#8
Medium Risk
Not having an Accurate Definition of Compensation
Plans may have different compensation definitions for different purposes, affecting deferrals and testing.
- Potential Consequences
- Testing failures
- Incorrect contributions
- Plan corrections
- Compliance issues
- Prevention Tips
- Review plan document compensation definitions
- Ensure consistent application across all purposes
- Clarify treatment of bonuses and overtime
- Document compensation inclusion/exclusion decisions
- Coordinate with payroll on W-2 reporting
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Accurately applying a plan’s stated definition of compensation is a key element to operating an error-free plan. A plan may contain different definitions of compensation for different plan purposes. Amounts may be considered “compensation” and be eligible for deferrals, but those same amounts may be excluded when calculating compensation for determining employer nonelective contributions or for nondiscrimination testing.
Additionally, many items may or may not be included in compensation. For example, the inclusion of expense reimbursement, car allowances, bonuses, commissions and overtime pay can vary from plan to plan. Plan sponsors who define compensation by reference to amounts reportable in W-2’s will need to pay particular heed to these regulations.
"Planning is bringing the future into the present so that you can do something about it now."
— Alan Lakein
