Compensation under the new tax bill

So, if compensation for qualifying tips or overtime isn't taxable, does that have any effect for qualified plan contribution purposes? These aren't "fringe benefits" so a plan that excludes taxable fringe benefits wouldn't exclude these on that basis. It seems to me that it shouldn't have any effect, but I'm trying to think situations where it might? Any thoughts on this? 

Good question.  There is a lot of flexibility in how plan compensation (think what is used to calculate contributions and deferrals) and tips and overtime would be included unless explicitly excluded (and tested for nondiscrimination).  So no real change.  There is a fair amount of flexibility in definitions of compensation for compliance purposes, but all would include tips and overtime (I agree that tips and overtime are not fringe benefits).  So no real change.

The question does raise an interesting point.  I haven't done the math, but for an employee who has a substantial percentage of income from tips, is there a point where it does not make sense to defer non-taxable income that will be taxable when it ultimately will become taxable when distributed?

Continuing in this vein, does it make sense for an employee who has a substantial percentage of income from tips to make Roth elective deferrals?

Interesting points. Thanks.

The statute’s provision with the heading “no tax on tips” is not an exclusion from income; it’s a deduction. Internal Revenue Code of 1986 § 224, added by Act § 70201 [attached].

Likewise, “qualified overtime compensation” is not an exclusion from income; it’s a deduction. Internal Revenue Code of 1986 § 226, added by Act § 70202 [attached].

A retirement plan might be unlikely to exclude from whatever otherwise would be within the plan’s measure of compensation, for whichever purpose, an amount the plan’s administrator and a participating employer might not know without obtaining information from the participant.

Also, the Internal Revenue Service has sometimes interpreted 26 C.F.R. § 1.401(k)-1(a)(3)(iii)(A) and earlier interpretations to preclude a § 401(k) elective deferral from an amount “available” to the participant without handling through the employer—for example, a tip a diner paid, in currency, directly to the waiter.

This is not advice to anyone.

Internal Revenue Code 224.pdf Internal Revenue Code 226.pdf

On 7/8/2025 at 9:15 AM, Paul I said:

Continuing in this vein, does it make sense for an employee who has a substantial percentage of income from tips to make Roth elective deferrals?

It would certainly make sense to make Roth contributions. If you're wanting to see if it makes sense, you'd want to look at your tax brackets in retirement.