Our Approach to Keeping Plans Simple
Retirement plans can be very complex to administer, but one simple theme is clear: the more complex your plan, the harder it is to operate, and the tougher the burden on you. In short, complexity makes plans more vulnerable to error. Therefore, we prefer to keep plans simple, which applies to the definition of “compensation.” You can read more about the impact of the plan’s compensation definition in our PAA Guide, which is provided to all sponsors during implementation. By default, our standard language in the Plan Adoption Agreement (“PAA”) is to consider compensation to be all W-2 wages.
My company pays bonuses, commissions, and other forms of benefits to our employees. Are they all included in that definition?
Yes. Income reported on W-2 wages generally includes bonuses and irregular payments like sales commissions. Your company might also consider employer-paid group medical coverage to be included in W-2 earnings. The plan’s calculations for an employer match, if you offer one, are based on the definition of compensation.
What if my company reports earnings for all or some of its employees, owners, or partners on a Schedule K-1 or some way other than a W-2?
Please see our article, "Reporting Earnings on Schedule K-1s." It is also unnecessary for sponsors to provide us with actual copies of their Schedule K-1 or Schedule C for year-end compliance for those participants. However, you do need to provide us with their net earnings from self-employment that are eligible for retirement plan contributions. This should include any amounts they have contributed to the plan. As a reminder, we rely on all data provided by you or anyone on your behalf, like your payroll provider, so it is your responsibility to confirm that any information you provide to us is accurate and complete.
Can I exclude any portion of my employees’ W-2 earnings from my plan's definition of “compensation”?
If you feel strongly about excluding certain types of compensation, such as a bonus, from compensation, we may be able to support that, and you should speak with a member of the Compliance Team. However, changing the compensation definition for your plan could cause it to fail annual compliance tests, for instance, if it reduces the income for non-highly compensated employees more than it does for highly compensated employees. As a result, we would need to perform additional compliance testing that may result in additional fees. As mentioned above, adding complexity also makes it more difficult to administer the plan. In general, we would recommend limiting any exclusions to only compensation earned before a participant enrolled in the plan and taxable fringe benefits. For plans where we have an integration with your payroll provider, our ability to support these exclusions depends on your payroll company’s ability to properly and clearly identify the excluded portion of compensation in your payroll files.
Additional exclusions, like limiting compensation to base pay, require additional testing that we do not offer as part of our core services. We would be happy to introduce you to a third-party administrator (“TPA”) who may be able to assist you with that type of complexity, and we would then serve solely as your non-fiduciary recordkeeper. Adding a TPA partner may delay the plan of getting onboarded to our platform, but it could meet your objectives.
What if my employee doesn't want their bonus contributed towards their 401(k)?
If you are running a bonus payroll that you believe includes payments that should be excluded from specific participant's deferral elections, your employees can elect to change their deferrals to 0% via their participant portal.
Please note that the deferral elections must be made before the employer runs the bonus payroll in their payroll system to ensure that the participant's deferral elections are updated in a timely manner. We recommend that participants update their deferrals 3-5 business days before the bonus runs in the employer's payroll system to ensure that their deferrals are updated before the payroll processes. After the bonus payroll runs, if the employees wish to increase their deferrals back to their original rates, they may.
What is the difference between severance and post-severance pay?
Severance pay is not included in plan compensation and is part of a severance package offered at termination for the employee. Post-severance pay is eligible compensation for bundled plans, including the payout of any accrued final payrolls, vacation, sick time, etc. If you are issuing severance pay to terminated employees, please let us know so that testing and calculations can be completed accurately.
Note: If you use an outside TPA, we recommend you confirm with your TPA if the compensation is eligible.