QKC > Chapter 4: Compensation > Flashcards

Chapter 4: Compensation Flashcards

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1
Q

Compensation is used to calculate 415 limits, HCE determinations, non-discrimination testing; and what three other items? (TAD)

A

Determines:

Top Heavy Allocation (minimum due to NHCEs)

Determine employee’s ALLOCATION of contributions and forfeiture

Deductions (Tax) for Employers contributions

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2
Q

Compensation is limited to a dollar amount specified in this Internal Revenue Code:

A

401(a)17

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3
Q

401(a)17 is determined each _______
And the limit is applicable to any planer that begins during the ________

A

January 1st

Calendar Year

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4
Q

2023’s 401(a)17 limit is: $330k
2024’s 401(a)17 limit is: $345k

For a fiscal year plan, whose new plan year starts on June 1, what would be the 401(a)17 limit in place starting the new plan year- June 1,2023?

A

$330k

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5
Q

Besides identifying HCE‘s and key employees what are two other important uses of 415 compensation?

A

Calculating minimum benefits or contributions under top-heavy plans

Determining minimum contribution such as Gateway contributions that must go to participants and plans that use cross testing

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6
Q

The definition of compensation for allocating employer contributions must be 415 compensation, true or false?

A

False

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7
Q

Compensation used to perform non-discrimination testing, maybe, but is not required to be IRC 415 comp, true or false?

A

True

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8
Q

What are the three permissible definitions of 415 compensation?

A

Current includable compensation

W-2 compensation

340 one compensation (wages for income tax withholding)

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9
Q

Current includable compensation includes all wages, salaries, fees, and other amounts received by the employee for _________, but only to the extent includable in ________ _________.

A

Personal services

Gross income

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10
Q

Aside from direct compensation, such as wages, salaries, fees; what other supplemental wages are included in the definition of current include comp?

A

Overtime, bonuses, commissions, tips, fringe, benefits, reimbursements

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11
Q

Current includable compensation includes overtime, bonuses, ______, _______, fringe benefits, such as __[example]___ and reimbursements or other_______ ___________s under a non-accountable plan.

A

Commissions
Tips
Taxable use of a company car
Expense allowances

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12
Q

Under the current includable compensation definition of compensation, what types of foreign earned income are included, though they aren’t taxed?

A

IRC 911- applicable to US citizens living abroad
IRC 931- income from sources within Guam, American Samoa, North Mariana Islands
IRC 933-income from sources within Puerto Rico

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13
Q

What are the IRS Safeharbor exclusions to 415 compensation? (Minsc.e.d)

A

Moving expenses.

IRC 83 property

non-qualified plan comp

Stock options

Certain elective deferrals, treated as compensation

disability benefits

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14
Q

What is IRC 83 property?

A

An employer may give an employee property rather than cash for services rendered

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15
Q

Is there a vesting schedule that can be attached to 83 property?

A

Yes, an employer may attach a vesting schedule of sorts to IRC 83 property. If an employee leaves before fulfilling the requirement, the property returns back to the employer.

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16
Q

If IRC 83 property has a vesting scheduled attached to it, is the property taxed when it is given or once it’s vested to the employee?

A

It likely is not taxed until the employee has emerged from the vesting schedule

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17
Q

Under what IRC code can an employee make an election to be taxed upfront for property received under IRC 83?

A

IRC 83B allows an employee to be taxed upfront if elected. This makes a lot of sense if the employee expects the property to increase in value.

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18
Q

415 compensation does not include these four types of remuneration an employee might receive as they participate in the 401k, receive other benefits or in general payment, regardless of whether the plan applies the current includable comp definition or the Safeharbor version of this definition.

A

ER Contributions to a DC plan

EE Distributions from a DC plan

Stock options

ER Premiums for benefits: i.e., premiums for Group term, life insurance, employer contributions to a 403B plan

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19
Q

Many plan documents that use the current includable income definition of 415 comp, do so through what provision?

What is required if this is elected?

A

adopt a safe Harbor rule of comp

The Plan document must specify that it is using the safe Harbor rule for 415 comp purposes

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20
Q

What is the net result of implementing the safe Harbor rule on current includable definition of 415 compensation?

A

It would have that effect of reducing an employees 415 compensation

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21
Q

Under the W-2 compensation definition, IRC 415 compensation is defined as wages determined under what IRC?

A

3401 a

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22
Q

Wages under IRC 3401 are

A

Wages for income tax, withholding purposes

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23
Q

The W-2 definition is similar to the wages definition for FICA purposes, but is:

A

More inclusive

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24
Q

Any rules that limit the renumeration included in wages based on ____ or ____ of the employment where the services performed are disregarded

A

Nature or location

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25
The IRS permits the plan to state the W-2 comp definition by referencing amounts reported as:
Wages, tips, or other compensation shown on form W-2
26
What additional payment types are included in the W-2 definition of compensation? (Three types) (FIND)
**Foreign income** **Non-cash payment** such as taxable portion of a company car **Distributions from an unfunded nonqualified plan**
27
Deemed distributions under IRC 409 a in post 2004 tax years are also wages for W-2 purposes, true or false?
If after 2004, true
28
What is the third permissible definition of IRC 415 compensation?
Wages for income tax, tax withholding – IRC 3401A
29
Using the IRC 3401a definition of compensation, is compensation included in wages based on the nature or location of the employment or service performed?
Yes. It cannot be disregarded, even if it is elsewhere.
30
Are payments from qualified plans, excluded, or included in the definition of IRC 3401A?
Excluded
31
Are payments for unfunded, non-qualified, deferred comp plans included in the definition of IRC 3401 a compensation?
They are generally included Because they are treated as wages when paid
32
Using the IRC 3401 a definition of compensation, wages can be determined by means other than hours and salary. What are three other ways that wages can be determined?
Time, piece work, percentage of profits
33
In what cases would sick pay not be included in the IRC 3401a definition of compensation?
If the sick pay was provided by a third-party insurer and the third-party is liable for income tax withholding.
34
What about Worker’s Comp.? Is Worker’s Compensation covered underneath the IRC 3401 a definition of compensation?
No. Payments that are made pursuant to workers comp are not reported as wages by the employer.
35
Are payments made under a reimbursement or other expense allowance arrangement included or excluded from the IRC 3401a definition of compensation?
They are excluded- if payments are treated as paid under an accountable plan
36
What are some examples of non-taxable fringe benefits?
Concierge Services Employee Discounts Company car De Minimus benefits like the copier Qualified transportation benefits On site gym Qualified tuition reduction
37
What’s the deal with qualified transportation benefits that are purchased and how are they included or excluded from the IRC 3401 a definition of compensation?
They are not included in box one of W-2, but will be included in comp for elective deferrals
38
Is a housing allowance for a minister included in the IRC 3401 a definition of compensation?
No
39
How is the compensation determined for a self-employed individual?
It’s based off of earned income, regardless of which of the three definitions of 415 is used for the other participants
40
Tips: current includable compensation _______ all tips. W-2 and IRC3401A ______ non-cash tips and tips of less than ______ per month
Includes Excludes, $20
41
IRC 3401F recognizes tips as wages when a _______ statement including such tips is given to the employee. If no statement is furnished, tips are treated as wages when?
Written When received by the employee
42
Generally withholding on tips that are treated as wages can be taken from non-tip wages. Under what circumstances? What would be the alternative?
If the non-tip wages are insufficient to cover the withholding liability The employee turns over sufficient funds to cover the withholding
43
Exceptions exist for each type, but generally How are Medical benefits, which includes amounts paid under accident, and health plans are treated under: W2 Current Includable IRC3401a
Included Excluded. Included
44
Any portion of Group term life insurance, which is included in the employees income is treated how by the various definitions of compensation? W2 & Current Includable do what? IRC 3401a does what:?
W2 & Current Includable: Included IRC 3401a: excluded
45
non-qualified stock options are treated how by current includable? How about W2 and 3401a?
Current includable - excluded W-2 and IRC 3401a - included
46
Money’s realized from the sale, exchange or disposition of qualified stock options are included or excluded from all definitions of comp?
Excluded
47
What are two different names for qualified stock options?
**Incentive** stock options **Statutory** stock options
48
Distributions from an unfunded, non-qualified Plan are included as compensation in which definitions:
W-2 & IRC 3401a Current includable excludes
49
What is an IRC 409 a plan?
Not qualified deferred compensation plan
50
Are deemed distributions from a IRC 409A, non-qualified deferred comp plan considered wages for 401(k) purposes? If so, under which definitions of comp?
They are considered income, but only two of the definitions of compensation include them, which are W-2 and IRC3401A definitions. They are excluded under current includable compensation and the Safeharbor definition
51
In all definitions of compensation qualified, moving expenses are included or excluded? What about non-qualified moving expenses?
Qualified is excluded from all forms of compensation. Non-qualified is only included in current includable comp
52
415 income is grossed up to include pretax, deferrals, true or false?
True – this is consistently applied across all definitions of 415 compensation
53
All three definitions of compensation treat contributions to an unfunded nonqualified plan as compensation when?
When the funds are received from the non-qualified plan
54
All definitions of 415 must grossed up to include these two contribution types that pertain directly to the 401k and what two benefits outside of the 401k?
Pretax 402G deferrals Pretax catch-up Pretax section 125 contributions Pretax deferrals for qualified, transportation, fringe benefits
55
Is the earned income of a self-employed individual gross back up to cover pretax elective contributions to 401(k) Deferrals.
Yes
56
Are employee contributions picked up by a governmental employer via a pick up arrangement?
No, they are not
57
Our Roth contributions added back in for 415 comp definition?
No, they are not added back in
58
What is the first weeks rule?
It allows compensation that accrued during the prior year, but is paid in the current year to be considered for the 401(k).
59
What are the requirements in order that the first few weeks rule be able to be applied?
The amounts are paid during the first few weeks of the new year. The amounts are included on a uniform basis to all employees. No comp is included in more than one limitation here. You don’t get to count twice.
60
Is the first few weeks rule available? Only if you have an accrual basis?
No, it’s available whether you use cash or accrual.
61
Is all compensation in a related group considered even if one of the IDs doesn’t offer a plan?
Yes, all income inside of a controlled or affiliated service group is combined for consideration
62
How are service members treated before the HEART act when they were deployed?
They were treated as terminated employees
63
In what year was the HEART act enacted?
2008
64
What does the HEART act allow?
Allows payments from an employer to a employed service member, not to exceed normal wages during a period of active duty.
65
What are the requirements for the HEART act?
The differential wage payment can be made if the active service member is on duty for more than 30 days. And Represents all or a portion of the wages the employee would’ve received had they been at work
66
Each of the 415 compensation definition is a safe harbor definition of what?
414 S compensation
67
414 S compensation is used for the following five items: (STAMP)
**Selective** deferrals **Tests:**Non-discrimination for contributions and benefits **After** tax employee contributions **Matching** contributions **Permitted** disparity formulas
68
Differential wage payments may be considered part of 414 S comp? True or false.
True, or they may be excluded as well
69
Regulations permit three Safeharbor modifications, to a 415 definition of compensation to arrive at 414S, what are they?
Exclude fringe benefits Exclude elective deferrals Exclusions applied only to HCE’s
70
If only some, but not all of the modifications allowed to 415 definitions of compensation to arrive at 414s are performed, does the definition still meet a safe harbor def of 414S and not need to be tested?
That’s correct. Any combination or all three of the modifications to 415 may be made and still be considered safe Harbor
71
What is the limitation year?
It’s a 12 month period is defined by the IRS that establishes limitations for compensation that can be considered for the 401(k) as well as contribution limits
72
What is the plan year?
The 12 month period during which compensation is recorded and deferrals are attributed as well as contributions from an employer. It typically is a calendar year or it could be a fiscal year. In either event the planer is defined in the Plan document.
73
What is the measurement year?
Has several applications, it will be the 12 month period that is used for determining various criteria for the 401(k). For example, the measurement year for determining 415 compensation is the limitation year. When used as the basis for computing 414 S, the compensation is measured for the Plan year.
74
What items can be excluded from 414 S compensation and still provide a safe harbor definition of 414 S? (DWARF) **What is the rule if these types of compensation are excluded?**
Deferred compensation Welfare benefits All of the above must be excluded for the modification to be a safe harbor. If only some are excluded, the definition must be tested. **(This is the rule if these exclusions are made)** Reimbursements/expense allowances Fringe benefits (cash, and non-cash)
75
Exercising the safe Harbor exclusions available to 414 S, what is the implication to the three different types of 415 compensation?
By excluding these items, most of the differences between the three different versions of 415 compensation are eliminated
76
415 compensation requires deferrals be included in compensation, but 414 S may exclude them. What did the deferral exclusions cover?
401k, 403b, Simple IRA, SAR Sep Section 125 or 457 Qualified Trasnportation
77
How are Roth deferrals treated under the 414 S safe Harbor exclusion option?
They are not treated any differently than pretax deferrals
78
Regarding 414 S, if there is more than one deferral arrangement- say there is a 401(k) plan and a section 125 plan, is it permissible to exclude deferrals for one and not the other and still retain a safe Harbor definition of 414 S?
The modification would not be considered safe Harbor. Exclusions must be consistent across all deferral arrangements.
79
If 415 compensation is modified in any manner other than by safe Harbor modifications the resulting compensation may be treated as 414S only if (two criteria)
The definition is reasonable And Satisfies the compensation ratio test
80
If 415 comp is modified in a manner using non-safe Harbor modifications, which are not reasonable or do not satisfy the compensation ratio test, then they can’t be used for DAMP. However, the plan may still use them for what?
Allocation of contributions and/or determination of benefits These have to be tested under IRC 401A4 using a comp definition that does meet for 414 S requirements.
81
Does a Safeharbor application of say Perrada profit share need to be tested if the definition of compensation doesn’t pass for 414s?
Yes, it would have to pass the compensation ratio test using W-2 wages or an acceptable 414 S definition of comp, the plan to defined comp and determine whether or not the allocation percentage of “Prorata profit share” there’s actually pro Rata.
82
What modifications will be considered reasonable definitions? (COPE)
Call in premiums Overtime Premiums for shift differential Excluding bonuses
83
What is the de minimus spread that’s allowed for using the compensation ratio test
If the NHCEs exceed the ratio of the HCEs OR If the HCEs are no more than 3% above the NHCE %
84
414 S definition for self-employed individual means earned income as defined in
IRC 401 C2
85
Is the rate of pay definition of compensation a safe harbor definition?
No, and it must be tested
86
Can compensation from a related employer and a controlled group or affiliated service group be disregarded?
only if the compensation ratio test can be satisfied under the modified definition
87
If the 401(k) is going to be a safe harbor 401(k), then how must the definition of compensation be defined?
The definition used for allocation purposes must satisfy one of the permitted definitions of IRC 414S comp.
88
Sometimes the Plan document will specifically exclude or include severance payments and determining an employees allocation, true or false?
True
89
Severance comp generally is not included in 415. However, payments are included if: (two criteria)
The payment is made by later of: 2 1/2 months after severance Or last day of limitation year in which Separation occurs OR The amounts would have been included in 415, if they were paid prior to the employee severance and fall into one of two categories : Regular comp Unpaid sickleave vacation and PTO
90
What types of post severance pay are never included?
Non-qualified deferred compensation Parachute payments received after termination
91
Why is post severance pay not allowed to be contributed to a 401(k)?
The IRS says because the individual is no longer an employee
92
A preapproved plan must offer at least two definitions of safe Harbor 414 S compensation, true or false?
False they need to offer at least one
93
Concerning overlapping plans, in a taxable year of contributions made under the 401(k) are elective, deferrals only than what happens?
The 404a7 limit does not apply
94
What is the 404a7 deduction limit?
25% of comp of all participants under the overlapping plans Or The minimum funding requirement for the defined benefit plan
95
Why would the 404a7 limit not apply to overlapping plans? What covers the defined benefit plan in such case cases
Because contributions are only being made to the 401(k) arrangement and a defined contribution plan and nothing else Pension benefit guarantee corporation
96
What is the 404a7 limit in practice? What is the limit?
The total deductible contributions an employer can make when an individual is a participant in both a DC & DB plan. Limit equals 25% of comp OR amount needed for minimum DB funding standard
97
Are profit sharing contributions that are less than 6% of compensation subject of 404a7 limitation?
If the 6% cushion is not exceeded in the 401(k), then the 404a7 does not apply to the DB plan
98
IRC 415, must include elective deferrals to a plan, true, or false?
True
99
The average percentage of total comp that is considered for non-highly compensated must be at least 70% of the average percentage of total compensation considered for HCE’s in order for the definition of compensation to satisfy IRC 414 S? True or false.
False. 70% is not relevant HCE ratio of compensation can only exceed the NHCE by up to 3% NHCEs can always exceed HCEs
100
The plans definition of compensation used for allocating contributions must satisfy the non-discriminatory definition of comp under 414 S, true or false?
False A plan is not required to use comp that satisfies 414 S in calculating the amount of contributions provided.
101
414 S compensation must include elective deferrals to a 401(k) plan to avoid testing that definition for non-discrimination, true or false?
False Deferrals can be excluded as long as all deferrals are excluded
102
415 comp must be used to determine HCE’s, true or false?
True
103
414 S, must be used to determine key employees, true or false?
False 415 is used to determine key employees based on compensation
104
415 comp must not include tips depending on how 415 comp is defined, true or false?
False
105
Designated Roth contributions are included in 415 compensation, true or false?
True. Care must be taken in the Roth is not counted twice due to how the contributions are reported on W-2s
106
Excluding non-taxable fringe benefits from 415, is a safe modification to 414 S compensation meaning the resulting definition will not need to be tested for non-discrimination purposes, true or false?
False. Non-taxable fringe benefits are not included in any definition of compensation, and therefore would not require a test
107
415 comp is based on the plan year, true or false?
False it is based on the limitation year
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