Review of Qualified Plan Compensation Definition May be Needed Due To Tax Reform

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Tax reform made few changes that directly impact qualified retirement plans; however, it made some changes that may indirectly impact qualified retirement plans. We previously blogged on the indirect changes that tax reform had on hardship distributions. 

Tax reform also made changes to the taxation of certain fringe benefits that may impact the definition of “compensation” used in some qualified plans. Some qualified plans define compensation for plan purposes based on the taxability of a fringe benefit.  For example, a qualified plan may exclude from its definition of compensation “moving expenses, to the extent excluded from gross income.”  After tax reform, employers may no longer pay or reimburse moving expenses on a tax-free basis.  In the example, since moving expenses are no longer excludable from gross income, they will become includible in the definition of compensation under the qualified plan.

Plan sponsors may want to take this opportunity to review the definitions of compensation used in their qualified plans against the pay codes in their payroll systems to make sure the proper items are includible under the qualified plans’ definitions of compensation.  A disconnect between the qualified plan’s definition of compensation and the payroll system pay codes is one of the most common errors that plan sponsors make in administering qualified plans.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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