401(k), FSA, etc.  When they are saying that there is $20K of heatlh insurance expense, i would assume this is employer-paid health insurance that is excluded from taxable compensation, right?  Barring other language in the document, i wouold think that this is not included.  But, the document and the Code would control.