Safe Harbor Nondiscriminatory Definitions of Compensation
The Treasury regulations under Code §415 prescribe three alternative definitions of compensation. The general 415 definition of compensation (for purposes of Code §415(c)(3)) includes elective deferrals to a 401(k) plan, a SARSEP, a 403(b) plan or a SIMPLE IRA plan, and pre-tax contributions to a cafeteria plan, a 457 plan or a qualified transportation fringe benefit plan. The two “alternative” 415 compensation definitions are “net” of these pre-tax amounts. Therefore, for 415 purposes, if the plan uses one of the alternative definitions, it must be increased for elective deferrals.
For nondiscrimination purposes, the Code §414(s) regulations consider the three 415 definitions as safe harbor testing definitions of compensation. However, an employer may modify any of the three alternative definitions by “including” or “excluding” elective deferrals (except 457 plan contributions) and remain within the nondiscrimination safe harbor.
The definition of compensation is defined in your Plan’s Adoption Agreement. Please refer to your adoption agreement to determine which if the following three attached definitions apply. If you need any assistance in locating this information or have additional questions, please contact BPC.
Please select the links for a full description on includible and excluded forms of compensation:
(a) The “415 compensation” (current income) definition. See Treas. Reg. §1.415-2(d)(10).
(b) The “Federal income tax wage withholding” (Code §3401(a)) definition. See Treas. Reg. §1.415-2(d)(11)(ii).
(c) The “Form W-2” (Box 1) definition. See Treas. Reg. §1.415-2(d)(11)(i).