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ERISA Update: How Does Your Plan Define Compensation?
Last Updated: August 05, 2011
The term “compensation” plays a very important role in the operation of retirement plans. Key areas where compensation is used within plan documents include: top-heavy minimum contributions; the limitations under Code Section 415; determining highly compensated employees (HCEs); nondiscrimination testing; allocations of plan contributions; and calculating the appropriate amount of employee deferrals. For instance, the precise definition used could be the difference between participants getting hundreds of dollars more in employer contributions or deferral amounts.
To comply with IRS rules, qualified retirement plans must clearly describe in their document which definition of compensation they use. Improper administration of a plan’s compensation definition may result in an operational plan failure, thus requiring an expensive correction procedure under the IRS’s Employee Plans Compliance Resolution System (EPCRS). Furthermore, because administering a plan in accordance with plan provisions is a basic fiduciary responsibility, it is imperative that plan administrators adhere to their plan’s definitions of compensation.
It is not enough for a plan’s administration of compensation to be in compliance with the rules – it must also be in compliance with its document. Unfortunately, it is exceedingly common to find discrepancies between documents and administration when it comes to compensation. Compliance is difficult because it requires plan administrators, payroll departments, and record keepers to see eye-to-eye with a plan’s definition of compensation and to understand the nuanced rules that pertain to that definition.
Because mistakes are common, we encourage all plan sponsors to study their plan’s compensation definitions to see if these precisely match their administration. Should you have any questions, please contact ERISA Services. Our consultants are available to assist with all matters related to plan compensation.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.
