When Compensation Is Not “Compensation”

The IRS’s Summer 2011 Retirement News for Employers points out a perhaps uninteresting but important issue: what counts as “compensation” for purposes of your company’s retirement plans?

A plan has to define “compensation” for purposes of, among other things, calculating salary deferrals, employer matching contributions, and discretionary contributions. For example, a plan may provide that an employee can defer up to 6% of his or her “compensation” each year with a discretionary employer contribution of 3%. Here’s the rub: compensation can mean different things for each type of contribution–the employee deferral definition of “compensation” may include bonuses and commissions while the definition of discretionary contribution “compensation” may include only the employee’s base salary. It’s critically important, then, to make sure that you’re making the correct contributions to your plans; an operational failure could lead to a dreaded plan disqualification and resulting taxation.

The good news, however, is that employers who catch these errors on their own can generally correct them through the IRS’s Employee Plans Compliance Resolution System, or EPCRS. While EPCRS can be complicated–and can involve paying a fee–it’s much better than being corrected the hard way.

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