Know Your Plan’s Definition Of Compensation

Know Your Plan’s Definition Of Compensation

It is important to understand the definition of “compensation” as defined by the plan and to distinguish between eligible and non-eligible compensation because a participant’s total earnings may not be entirely eligible for 401(k) deferrals. The plan document will dictate which types of earnings are deemed to be eligible versus non-eligible. Eligible earnings could include regular wages, overtime, bonuses, vacation pay, holiday, etc. Different plans have different definitions of eligible compensation. Here are some important considerations related to compensation information:
  • Employees’ deferrals are calculated as a certain percentage of an employee’s compensation
  • Employees’ deferrals are based on a certain amount of their compensation (as elected by the employee) limited to prescribed maximum dictated by the IRS each year ($245,000 for 2010 and 2011)
  • Employer matching contributions would be incorrect if based upon erroneous compensation amounts

Plan may incorrectly pass or fail ACP/ADP tests (non-discrimination testing) if the incorrect compensation information is included in the census report used in the testing procedures.

Plan sponsors are advised to understand eligible and non-eligible compensation as defined by the Plan document and document its monitoring of such compensation accordingly.

NEED MORE INFORMATION?

If you need more information regarding this or any other topic affecting your retirement plan, visit our Withum ERISA Knowledge Corner online, follow us on Twitter at WSB_ERISA or contact us at [email protected] to arrange a free consultation today.

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.

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