Compensation Definition Rules for Qualified Retirement Plans

Summary

This practice note explains requirements and considerations for defining the term “compensation” in retirement plans intended to be qualified under the Internal Revenue Code (I.R.C.). Quantifying employee and participant compensation is important for various purposes under such plans. Foremost, compensation is used to determine plan contributions or benefits. However, compensation is also used to administer limitations on contributions or benefit accruals, to determine highly-compensated-employee status, and to comply with non-discrimination and top-heavy rules. Statutory and regulatory requirements dictate the parameters of the definitions of compensation that qualified plans can use for certain tasks. Although a plan can use a single definition for all purposes (assuming it complies with all of the applicable I.R.C. requirements), it is common to use different definitions for different purposes. Choosing among the definition formulations permitted under the I.R.C. is one of the ...