 NEWSLETTERS Volume 8, Issue 1 .................... June 2008 Plan Compensation Clarified Your retirement plan can define compensation. The simplest and most common definition of compensation is gross compensation including 401(k) contributions and contributions made to a cafeteria plan, if applicable. Other definitions of compensation may exclude certain types of compensation, such as bonuses or commissions. If some items, such as these, are excluded from plan compensation, the compensation must be tested to confirm it is not discriminatory. The 414(s) Test compares gross compensation to the plan compensation to determine if the plan compensation is discriminatory. If the 414(s) Test passes, the plan is allowed to exclude the compensation elected. If the 414(s) Test fails, the plan is not allowed to exclude the compensation elected. The 414(s) Test must be prepared annually. The plan must define compensation in the plan document. For example, if a plan excludes bonuses from compensation for plan purposes, the plan document must specifically state this. If you have any questions about your plan's definition of compensation, please contact Administrative Retirement Services, Inc. When an employee terminates employment, they may receive one or several paychecks afterward. Compensation an employee earned while employed that is paid to them after their date of termination may or may not be counted for plan purposes. If the employee receives the compensation within the same calendar year, or within 2 1/2 months following their date of termination if not within the same calendar year, then the compensation counts for plan purposes. If the employee receives the compensation after the same calendar year, or after 2 1/2 months following their date of termination if not within the same calendar year, then the compensation does not count for plan purposes. If an employee receives compensation for vacation and sick time he accrued when employed, it may or may not be counted for plan purposes. If the employee receives the compensation within the same calendar year, or within 2 1/2 months following their date of termination if not within the same calendar year, then the compensation counts for plan purposes. If the employee receives the compensation after the same calendar year, or after 2 1/2 months following their date of termination if not within the same calendar year, then the compensation does not count for plan purposes. If an employee receives severance pay due to termination of employment, this compensation does not count for plan purposes. In order for compensation to count for plan purposes, the compensation must have been earned for time the employee worked. If an employee is receiving compensation for time in which no hours were worked, the compensation would most likely not count for plan purposes. If you have a situation arise
that is unclear, please contact Administrative Retirement Services, Inc. to
discuss the situation in more detail to determine if the compensation would be
counted for plan purposes. © Administrative Retirement Services, Inc. 2008 Published by Administrative Retirement Services, Inc., Copyright 2001 by Administrative Retirement Services, Inc. Reproduction in whole or in part is prohibited except by written permission. All rights are reserved. Information has been obtained by Administrative Retirement Services, Inc. from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Administrative Retirement Services, Inc. or others, Administrative Retirement Services, Inc. does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Readers should seek specific advice before acting with regard to the subjects mentioned here. |