Qualified Plan Design: Defining Compensation for Federal Income Tax Wage Withholding (Code Section 3401(a))

Code Section 3401(a) provides the definition compensation for Federal Income Tax Wage Withholding for Retirement Plan purposes. All possible compensation items are described below, but only those compensation items allowed by your Plan should be used for Plan purposes. It is important that you refer to your Plan Adoption Agreement for a detailed list of additional compensation exclusions in your Plan (see "EXCLUDED COMPENSATION).

Items included in Federal Income Tax Wage Withholding:

  • Wages
  • Salaries
  • Fee for professional services
  • Commissions on sales
  • Commissions on insurance premiums
  • Bonuses
  • Tips, excludes non-cash tips and cash tips less than $20 per month
  • Employee's receipts from an unfunded unqualified plan
  • Employees' moving expenses; exclude amount deductible under 217
  • Amounts realized from exercise of non-qualified stock options or when restricted stock or property become fully transferable and no longer subject to risk of forfeiture
  • Value of non-qualified stock option included in income in the year in which granted

Items excluded from Federal Income Tax Wage Withholding:

  • Costs of group term life insurances in excess of $50,000
  • Amounts realized from sale or exchange of stock acquired under qualified stock option
  • Salary reduction amounts (Code Section 125, 401(k), etc)
  • Fringe Benefits – include all except items specifically excluded under 
    §3401(a):  benefits/payments excludible from income under §§74(c), 117, 127, 129, 132
  • Amounts paid under accident and health plans (which are includible in income); exclude medical  reimbursement under a self insured medical plan within §105(h)(6)
  • Amount includible in income upon making Section 83(b) election