Calculating compensation is one of the most common errors plan sponsors have when providing data to us. We can’t administer your plan properly unless we have accurate compensation information. Below is a list of five most common mistakes:
1. Using Box 1 or Box 5 Wages: Most plan documents define W2 wages as the definition of compensation. However, that does not mean that you can automatically use a participant’s Box 1 or Box 5 wages for compensation. The definition typically requires that you add or subtract additional items such as elective deferrals(other than ROTH).
2. Deferrals of severance pay: Pay given to an individual due to employment termination can not have deferred payment for 401k, 457b or 403b purposes. Severance pay is not made to an employee and only employees can defer into a plan. The employee can defer from regular pay, vacation pay and sick leave pay if it is paid within 2 months of termination.
3. Inconsistent payroll practices: If your company has several locations, but only one plan document, each location needs to be calculating compensation in the same manner. One location might provide a bonus via a gift card while another location might give it in the form of a check. All locations must be calculated uniformly with respect to the plan document.
4. Exclusion of non-cash benefits: A plan document’s definition might require an inclusion of non-cash benefits. This amount is typically overlooked but the value of the non cash benefit may need to be included as compensation and therefore deferrals might be required based on that value.
5. The biggest failure of all? Failure to deduct deferrals from extra payrolls: Employee deferrals must be deducted from all special payroll payments to the employee. A bonus is the biggest error we see. If you give an employee a Christmas bonus, a performance bonus or a bonus because you like the color of their car, deferrals should be taken from that check UNLESS you have a form on file, in their employee file, that states they do not want deferrals taken from bonus’.
If you think that you might have calculated compensation incorrectly, please contact us so we can talk with you about the error. We will work with you to fix it in the future!