Compensation Definition

Good morning everyone!  I just wanted to confirm what people use for the definition of compensation for plans.  Generally we use W-2 compensation, but we have a case (about 35-40 participants) where the owner is being taken off W-2 and instead will simply be paid by a draw whenever the company profits allow it.  Obviously he still wants to remain a part of the plan.

Thanks in advance!

It might be helpful to know more about this situation.  Like, what kind of entity is it, and is there a change that is driving this? 

In any event, it sounds like this is or will be a self-employed person, and you might want to read the definition of W-2 comp in the plan document.  (It will include self-employment income.  "W-2 compensation" does not mean you literally have to get the number off of a W-2.)

Compensation for self-employed individuals is always net earned income, regardless of whatever definition is chosen for employees.

What type of entity is the sponsor?

C-Corporation? S-corporation? LLC - with an S Corp election? LLC taxed as a Partnership / Sole Prop? Something else?

If it is an S-Corporation, LLC with an S-Corporation, or C Corporation - the owner's "draws" would be regular profit or perhaps equity payments, but in any case would not earned income for plan purposes. They would need W-2 based compensation in order to keep having contributions to the plan. 

If the sponsor is an LLC taxed as a partnership, or something else with self-employment earned income - I'd ask the accountant for make sure the person has actual earned compensation. The term "draws" is sometimes used loosely, and doesn't always mean the person had actual earned income, even though they received money from the business. I'd check with the CPA if you are unsure about the specific classification of the money received as a "draw".