QKA 2 Unit 1: Compensation Flashcards
What are the two types of compensation?
Direct and indirect
What are the two types of direct compensation?
Main types and supplemental types
What are examples of main types of compensation?
Salary, hourly, and commissions
What are examples of supplemental direct compensation?
Bonuses, overtime, holiday pay, PTO
What is indirect compensation? what are a few examples of indirect compensation?
1) refers to taxable, non-monetary benefits
2) reimbursements, fringe benefits, expense allowances
What is the compensation limit for DC plans in a given year?
The 401(a)(17) limit
How do fiscal year plans use the 401(a)(17) limit vs. Calendar Year Plans?
Fiscal year plans use the 401(a)(17) limit in place at the beginning of the fiscal year. Calendar Year plans just use the prescribed 401(a)(17) limit in place for each year.
What are the three main definitions (not measuring periods) of compensation used in a retirement plan?
1) 415
2) Plan
3) 414(S)
What is 415 compensation used for?
What are the three types of 415:?
1) Identifying HCEs
2) Identifying Key EEs
3) Calculating min contributions to non-key EEs in TH plans.
- Current Includable Comp
-W2
-3401A Income
What are the four permissible definitions of 415 compensation?
1) W2
2) 3401(a) Withholding
3) Statutory
4) Simplified
What are the two steps to determining for 415 Comp?
1) start with one of the four base definitions
2) Then add in these amounts: deferrals, Section 125 contributions, 132(f)(a)-Qualified Transportation Fringe Benefits
What are the 3 periods available in the Compensation Period Rule?
1) The Plan Year
2) The Fiscal Year: coinciding/ending with the Plan Year.
3) The Calendar Year- coinciding/ending with the plan year
Under 415 comp Definitions, What is the first year of eligibility rule?
The full years compensation is considered even including pre-participation compensation
What schedule is sole proprietor, earned income declared on?
 Schedule C
What schedule is partnership income declared on?
Schedule K
Reductions like health premiums and 401(k) deferral’s are not included in this type of compensation, but are included in this type of compensation.
W2, 415
414S compensation is used for nondiscrimination tests and the 4 following items: (DAMP)
1) deferrals
2) after tax employee contributions
3) matching contributions
4) permitted disparity
All 415 compensation definitions are what type of compensation?
Safeharbor definition of IRC 414S
The regulations permit, three safe Harbor modifications to the IRC415 compensation definition to arrive at IRC 414S compensation. The three modifications are: (HER)
1) HCE Comp- any portion can be excluded
2) Employer Deferrals may be included which were made on behalf of an EE that are not included in Gross Income
3) Comp may be Reduced for Reimbursements and Expense Allowances
IRC401(a)(17) compensation dollar limit is subject to annual _______, but the applicable dollar amount must always be a multiple of what?
COLAs, $5000
If a top-heavy plan, excludes, elective deferral to determine a non-key employees allocable share of employer contributions, the elective deferral’s must be what?
Added back as required under the IRC 415 compensation definition
A qualified plan may include a CODA only if it is one three types of plans which are:
Profit sharing plan, stock bonus plan, or pre-ERISA money purchase
Normally, a 401(k) plan will permit, eligible employees to make salary reduction elections against all forms of compensation, including base salary, overtime, wages, Commissions, Bonuses, and other forms of taxable income. But the plan document may do what?
Restrict the elections to only certain forms of compensation, such as base salary only
IRC414S compensation must be defined to constitute a non-discriminatory definition. But there is no requirement that the definition of compensation that is eligible for deferral under a 401(k) arrangement be non-discriminatory-true or false? Why?
True, for CODA Safe Harbors, but regulations do require that QACA’s provide for nondiscriminatory deferrable compensation
If IRC414(s) Safeharbor compensation is used such as 415 compensation, then the allocation will always be a uniform percentage of compensation and the plan may rely on the design-based safe harbor, without having to test its definition. If a modified definition is used which excludes bonuses overtime or commissions, the compensation is not treated as 414 S unless it satisfies which test.
The compensation ratio test
What is the compensation ratio test equation?
3 steps
(Comp, Groups, Delta)
Plan Defined Comp
—————————-
415 Comp Definition
Determine percentages for HCEs & NHCEs
HCEs can not exceed 3% more than NHCEs
As a general rule, compensation paid to an individual after termination may not be treated as 415 income, unless what 2 exceptions:
1) it was income the employee would have otherwise received: regular comp, leave, cash outs, nonqualified deferred comp payments
2) If paid by the latter of 2 1/2 months after severance or the last day of the plan year
Severance pay is always included in 415?
False, it is never included
What other type of post severance compensation is never included in 415?
Nonqualified deferred compensation
Employers have a great deal of flexibility, defining compensation for a plan, true or false?
True
What exclusions to 415 compensation for a 401(k) are allowed? (4 items PERL)
1) Prior Comp (compensation prior to becoming a Participant in a component of the plan)
2) Employee Deferrals
3) Related Company Comp not participating in the plan
4) Location/Division Comp- not participating
The usage of 414S compensation is important because it is required when performing what
Nondiscrimination testing
Using the W-2 compensation definition of 415 compensation, what are the three exclusions that are allowed? (FAT)
Fringe Benefits
Allocated Tips
Tips under $20 per month
Using the 3401(a) withholding definition of 415 compensation what are the four exclusions that are allowed for? (NEAT)
1) Non taxable
fringe
2) Excess Group Term Life
3) Allocated Tips
4) Tips under $20
What 2 definitions of 415 include tips without limitation?
Statutory and simplified
What type of benefit is excluded from all definitions of 415 compensation?
Nontaxable fringe benefits
What is the only definition of 415 compensation that excludes nonqualified moving expenses?
Simplified
What is the only definition of 415 compensation which excludes taxable, medical and taxable sick pay?
Simplified
What two definitions of 415 compensation exclude IRC 83 property and IRC 83(I) income?
Statutory and simplified
Do W-2 compensation and 3401a withholding definitions of 415 compensation include or exclude types of non-statutory stock?
They include
What is the “Safe Harbor” Definition of IRC 414(s) compensation? And what does it mean?
415
Is not subject to Compensation Ratio Test
If a definition of compensation is ( ), then It must pass what test? What is the percentage of spread that is typically allowed by the IRS? Between which parties?
Modified
Compensation Ratio Test
3% max
HCEs and Non HCEs
How often must the Compensation Ratio Test be performed when a modified definition of compensation is present on a plan?
Annually
What is the formula for the Compensation Ratio Test?
Plan Definition of Comp being used divided by 415 Definition.
Determine percentages for HCEs and NHCEs
HCEs amount can only exceed by 3% over Non HCEs
The fact that a plan uses a modified definition of compensation means that it fails to be a design based safe harbor? True or False? And why?
False, it simply means the plans comp definition needs to be tested each year to see if it satisfies 414(s).
There are 3 permissible definitions of compensation under IRC 415 which are:
- Current includable compensation
- W2 Comp
- Wages for income tax withholding
What is the definition of Current Includable Income? (List of 4). What is the caveat?
Includes all:
1) Wages
2) Salaries
3) Fees
4) Other amounts received by EE in course of employment
Caveat= only to the extent includable in GROSS INCOME
The existense of CODA in a Pension Plan such as (name 3 Pension Plans) will do what to the plan?
- DB plan, Money Purchase Plan, Target Benefit Plan
- Disqualify the plan
What is DAMP?
The acronym for what 414S income is used for besides non-discrimination testing
What is HER?
The modifications to 414S Income to arrive at 415 Income.
What is HER?
The modifications to 414S Income to arrive at 415 Income.
What does CODA mean? What is the premise?
“Cash Or Deferred Arrangement”
Is an arrangement that states the amount each eligible employee may defer is available in cash, so the EE’s election is between Cash and Deferred Compensation.
Why can a Participant not defer money they may have received in a check already?
Because of the IRSs “Current Available Compensation” Rule - which states wages that have been paid or could be received at the EEs discretion must be taxed.
A 401(k) arrangement must use a definition of compensation that is nondiscriminatory. True or false?
False. This is true EVEN in Safe Harbor Plans, although regulations do require QACA Safe Harbors to use a Non-Discriminatory definition.
If a 415 Definition of comp (Safe Harbor 414S) is used then the allocation will always be (what)?
The plan will not be subjected to (what)?
IF a MODIFIED definition is used which excludes bonuses, overtime, commissions…etc, the compensation is not treated as 414S unless what?
1) A Uniform Percentage of 414S
2) No Testing of the Comp Definition
3) Must pass Compensation Ratio Test
Plans that exclude fringe benefits must do what in order to remain safe Harbor with 414 S compensation?
Exclude all fringe benefits. You cannot just exclude some and retain 414 S safe harbor protection.
