definition of compensation for a SIMPLE plan


G

Gary Goodman

An employee who is participating in an employer's SIMPLE plan (IRC Section 408(p))has elected to contribute 6% of his pay each year. The employer contribution election says that the employer will contribute 3% of the compensation (Election II(1) on page 3 of Form 5304-SIMPLE).

The employee had $3,000 withheld of his $50,000 salary, but noticed that the employer's 3% was only about $1,400 because the employer calculated the 3% after the Section 125 deferrals.

415(c)(3)(D)Certain deferrals included.--
The term "participant's compensation" shall include--

415(c)(3)(D)(i)
any elective deferral (as defined in section 402(g)(3)), and

415(c)(3)(D)(ii)
any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), or 457.

My question is "does the employer base its contribution on the full salary or after flex plan deferrals under IRC 125?" In other words, if the salary is $50,000 and the employee pays $3,000 for medical insurance on a pre-tax basis should the employer contribute $1,500 ($50,000 * 3%) or $1,410 ($47,000 * 3%)?

Thanks for any help.

Gary
 
Ad

Advertisements

A

Alan

An employee who is participating in an employer's SIMPLE plan (IRC Section 408(p))has elected to contribute 6% of his pay each year. The employer contribution election says that the employer will contribute 3% of the compensation (Election II(1) on page 3 of Form 5304-SIMPLE).

The employee had $3,000 withheld of his $50,000 salary, but noticed that the employer's 3% was only about $1,400 because the employer calculated the 3% after the Section 125 deferrals.

415(c)(3)(D)Certain deferrals included.--
The term "participant's compensation" shall include--

415(c)(3)(D)(i)
any elective deferral (as defined in section 402(g)(3)), and

415(c)(3)(D)(ii)
any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), or 457.

My question is "does the employer base its contribution on the full salary or after flex plan deferrals under IRC 125?" In other words, if the salary is $50,000 and the employee pays $3,000 for medical insurance on a pre-tax basis should the employer contribute $1,500 ($50,000 * 3%) or $1,410 ($47,000 * 3%)?

Thanks for any help.

Gary
Generally, the employer match uses the same compensation. That is
basically your W-2 wages before your elective deferrals including Sec.
125. However, an employer is allowed to make an election to use your W-2
wages before your plan elective deferrals and after your Sec. 125 deferrals.
It looks like this employer made the election.

This is explained in IRS Pub 560 under compensation definitions.
 
Ad

Advertisements

G

Gary Goodman

Generally, the employer match uses the same compensation. That is
basically your W-2 wages before your elective deferrals including Sec.
125. However, an employer is allowed to make an election to use your W-2
wages before your plan elective deferrals and after your Sec. 125 deferrals.
It looks like this employer made the election.

This is explained in IRS Pub 560 under compensation definitions.
--
Alan
http://taxtopics.net

--
Thanks Alan. Since I posted this, I found the info in Pub. 560, but have been told that the employer has used the higher compensation amount when questioned by departing employees.
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top