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We are looking at paying bonuses and have a question. In order to calculate total compensation (to determine the 10% cap on profit sharing bonuses), the regulation states to total 1)All wages and tips reportable for Medicare tax purposes in box 5 on IRS form W-2, 2) contributions that are made to designated tax advantaged plans that are defined contribution plans, and 3)The profit sharing bonus itself (even though it is paid in a different year). My question is what about a section 125 Cafeteria plan. This compensation is not reported in box 5 of the w2. Can it be added for the total compensation amount? Or is this considered a “designated tax advantaged plan” that would be added in step 2 of the calculation? I can’t find anything in the regulation or comments that address this issue. Thanks for any input!
Based on the definitions from the IRS (see below),I don’t believe it would fit into the second category as a defined contribution, but that is something you would need to confirm with an accountant or tax professional.
I do believe it would be considered compensation and would be included in the total in order for compensation to be considered consistently among your employees. In the preamble to the final rule it mentions that the reason for attaching the w-2 amounts to the definition of total compensation in the commentary was to make things easier on creditors because they are already preparing that information.
I recommend you contact your regulator and get their opinion.
IRS Definitions:
1) https://www.irs.gov/retirement-plans/plan-participant-employee/definitions
and
2) Internal Revenue Code section 414(j), 26 U.S.C. 414(j):
(i) Defined contribution plan
For purposes of this part, the term “defined contribution plan” means a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.
(j) Defined benefit plan
For purposes of this part, the term “defined benefit plan” means any plan which is not a defined contribution plan.
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