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Definition of Compensation in a 401 (k) Plan

401k

“What is the definition of compensation used in a 401(k) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  1. The statutory definition of Treas. Reg. §1.415(c)-2(a)–2(c) (a.k.a., “415 compensation”)
  2. The simplified definition, which is defined at Treas. Reg. §1.415(c)-2(d)(2)
  3. W-2 wages, which is defined at Treas. Reg. §1.415(c)-2(d)(4)
  4. Wages for income tax withholding under IRC §3401(a), defined at Treas. Reg. §1.415(c)-2(d)(3)
  5. One of the above definitions with certain adjustments
  6. Any reasonable definition of compensation that does not favor highly compensated employees

 

Conclusion

Several definitions of compensation may come into play for the purposes of administering qualified retirement plans. It is essential for plan administrators to understand 1) the particular plan purpose for which a definition of compensation is needed, 2) how the plan document defines compensation for that particular purpose, and 3) how to accurately apply the definition.

 

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