![]() In addition to one of these definitions, many 401(k) plan sponsors choose to exclude income related to reimbursements or other expense allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation and welfare benefits from the definition of compensation for deferral and match purposes, and these exclusions are considered legally compliant. 401(k) safe harbor plans must use one of the preceding compensation definitions in order to satisfy applicable Code requirements to be treated as a safe harbor plan. ![]() Most 401(k) plans, including safe harbor 401(k) plans, use one of the following compensation definitions for 401(k) deferral and match purposes: (i) a W-2 wages’ amount, plus additional amounts that would be wages but for a participant election (e.g., a pre-tax election under the 401(k) plan sponsor’s cafeteria plan and the participant’s 401(k) deferral election), (ii) Internal Revenue Code (Code) Section 3401(a) wages (i.e., a participant’s wages subject to withholding at the source, plus additional amounts that would be wages but for a participant election), or (iii) a Code Section 415 amount that includes wages, salaries, fees for professional services provided to the 401(k) plan sponsor, plus additional amounts that would be wages but for a participant’s election. What are the General Definitions of Compensation that May be Used for 401(k) Deferral and Match Calculation Purposes? These failures may result in time-consuming and expensive corrections being required through the Internal Revenue Service’s Employee Plans Compliance Resolution System (EPCRS) to maintain the 401(k) plan’s tax-qualified status. Unfortunately, compensation-related failures are common occurrences in connection with 401(k) plan administration. Failure to include a legally compliant definition of compensation will result in a plan document failure, and the failure to follow the plan’s definition of compensation when withholding participant elective deferrals and calculating company matching contributions will result in an operational failure. Compensation is a material component in determining a 401(k) plan participant’s deferral contributions and related company match amounts. Why is This Topic Important?Ĥ01(k) plan sponsors are required to include a legally compliant definition of “compensation” within the plan document. In last month’s Compliance Check, we discussed how to handle a situation where the 401(k) plan administrator is unable to reach a plan participant, i.e., a “missing participant.” In this month’s Compliance Check, we focus on your 401(k) plan’s compensation definition for deferral and match purposes. This article discusses the importance of 401(k) plan sponsors maintaining and properly administering a compliant definition of “compensation” for calculating plan deferrals and matching contributions. For example, a put writer is hoping an underlying stock won't drop below the strike price, the buyer is hoping it will.The further below the put's strike price the underlying falls, the larger the loss for the writer, and the bigger the profit for the put buyer.To help employers properly administer their 401(k) plans, in 2022, Foley & Lardner LLP is authoring a series of monthly “401(k) Compliance Check” newsletters. They get paid upfront, but face high risk (if uncovered) if the option becomes very valuable to the buyer. The premium is what option writers are after. For this right, the option has a cost, called the premium. Option buyers are given the right to buy or sell an underlying security, within a certain time frame, at a specified price by the option seller or writer. Option buyers want the options to expire in-the-money. Option writers prefer if options expire worthless and out-of-the-money, so they get to keep the entire premium.A put or call can be covered or uncovered, with uncovered positions carrying much greater risk.Option writers collect a premium in exchange for giving the buyer the right to buy or sell the underlying at an agreed price within an agreed period of time.
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