SunGard Relius

The most popular base definition of compensation for retirement plans is the “W-2" definition. However, we have been receiving a number of phone calls recently asking exactly what that definition covers, and which box of Form W-2 it reflects.

The short answer is that the W-2 definition reflects Box 1 of Form W-2, “Wages, tips, and other comp." This is the number a taxpayer uses to complete Form 1040. However, for 415 purposes (and for purposes of the various Code sections which are based on the 415 definition of compensation, such as the top-heavy rules), the plan must add back in elective deferrals. For this purpose, elective deferrals include deferrals to:

• Qualified plans
• 403(b) plans
• 457(b) plans
• Salary reduction SEPs
• SIMPLE IRAs
• Cafeteria plans
• Qualified transportation fringe benefit arrangements

Complicating this calculation is the fact that Roth deferrals are already included in income under Box 1. So, when adding back qualified plan deferrals, one is actually adding back only traditional, pre-tax deferrals.

Rather than use Box 1 and add back the deferrals, some practitioners have used Box 5, “Medicare wages and tips." This is unfortunate because there are a number of differences between Box 1 and Box 5. A difference which is currently receiving attention relates to health insurance premiums for S Corporation 2% or more shareholder-employees. Those premiums are always included in Box 1, but may be subject to an exclusion under Box 5. But there are other possible differences as well. As a result, Box 5 is not an appropriate source of compensation for retirement plans and never has been.

There are two exceptions, besides elective deferrals, to the rule that Box 1 compensation equals W-2 compensation for plan purposes:

1. A plan must disregard any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed. So, even if a foreign subsidiary pays an individual for work outside the United States and is not required to give the individual Form W-2, a plan must count the compensation which would have been reportable on a W-2.
2. A plan has the option to exclude amounts the employer pays or reimburses for an employee’s moving expenses if, at the time of the payment, it is reasonable to believe that the employee can deduct these amounts under Code §217. Such an exclusion would need to appear in the plan document itself.

Advanced Pension Conference. We will discuss EFAST2, Schedule C changes and other important and timely topics in our Advanced Pension Conference (APC). View the complete list of topics and register online! The APC is scheduled for February 17-19 in Orlando, Florida.