Hazard pay - state grant

Some states are paying certain front-line employees a "grant" or "extra payment" or whatever you might want to call it. This comes from the state/federal funds, and it is run through the employer as TAXABLE wages. The employer doesn't pay this out of their own pocket.

Is this considered eligible compensation for deferrals/profit sharing/whatever? The "simple" answer is that the plan in question defines compensation as W-2, so it would seem that as long as this is being reported/taxed on the W-2, it should be eligible compensation for plan purposes.

But since nothing is normal this year, I thought I'd see if anyone has different opinions?

I would say it is compensation.

Consider the PPP loans which are forgivable and turn into grants - money is used to pay employees, does not directly come from employer's pocket, other than it came through on its way from the government. But to the employee it is just pay. In your case, it's extra pay, hazard pay, whatever you want to call it - but it's hitting the W-2 as wages so it's plan compensation unless otherwise specifically excluded.

The kind of plan that allows most State and local government employees an opportunity for elective deferrals is a § 457(b) eligible deferred compensation plan.  (Public-school employees might use a § 403(b) plan.  And some governmental employers might have a § 401(k) arrangement under a transition rule in the Tax Reform Act of 1986.)

This explanation assumes a § 457(b) plan’s provisions are no more restrictive than is necessary to get § 457(b) tax treatment.

Under I.R.C. § 457(b), a participant’s yearly deferral limit ordinarily is the lesser of an amount and “100 percent of the participant's includible compensation for the taxable year.”  26 C.F.R. § 1.457-4(c)(1)(B)

“Includible compensation of a participant means, with respect to a taxable year, the participant's compensation, as defined in [Internal Revenue Code of 1986] section 415(c)(3), for services performed for the eligible employer.”  26 C.F.R. § 1.457-2(g).

No matter which way a governmental employer finds the money, I might assume the hazard pay you describe fits that definition.

In my experience, few employees have compensation so modest that the 100% prong controls the deferral limit for the sum of elective-deferral contributions and, if provided, matching and non-elective contributions under a governmental § 457(b) plan.  If an employer’s matching or non-elective contribution, if any, is provided under a plan other than the § 457(b) plan, it is even less likely that § 457(b)’s 100% prong practically controls a participant’s deferral limit.

If one of your questions is about the measure of compensation on which an employer provides a matching or non-elective contribution, that’s governed by the plan’s terms.

For a governmental plan, consider that a plan might have terms not stated in the thing practitioners call a plan document; State (and local) public law controls.

On ‎9‎/‎29‎/‎2020 at 11:02 AM, Belgarath said:

Some states are paying certain front-line employees a "grant" or "extra payment" or whatever you might want to call it. This comes from the state/federal funds, and it is run through the employer as TAXABLE wages. The employer doesn't pay this out of their own pocket.

Is this considered eligible compensation for deferrals/profit sharing/whatever? The "simple" answer is that the plan in question defines compensation as W-2, so it would seem that as long as this is being reported/taxed on the W-2, it should be eligible compensation for plan purposes.

But since nothing is normal this year, I thought I'd see if anyone has different opinions?

Belgarath, you mean these are private companies that are receiving the grants to pay higher wages, right?

The particular plan that caused this question to be raised is a 501(c)(3), but the many would be private for-profit businesses. 

Belgarath, sorry for my miscue; I didn't see that a State might provide the money to non-governmental employers.

No problem - I didn't specify this properly in the OP.

I think this is compensation both under 415 and under most plans' definition of allocation comp.

Thanks all.