This IRS generally defines compensation to include any payment made by an employer to an employee for services rendered in the course of the employer’s business.
Qualified plans use compensation in many different contexts. Qualified plans are permitted, within certain limits, to use different definitions for different plan purposes. For example, a plan sponsor may choose to exclude bonuses, overtime, or other types of payments from compensation for certain plan purposes, but not for others.
Many employers are confused about whether certain compensation items should be included when considering what makes up compensation as it relates to what plan contributions should be based on.
What this means is that any type of payment to an employee (besides reimbursed expenses) shall be considered plan compensation as it relates to what plan contributions shall be comprised of unless the plan specifically opts out of considering such type of compensation. The biggest question we get with this, is should bonuses be considered compensation?
The answer is yes, unless the plan documents expressly opts out and excludes bonuses from compensation.
For more information on this and any other 401k related topic, contact CMP.