An Introduction to Compensation for Retirement Plans

When you hear the word compensation, what comes to mind?

For most people, the word just means the money they receive in their paycheck. If you’re a retirement plan sponsor, there are three primary ways of defining the word ‘compensation’ when it comes to plan administration.

  • W-2 Wages: This is typically what comes to mind when an HR person or plan administrator thinks of about compensation. This is the amount reported in box 15 of a W-2 form and includes W-2 wages are calculated for the year and include the additional amounts of compensation, if any, that do not have income tax withheld.
  • 3401a Wages: Named for the section in the tax code it appears, that Code Section 3401(a) wages are defined as compensation that is subject to federal income tax withholding at the source of the compensation.
  • 415 Compensation: Unlike the previous two definitions, this is not used for tax reporting. 415 compensation is an employee’s gross wages, including pre-tax salary deferrals, fees for professional services, and amounts received for personal services.

Understanding differences between compensation definitions

Use the following chart as a quick guide to the differences between different kinds of compensation. This is not intended as a complete list, but as an easy reference tool.

Type of Compensation

W-2 Wages

3401(a) Compensation

415 Compensation

Wage/Salary

Included

Included

Included

Overtime, Bonuses, and Commissions

Included

Included

Included

Tips

Noncash tips and tips under $20 per month are excluded

Noncash tips and tips under $20 per month are excluded

Generally included (exclude allocated tips)

Elective Deferrals

Included

Included

Included

Taxable Medical or Disability Benefits

Included

Included

Excluded

Shop Safe Harbor Plans ->

‍

What is 415 Safe Harbor compensation?

415 compensation is used for 401(k) compliance tests, most of which Safe Harbor plans are designed to pass automatically.

However, 401(k) plans with Safe Harbor features can still be subject to top-heavy testing, so these numbers do matter.

In the context of Safe Harbor 401(k) plans, 415 compensation is used to:

  • Verify your exemption from nondiscrimination testing
  • Determine key employee status for top-heavy testing
  • Calculate a top-heavy minimum contribution when necessary

What is 415 Safe Harbor compensation used for?

Your 401(k) plan provider will send over an Annual Data Request to ensure the correct compensation for the plan is filed each year.

These figures will be used to determine any employer contributions made to the plan. This is particularly important for Safe Harbor plans, which require mandatory employer contributions. Employee compensation is also factored in when applying the annual 415 limit (which is $69,000 for 2024).

What to include in 415 Safe Harbor compensation

Consider including the following items as 415 compensation:

  • All Wages
  • Salaries
  • Professional Service Fees
  • Sales Commissions
  • Bonuses
  • Tips
  • Overtime
  • Insurance Premium Commissions
  • Fringe benefits and allowable reimbursed expenses
  • Foreign earned income
  • Severance (separate from severance package)

What to exclude in 415 Safe Harbor compensation

You may leave out:

  • Employee compensation paid prior to entering the plan
  • Employee receipts from an unfunded or unqualified plan
  • Amounts paid under health or accident insurance plans (included under Section 83b)
  • Employee moving expenses
  • Medical or disability benefits
  • The value of non-qualified stock options
  • The cost of group term life insurance exceeding $50,000
  • Severance package (separate from severance pay)

Avoid mistakes and keep your 401(k) Plan in compliance with ERISA and the IRS!

Logging the correct compensation for employees will prevent a costly correction later. A good 401(k) plan administrator provides a detailed explanation of the different forms that employers are required to fill out, so all the information is accurate the first time around, and there are no costly, time-consuming corrections to make later.

At Ubiquity, we work with small business employers to ensure they understand the Safe Harbor 401(k) and how to test compensation applicable to their plan.

Ask questions to receive immediate answers – over the phone, in chat, or by email.

We’re always here for you! An experienced provider will make it easy for you to meet ERISA requirements mandated by the Department of Labor and IRS compliance standards. Whether you are interested in setting up a new 401(k) plan or would like to change an existing plan, Ubiquity offers attentive and proactive service.