Participant's deferral election and non cash compensation

Plan compensation is defined as W-2 compensation with no exclusions

Employer provides group term life and has to add to the employee's W-2 at end of year the PS 58 costs (or whatever it is called today).  Plan is silent as to non cash compensation in this regard.  I remember years ago at a seminar that you cannot defer to the 401(k) if no cash element.  I just never see non-cash fringe benefits being excluded in the Plan documents for 401(k) purposes.  Is this because a cash or deferred arrangement?  I am confused and not sure if I need to be concerned.

Thoughts / cites are very much welcome.

As you say, the cost of group term life (GTL) coverage exceeding $50,000 (less any amounts the employee paid toward the coverage) is included in an employee’s taxable income.  Since your plan document uses the W2 definition, then the imputed income from excess GTL coverage is included in compensation. (If §3401(a) definition, excess GTL coverage is excluded.)

Though your plan uses W2 compensation, your plan could still exclude taxable fringe benefits, e.g., excess GTL, from eligible plan compensation.  Here, though, your plan  terms don’t explicitly exclude the excess GTL.

Excess GTL is not paid in cash because the value of the benefit is imputed. Thus, an employee cannot defer out of imputed income, however, that does not mean that amounts are not to be deferred from the employee’s compensation due to the imputed income.  Arguably, this c/would be treated like FICA.  Imputed income is subject to FICA withholding.  However, like 401(k) deferrals, the FICA tax cannot be withheld from the imputed income… at least not directly.  This is because there is no cash to use as a source of funds from which to withhold.  So any FICA due because of the imputed income must be paid using income other than the imputed income.  The amount of the imputed income is added to the employee’s other taxable compensation to calculate the total FICA tax due, but the tax payment comes indirectly from the employee’s other compensation and not directly from the imputed GTL income.  The net effect is the same as FICA withholding from the imputed income, as long as there is other cash compensation to pay the tax.  It would seem that if your plan does not exclude the imputed GTL income from the compensation definition, technically this is what should happen with regard to 401(k) deferrals – they should be based on that imputed GTL income such that the deferrals would not come from the imputed GTL income directly but indirectly from the employee’s other cash compensation, assuming there is sufficient other cash compensation.  Failure to include the imputed GTL income (i.e., all forms of eligible compensation) in determining qualified plan contributions could result in a plan operational failure—here, a missed deferral opportunity.

The other thing you may be able to do is rely on the employer’s discretionary authority to interpret plan provisions and terms, assuming the plan contains this discretion.  If the GTL imputed income is not specifically excluded under the terms of the plan, perhaps the employer could interpret this item to be included or excluded from the definition of a fringe benefit provided the interpretation is applied on a consistent basis.  Of course, it would be best to be explicitly included or excluded from the comp definition.  Also, even if excluded using the employer’s discretion, it seems advisable to include it in the compensation definition for purposes of matching or nonelective contributions.

Sorry no authorities to rely on …. just thoughts

If using a prototype formatted document, look at the basic plan document. Maybe in the deferral section rather than the definition of comp. Some plans allow the exclusion of non-cash compensation for deferral purposes. 

Appreciate the responses