View This Newsletter: Determining Retirement Plan Compensation

Overview:

This newsletter explains the intricacies involved with determining retirement plan compensation.

• Determining Retirement Plan Compensation
  • Compensation used for:
    • Calculating contributions
    • Applying limits
    • Conducting non-discrimination testing
    • Determining tax deductions
• Overview
  • Four General Definitions
    • W-2 compensation;
    • Withholding wages;
    • Current includible compensation; and
    • Simplified compensation
  • Compensation ratio test
• Pre-Participation Compensation
  • This pay is usually included, but may be excluded if noted in the plan document
• Bonuses, Commissions and Overtime
  • The default under the four definitions is that all of these are included unless otherwise noted in the plan document
• Taxable Fringe Benefits
  • A plan can exclude taxable fringe benefits from its compensation definition
• Reimbursements and Allowances
  • Distinction between the two
  • Reimbursements are not included as plan compensation, while allowances are included.
• Post-Severance Compensation
  • Four categories:
    • Amounts earned but not yet paid at time of termination;
    • Payments for unused leave;
    • Distributions from deferred compensation plans; and
    • Traditional severance pay.
• Self-Employed Individuals
  • Earned income
• Employees vs. Independent Contractors
  • Distinction between the two
• Conclusion
  • Determining compensation can be quite complicated.
• IRS and Social Security Annual Limits
  • The 2015 limits will remain unchanged for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment.

Pinnacle Plan Design is a third-party administrator (TPA) for employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting for 401(k)/profit-sharing plans, defined benefit plans, cash balance plans, and 403(b) plans. Pinnacle Plan Design proudly serves businesses nationwide.