Section 415 compensation is a term used in the context of retirement plans, specifically 401(k) plans, to calculate employee deferrals and company contributions (https://www.forusall.com/401k-blog/415-compensation-for-safe-harbor-401-k-plans). It is defined as all items of remuneration described in the Internal Revenue Code (IRC) Section 415(c)(3), with certain exclusions (26 CFR § 1.415(c)-2).
Key Facts
- Definition: Section 415 compensation is defined as all items of remuneration described in the Internal Revenue Code (IRC) Section 415(c)(3), with certain exclusions.
- Inclusions: The following types of remuneration are generally included in Section 415 compensation:
- Wages, salaries, and fees for professional services
- Amounts received for personal services rendered in the course of employment
- Commissions, bonuses, and tips
- Fringe benefits and reimbursements under a nonaccountable plan
- Amounts deferred at the employee’s election that would be includible in gross income
- Exclusions: There are certain items that are not included in Section 415 compensation:
- Contributions made by the employer to a plan of deferred compensation
- Distributions from a plan of deferred compensation
- Certain types of contributions specified in the IRC
- Safe Harbor Definitions: There are safe harbor definitions of compensation that can be used in a retirement plan instead of the generally applicable definition. These safe harbor definitions provide clarity and simplify compliance testing.
Inclusions
The following types of remuneration are generally included in Section 415 compensation (26 CFR § 1.415(c)-2):
- Wages, salaries, and fees for professional services
- Amounts received for personal services rendered in the course of employment
- Commissions, bonuses, and tips
- Fringe benefits and reimbursements under a nonaccountable plan
- Amounts deferred at the employee’s election that would be includible in gross income
Exclusions
There are certain items that are not included in Section 415 compensation (26 CFR § 1.415(c)-2):
- Contributions made by the employer to a plan of deferred compensation
- Distributions from a plan of deferred compensation
- Certain types of contributions specified in the IRC
Safe Harbor Definitions
There are safe harbor definitions of compensation that can be used in a retirement plan instead of the generally applicable definition (26 CFR § 1.415(c)-2). These safe harbor definitions provide clarity and simplify compliance testing. The three safe harbor definitions are:
- Simplified compensationIncludes only wages, salaries, and fees for professional services, and excludes all other items listed in the IRC.
- IRC Section 3401(a) wagesIncludes wages subject to federal tax withholding, plus amounts that would be included in wages but for certain elections.
- Information required to be reported under sections 6041, 6051, and 6052Includes all payments of compensation to an employee by their employer in the course of the employer’s trade or business for which the employer is required to furnish the employee a written statement.
Conclusion
Section 415 compensation is an important concept in retirement planning. Understanding its definition, inclusions, and exclusions is crucial for calculating employee deferrals and company contributions, as well as for compliance testing. Employers should consider using the safe harbor definitions of compensation to simplify the process and ensure compliance with the IRC.
References
- 26 CFR § 1.415(c)-2 – Compensation
- https://www.forusall.com/401k-blog/415-compensation-for-safe-harbor-401-k-plans
- https://www.employeefiduciary.com/blog/401k-plan-compensation-what-employers-need-to-know
FAQs
What is Section 415 compensation?
Section 415 compensation is a term used in the context of retirement plans, specifically 401(k) plans, to calculate employee deferrals and company contributions. It is defined as all items of remuneration described in the Internal Revenue Code (IRC) Section 415(c)(3), with certain exclusions.
What types of remuneration are included in Section 415 compensation?
Section 415 compensation generally includes wages, salaries, fees for professional services, commissions, bonuses, tips, fringe benefits, and reimbursements under a nonaccountable plan.
What types of remuneration are excluded from Section 415 compensation?
Section 415 compensation excludes contributions made by the employer to a plan of deferred compensation, distributions from a plan of deferred compensation, and certain types of contributions specified in the IRC.
Are there any safe harbor definitions of Section 415 compensation?
Yes, there are three safe harbor definitions of Section 415 compensation that can be used in a retirement plan instead of the generally applicable definition: simplified compensation, IRC Section 3401(a) wages, and information required to be reported under sections 6041, 6051, and 6052.
What is the purpose of the safe harbor definitions of Section 415 compensation?
The safe harbor definitions provide clarity and simplify compliance testing for retirement plans.
Which safe harbor definition of Section 415 compensation is the most inclusive?
The safe harbor definition that includes information required to be reported under sections 6041, 6051, and 6052 is the most inclusive, as it includes all payments of compensation to an employee by their employer in the course of the employer’s trade or business for which the employer is required to furnish the employee a written statement.
Which safe harbor definition of Section 415 compensation is the least inclusive?
The safe harbor definition that includes simplified compensation is the least inclusive, as it only includes wages, salaries, and fees for professional services.
How do I determine which safe harbor definition of Section 415 compensation to use in my retirement plan?
Employers should consider the specific needs of their plan and participants when selecting a safe harbor definition of Section 415 compensation. The most inclusive definition may not always be the best choice, as it could result in higher costs for the plan.