Connecting the Dots between Plan Compensation and Plan ...

[Pages:22]10/17/2016

Connecting the Dots between Plan Compensation and Plan Operation

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10/17/2016

Session Objectives

? Discuss various roles compensation plays in qualified retirement plans

? Review definitions used as basis for plan compensation

? Address common compensation errors and available corrections

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Compensation Has Many Roles

? Contribution and benefit calculations ? Annual contribution/benefit limits--IRC ?415 ? Non-discrimination testing--IRC ?? 401(a)(4),

401(k), 401(m), and 414(s) ? Highly compensated employees ("HCEs")

IRC ?414(q) ? Key employees--IRC ?416

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Compensation Definitions

? 415 compensation ? 414(s) compensation ? Plan compensation

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415 Compensation Uses

? HCEs--prior year 415 compensation exceeding *$120,000 (2016 and 2015)

? Key employees and top heavy contributions ? Annual contribution and benefit limits ? Cross-testing 5% gateway contribution ? Deductible contribution limit

*Retirement plan COLA chart: pub/irs-tege/cola_table.pdf

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415 Compensation

? 415 Compensation defined in Treasury Regulations ? "Currently Includible Compensation"

? Regulations provide 3 alternative definitions: ? Form W-2 (box 1) ? 3401(a) Comp (federal income tax withholding) ? 415 Safe Harbor Compensation ("Simplified")

? All definitions adjusted to include pre-tax elective deferrals under following IRC ??

? 401(k), 403(b), 408(k), 408(p), 457(b), 125, 132(f)

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415 Compensation

? Compensation paid by related employers is included as 415 Comp

? Controlled groups ? Affiliated service groups ? Regardless of whether related employer participates

in plan

? Amounts paid during limitation year, including comp paid while not an eligible participant

? 5 % gateway may exclude comp while not participant

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415 Compensation

Compensation Type

Pre-Tax Elective Deferrals Roth Contributions Imputed Group Term Life Taxable Moving Expenses

Form W-2, Box 1

Included Included Included

Included

3401(a)

Included Included Excluded Included

Nonqualified Plan Distrib Taxable Medical/Disability

Included Included

Included Included

415 Safe Harbor Included Included Included Excluded

*Excluded Excluded

Currently Includible Included Included Included Included

*Excluded Included

*Excluded unless plan document includes.

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415 Post-Severance

? Timing rule--certain post-severance 415 Comp must be paid by the later of: ? End of Limitation Year, or ? 2 ? months after employee termination

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415 Post-Severance

Post-Severance Pay

Regular Pay PTO Cash-Outs

Must May Subject to Include Include Timing Rule

Unfunded Deferred Comp only if

it would have been paid at same time regardless of employee termination

Disabled Salary Continuation

Military Service Salary Cont.

N/A

N/A

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414(s) Compensation Uses

? ADP/ACP testing

? Deferral and matching contributions

? General testing/cross-testing IRC ?401(a)(4)

? Non-elective contributions ? Except 5 % gateway contribution

? Calculating employer contributions under design-based safe harbor plan

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414(s) Compensation

? 414(s) compensation may use any 415 compensation definition ? W-2 ? 3401(a) ? 415 safe harbor ? 415 currently includible

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414(s) Compensation

414(s) permits adjustments to 415 Compensation 1. Exclude elective deferrals:

? 401(k), 403(b), 408(k), 408(p), 457(b), 125, 132(f)

2. Exclude expense allowances/reimbursements, fringe benefits (cash or non-cash), moving expenses, deferred compensation, welfare benefit plans, etc.

3. Exclude pay while not a participant 414(s) safe harbor adjustments must treat all elective deferrals and all expenses in 1 and 2 above the same

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414(s) Compensation

? 414(s) compensation deemed nondiscriminatory ? Plan document may define specific 414(s)

compensation to be used in testing or may permit any 414(s) compensation definition ? Check base document in pre-approved plans

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Plan Compensation Uses

? Calculate contributions and benefits ? Plan document will provide specific definition ? Plan compensation definition may not satisfy 414(s) compensation

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