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Navigating the Eligible Compensation Minefield

Practice Management

Mistakes involving eligible compensation are often at the center of compliance problems. A recent blog entry offers suggestions on ways to avoid such errors. 

So common are mistakes concerning eligible compensation, reports Cassell Plan Audits, that they saw no other kind of error as often in the 2020 audit season. “It’s counterintuitive, because the definition of ‘eligible compensation’ is dictated by the employer sponsoring the plan,” they write. “If the policy is under the employer’s control, you’d think everyone would get the implementation right … But you’d be wrong,” they continue. 

Digging a little deeper, they cite an unclear definition of eligible compensation as the top insight they gleaned last year from their audit work. For instance, they note, what constitutes eligible compensation “can get tricky” when its definition differs for types of contributions the plan allows. “And even when the definition is clear, the execution can get muddy,” they say. 

Mistakes can happen quite easily, Cassell Plan Audits suggests. For instance, they may simply happen because of inertia, they suggest; for instance, a long period may have elapsed since the establishment of a plan and it initially defined eligible compensation in its documents. Or mistakes can result from turnover in a human resources department, or from engaging with an outside party. 

They advocate “strict, well-defined controls” regarding what compensation is eligible, and a variety of steps to help the plan to avoid errors with eligible compensation. Among these are the following: 

Perform a self-audit. The blog recommends auditing income types against the plan, which defines compensation that is eligible to be included. They note that plans generally include three ways by which compensation will be defined: 

  • wages as defined on the Form W-2;
  • compensation subject to federal income tax; and 
  • compensation covered by the Code Section 415 safe harbor. 

Furthermore, they caution, compensation as defined in any of these manners can include or exclude specific forms of compensation such as reimbursements, moving expenses and overtime pay; therefore, they suggest matching income types against those the plan includes and excludes. 

Perform reviews. Review benefits plan documents to ensure that election forms match plan terms. Also, review compensation definitions annually.
Plan sponsor training. Make sure that the plan sponsor understands the plan documents. 

Create a checklist. Prepare a checklist by which it is possible to determine whether a particular check paid to an employee is considered part of compensation or not. 
Set and implement policy. Implement a strong policy that is clear, and make sure that all those involved with payroll and benefits plans are aware of it. 

All comments
Ivis Cardona
3 years 2 days ago
Create checklist for pay types with Emely