Introduction January 31st, January 15th January 31st

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1 Introduction Nondiscrimination testing is one of the most critical aspects of plan administration. Maintaining a tax-qualified plan provides significant tax advantages to both the plan sponsor and the plan participants. Failure to comply with the nondiscrimination testing requirements may jeopardize the tax-qualified status of the plan. The Compliance testing service offered by Prudential can help your plan comply with nondiscrimination tests that the government has established. If you have elected our compliance testing services, this booklet will assist you with general guidelines and help you understand how a successful submission of plan data will result in the efficient and accurate completion of your tests. If your plan's nondiscrimination tests are not administered within the time frames specified by federal regulations, the employer may be subject to penalties, excise taxes and potential plan disqualification. Please refer to the information below when submitting accurate data in the specified format to Prudential. You will be notified via prior to the end of the plan year as a reminder that it is time to do your plan s testing. The will include a link to our website s Compliance Testing tab, where you can either: Start the testing process for the year (you will be directed to the following steps: Review Plan Specifications; Complete Testing Questionnaire; and Submit Testing Data); or Let us know you do not want us to do your plan s compliance testing. We will send you weekly s until you elect or decline our year end testing services. After the first month, if you don t take any action, you will receive monthly reminders. If testing data is accurate and is submitted by January 31st, Prudential will process any ADP/ACP corrective distributions (adjusted for earnings or losses) by the 2 ½ month deadline. If you want Prudential to complete a contribution or forfeiture allocation that is intended to be funded during the first quarter of the plan year, your data and questionnaire must be provided by January 15th. If testing data is not accurate and/or is not submitted in the correct format, you will be required to resubmit the data. In addition, if you resubmit the data after January 31st, Prudential may not be able to remove excess contributions by the 2 ½ month deadline. Please note: The information you provide directly affects the results of your tests. Prudential has no responsibility for consequences resulting from incorrect data. In addition, the data provided for compliance testing purposes does not automatically update Prudential s recordkeeping system. Any recordkeeping updates must be submitted via normal business process. November

2 Table of Contents What s New... 4 Reminders... 4 Plan Sponsor Testing Checklist... 5 Compliance Testing Timeline... 6 Compliance Testing Web Walk-Through... 7 Quick Links Compliance Testing Checklist Data Specifications Compensation Glossary Qualified plans under section 401(a) [including section 401(k) plans]: Section 415 (Annual Additions Limitation) for Qualified Plans under Section 403(b) Compliance Testing Definitions Actual Deferral Percentage Actual Contribution Percentage Catch-Up Contribution % Owner Highly Compensated Employee (HCE) Key Employee Non-Highly Compensated Employee (NHCE) Minimum Coverage Test (IRC Section 410(b)) Elective Deferral Limit (IRC Section 402(g)) Annual Additions Limit (IRC Section 415(c)) Compensation Nondiscrimination Test (IRC Section 414(s)) ADP/ACP Test (IRC Section 401(k) & Section 401(m)) Top Heavy Test (IRC Section 416) General Nondiscrimination Tests (IRC Section 401(a)(4)) Question and Answers Employee Classifications Compensation Safe Harbor and EACA Plan Designs Contributions November

3 ADP/ACP & Minimum Coverage Testing Top Heavy Testing Related Employers Mid Year Compliance Testing November

4 What s New Plan Sponsor Testing Checklist Provides a helpful checklist to assist in ensuring complete and accurate data is provided. Please refer to the Plan Sponsor Testing Checklist page for important information. Reminders Data must be submitted in good order and in the required standard data format If revised testing is requested because of incorrect data submission, additional fees will be assessed. Screen Resolution You may need to change to the standard resolution for websites (1024x768 is not recommended). Compatibility View/Setting You may need to make the following changes to your Internet Explorer to allow all options to be reflected: Compatibility View. Click Tools, and then make sure Compatibility View is not checked. The internet page will refresh to update your view. Incorrect: Correct: Compatibility View Setting. Click Tools, then Compatibility View Settings. Be sure the first two boxes ( Include updated website lists from Microsoft and Display intranet sites in Compatibility View ) are not checked. notifications You will be sent s when: Your data has finished importing and is now available for you to view. Your data has been requested and is now available for you to view. An export file has been requested and is now available for you to view. s from PruRetirement edocs If you have any trouble viewing these s, we recommend that you contact your technology experts to check your computer s settings. November

5 Plan Sponsor Testing Checklist Plan Sponsor is responsible for performing the below steps: 1. Submission of a completed Compliance Testing Questionnaire Note: Any items left unanswered upon submission will be assumed to be No/Not Applicable. 2. Submission of complete and accurate data for testing purposes Population: Confirm the entire testing population was provided. This is generally all employees who perform at least one hour of service within the plan year. Certain employees are excludable from testing and do not need to be included, such as excluded union, excluded non-resident aliens and employees who did not meet minimum age & service do not need to be provided. However, you would need to identify Highly Compensated Employees (HCE) who were not previously provided. Compensation: Confirm compensation provided is correct per the definition elected in the plan document. HCE/415 compensation must be provided (one of the following definitions must be used per your document: W2, 3401(a), 415, 415 Simplified). If eligible compensation is not provided under Pretax, Match, Other, or Post-Tax Compensation columns as needed, HCE/415 compensation will be used to identify plan limit overages. Contributions: Confirm contributions tie back to your payroll records for the plan year. Employer contributions applicable to the plan year should be included, even if not yet funded. Indicators: All indicators (ex: Officer) and additional information (ex: Ownership) were included on the data file. Confirm there are no missing or invalid dates, indicators, compensation or contribution amounts. If the plan uses hours for eligibility for allocation purposes, confirm hours were provided for all employees. If hours are not provided we will assume 1000 hours for the plan year. 3. Submission of additional data as requested Once the Questionnaire and data is remitted, Prudential may request additional information as it relates to the below questionnaire items: Puerto Rico participants, USERRA contributions, Mergers & Acquisitions, Controlled Groups, QSLOB identification, Missed Deferrals and requested allocations. November

6 Compliance Testing Timeline Plan Year-End Data Submission Deadline* (1 month following plan year end) ADP/ACP Correctives processed by (2 ½ month deadline) ** (mm/dd) (mm/dd) (mm/dd) 12/31 01/31 03/15 01/31 02/28 04/15 02/28 03/31 05/15 03/31 04/30 06/15 04/30 05/31 07/15 05/31 06/30 08/15 06/30 07/31 09/15 07/31 08/31 10/15 08/31 09/30 11/15 09/30 10/31 12/15 10/31 11/30 01/15 11/30 12/31 02/15 * This is the deadline by which a Plan Sponsor must submit the Compliance Testing Questionnaire and the employee data file to Prudential in order to receive results and have any corrections to a failed ADP/ACP test completed within 2 ½ months after the end of the plan year. Any corrective distributions to remedy a failed ADP or ACP test that are processed after the 2 ½ month deadline will result in a 10% excise tax for which the Employer is responsible. However, it is permissible to refund ADP excess contributions or ACP excess aggregate contributions to correct a failed test after the 2 ½ month deadline so long as corrective distributions are made within twelve months after the end of the plan year being tested. Prudential suggests that Plan Sponsors taking corrective action more than twelve months after the end of the plan year refer to the correction guidance in Revenue Procedure (as known as the Employee Plans Compliance Resolution System (EPCRS) guidance). ** If test results with respect to a plan that contains an eligible automatic contribution arrangement (EACA) provision show ADP and/or ACP excess amounts that need to be distributed to HCEs, the deadline for distributing ADP/ACP corrective distributions to avoid the 10% excise tax is 6 months after the close of the plan year rather than 2 ½ months after the end of the plan year. November

7 Getting started: Compliance Testing Web Walk Through Already registered? New User? Questions? Enter your User ID and password Contact your Relationship Manager for access at Contact your Compliance Testing Specialist at November

8 Compliance Testing The following pages explain the Compliance Testing tab section of our website in detail and the steps to complete nondiscrimination testing for your plan year. As you move through the Compliance Testing tabs, you will be prompted to either answer questions or input corrected participant data. Click on the Manage Plan button, click on Plan Compliance in the Administration column, and then click on the tab marked Compliance Testing. Click Plan Year Testing. (You will see the current year s testing information and prior and mid-year information, if applicable.) Answer the questions and click Save to move to Step #1. November

9 Plan Specifications This section reflects the plan document information that will be used to complete your plan s compliance testing process. Complete the following steps: Review plan document information. Please Note: Plan Design Type is specific to those plans that follow the Safe Harbor plan rules. Contact your Relationship Manager or Compliance Testing Specialist with any questions. Check the box to acknowledge the information is complete and accurate. Click Submit. November

10 Testing Questionnaire Answer required questions. The responses to questions one, two, and five must correlate with the participant data in order to successfully submit data. o (e.g., if you indicate officers in your questionnaire, at least one officer must be identified in the data submission.) Further details can be found by clicking the Additional Q & A information link. Once all questions are answered, check the I acknowledge... box to confirm the information is complete and accurate. Click Submit to move forward with testing, or click Save & Continue to complete later. November

11 Testing Data This section contains the census data currently stored on our recordkeeping system. Complete the following steps: Click Please select a date range to begin. and enter the first payroll check date and last payroll check date of your plan year. Click Submit and you will be prompted to validate your address as an notification will be sent once the data is available for you to view. It may take a few moments for the data to display, depending on network activity. You can close the Sponsor Center and continue working while the data is retrieved. Plan Level Errors - A pop-up may appear informing you of the additional required information based on your responses from the Compliance Testing Questionnaire (questions one, two, and five). These errors will be present until a new data file is imported, or the data is submitted. Participant Level Errors - A validation will appear on each employee record. Any records indicated as Failed will need to be updated. When you click on a failed record, you will see the participant level data edit that caused the record to fail. November

12 To update individual records online: o Click the pencil icon to expand the employee records and review each record that has Failed in the Validation column. Input corrections to the employee record on this screen. When the employee record is saved, the web page will revert back to the Testing Data tab and the page will refresh. The employee record will now reflect a passing status. o All Failed records must be processed to reflect Passed in the Validation column. To update multiple records off-line: o You may export the file to make changes off-line by clicking Export Data and then clicking Submit to create the file. You will be prompted to validate your address as an notification will be sent once the data is available. You will experience a wait while the file is being generated depending on network activity. To retrieve the file, click on My Exports and save the Data File to make updates. The Error File provides a listing of errors that need to be corrected for each participant. Click on Import Data to upload your data file. Select the option to Use Prudential Contributions or Overlay data with what is on your file. When the option is selected to Create error file available under My Exports an excel file is generated while importing. There will be a wait time while your data is being imported. You will be prompted to validate your address as an notification will be sent once the data is available. o When the data is successfully imported, compare the totals from the pop-up on the web page to the amounts that were imported. You may be reminded of the participant information required based on your responses from the Compliance Testing Questionnaire (questions one, two, and five). Submit Data - The Submit button will be available when all participants have Passed validation. After clicking Submit, you will be prompted to provide your address so we can inform you whether the data has the required information or needs to be updated. After we receive the corrected data, we will perform the compliance testing and send you an with a link alerting you when the results are posted on the website. We may need to contact you for additional items (e.g., data questions, potential match violations and employer contribution calculation approvals) before testing is considered complete. November

13 Testing Results and Corrective Distributions When testing results are available, we will send you an with a link to the Testing Results tab. Please complete the following steps: Click on each Test/Limit to download the files for your records. Two years of testing results will be available on the Sponsor Center. Review the Additional Info for the IRS corrective methods for the failed test. Review the Result column and take action on each Failed item. The Further Steps column has a link to See Corrective Distributions that will guide you on how to approve the corrective distributions for processing. Select the desired action: Process all corrective distributions on date indicated* Process all corrective distributions now (it will be as of the current date)* - Select the check box to process these corrective distributions and choose Submit * If one of the two options above is selected, checks will be processed and sent directly to employees by Prudential. If special arrangements need to be made, please contact your Compliance Testing Specialist to make those arrangements before clicking Submit. Do not process distributions - Please enter an explanation and call your Relationship Manager or Compliance Testing Specialist Click Submit to process the corrective distributions. For further information regarding Corrective Distributions for the various tests, please click on the Summary of corrective alternatives link. November

14 This box has links to reference documents: Quick Links Compliance Testing Website Support - provides insight with respect to the online compliance testing process; annually updated with dates, data specs, compensation glossary, definitions, Q&A. Corrective Action Guide describes testing failures and corrective actions. IRS Corrections Programs - links directly to IRS website for self-correction information. Form 5330 & Instructions - links directly to IRS website for Form 5330, for testing done after the recommended time period. If you have any questions about completing your plan s compliance testing requirement, please contact your Compliance Testing Specialist at , or Compliance.Testing.Reporting@prudential.com. Please include your Plan ID in the subject line. November

15 Compliance Testing Checklist To Start: 1. Log on to the Sponsor Center sponsorcenter.prudential.com Click on the Manage Plan button, click on Plan Compliance in the Administration column, and then click on the tab marked Compliance Testing. 2. Answer the question indicating your preference for Prudential to complete your testing and choose Save. Proceed through the following sections: 1. Plan Specifications Review your document provisions. Check the box to acknowledge. Click Submit. 2. Compliance Testing Questionnaire Answer required questions. Click the box to acknowledge. Click Submit. 3. Testing Data Input date range for data file request: o Data can only be requested after your plan year ends. o Data request will take an hour or so to complete. Prudential will notify you via once your data is available for viewing. Close your browser while this data is being compiled. Plans that remit compensation on their payroll files should review and validate the data. Plans that don t remit compensation data should import their data file. Update participants in a Failed status. o Participants can be updated individually or by importing your data file. Click Plan Errors to ensure no additional participant information is required. Click Submit to provide data to Prudential. Provide your address for confirmation of your data submission. 4. Testing Results Review testing results. Download and save files for future reference. 5. Corrective Distributions If plan fails, corrective action may be necessary. Review. Check the box to acknowledge. Click Submit. November

16 Data Specifications This section of the Compliance Testing Data Submission Guidelines booklet explains, in detail, how your plan s data should be formatted. The information in this section is most useful for your payroll administrator or for the MIS individual at your company who would be able to ensure that your data is formatted correctly. Please disregard this section if you utilize one of Prudential s automated data submission options. Data Specifications Part 1 (Spreadsheet) 1 In order for Prudential to complete the necessary compliance testing for your plan, you will need to submit the employee data file in the standard format listed below. Please work with your payroll provider to have your file formatted as specified below. If your data is not submitted within the format listed below, it will not be considered in good order. You will be notified that your file has been rejected and resubmission of your data file within the correct format will be required. Resubmitted data files that are submitted after the deadline listed at the beginning of this guide will not be considered guaranteed for completion of testing by the 2 ½ month deadline. 2 Only the following spreadsheet application will be accepted: Excel, version 7.0 or lower 3 Do not submit or files with.exe extension 4 The file must be IBM Compatible. 5 For spreadsheet submissions: All column headings must be entered, but may be abbreviated; Data fields can be left blank, if not applicable to your plan; Enter dates in a MM/DD/CCYY format (e.g., 09/09/1974). Data Specifications Part 2 (Standard File Format) Part 2 of the data specifications provides instructions for setting up the standard file. The following information will help you use the Standard File Format Table: ** Item is required for all plans. Prudential will not begin the testing process if not provided. All other items are required if applicable to the plan. Standard File Format Spreadsheet Column A B C D Field Name & Comments **Social Security Number Number must be in format. Subplan - This should be the six digit subplan number associated with the Plan ID; or a unique identification of companies in a controlled group or multiple employer situations. **Employee Name - Format must be Last Name, First Name. **Birth Date Enter the birth date in a MM/DD/CCYY format (e.g., 01/15/1949). This date is needed for all employees, not just those employees participating in the plan. November

17 Standard File Format Spreadsheet Column E F Field Name & Comments **Hire Date Enter the original hire date (use column G for rehire dates) in a MM/DD/CCYY format (e.g., 09/09/1974). This date is needed for all employees, not just those employees participating in the plan. **Termination Date This is the employee's termination date. Enter the termination date even if the employee did not participate in the plan in MM/DD/CCYY format (e.g., 04/01/2004) or leave blank if not applicable. G Rehire Date - Enter the rehire date in a MM/DD/CCYY format. The date of termination must also be provided with any rehire date (e.g., 08/24/2007). H Hours Hours worked during the plan year must be in a number format, less than or equal to 3000, without decimals (Note: if decimals are provided, figures will be automatically rounded). If the plan has an hour s requirement for eligibility or allocations, this field must be completed. I J K L M Family Code Any person who owns stock in the company and has family members (Spouse, Child, Grandchild or Parent). Each Family group needs to be identified with the same number value (i.e. John Smith and Laura Smith coded with a 1 and Robert Jones, Marcia Jones and Paula Jones coded with a 2. Officer Indicator - Any company officer earning more than the allowable limit for the year being tested. If the test covers only part of a plan year, the limit should be prorated. This information is needed only if Prudential is determining Key Employees and performing your Top Heavy Test. This field is not required for ADP/ACP testing. Valid values are "Y" or "N". N/A for 403(b) Plans Highly Compensated Employee Indicator (HCE Indicator) - If Prudential is determining HCEs, leave this field blank. If you are determining who your HCEs are for the plan year being tested, enter values "Y" or "N". Exclusion Indicator - The plan may exclude or include only specific employee job classes. Use "Y" to indicate that the employee is excluded under the job class exclusions and "N" to indicate that an employee is not excluded. If the plan does not exclude any specific employee job classes enter "N" for all employees. This field is not to be used to identify eligibility status. Note: Part timers are not an excludible class of employees. Ownership Percentage - Any person employed by the company who owns, directly or indirectly, any employer stock, or other ownership interest, at any time during determination year, enter the actual percentage owned. Percentages are limited to a two decimal number, otherwise enter zeros. N O P Q Collectively Bargained Group # This information is used in performing the ADP/ACP test. If the plan has collectively bargained employees, enter a numeric union identification code (e.g. 1 for each employee of Union A; 2 for each employee of Union B, etc.). Otherwise enter zeros. Union Indicator This information is used in performing the ADP/ACP test. Enter Y if employee has collectively bargained for plan benefits, otherwise enter N. Non-Resident Alien Indicator - Enter Y if Non-Resident Alien with no U. S. source earned income. Valid values are "Y" or "N", otherwise leave blank **Compensation for Determining HCEs (HCE/415 Compensation) This compensation will be used by Prudential for various testing purposes (e.g. to determine the plan's HCEs for the upcoming testing year, 415 Annual Additions, 414(s) Compensation Testing, Top Heavy Minimum, etc). This field represents the current testing year earnings per the plan's definition of HCE compensation. November

18 Standard File Format Spreadsheet Column R S T U V W X Y Z AA AB AC AD Field Name & Comments **ADP/ACP Compensation This compensation will be used in the ADP/ACP test to calculate the percentages associated with those tests. According to your plan document, enter this compensation amount for every employee who received compensation for the plan year being tested. Pre-Tax Compensation - This compensation will be used to verify that pre-tax contribution percentages did not exceed plan limits. Enter zeros if not applicable. Matching Compensation This compensation will be used to verify that matching contribution percentages did not exceed plan limits. Enter zeros if not applicable. Other Compensation This compensation will be used to verify that contribution percentages other than matching contributions did not exceed plan limits. Enter zeros if not applicable. Post Tax Compensation This compensation will be used to verify that post-tax contribution percentages did not exceed plan limits. Enter zeros if not applicable. Pre-Tax Contribution The dollar amount the employee has contributed on a pre-tax basis during the plan year. If we have been recordkeeping the plan for the entire plan year and you want to use contributions from our recordkeeping system, leave blank. NOTE: If providing pre-tax contributions, include any catch up contributions in this amount. Post-Tax Contribution The dollar amount the employee has contributed on a post-tax basis during the plan year. If we have been recordkeeping the plan for the entire plan year and you want to use contributions from our recordkeeping system, leave blank. Match Contribution The dollar amount of Pre-tax/Roth related matching contributions the employee has received during the plan year. If we have been recordkeeping the plan for the entire plan year and you want to use contributions from our recordkeeping system, leave blank. Post-Tax Match Contribution The dollar amount the employee received as a post-tax match during the plan year. If we have been recordkeeping the plan for the entire plan year and you want to use contributions from our recordkeeping system, leave blank. Non-Match Contribution This field is only used in 415 Annual Additions and Minimum Coverage testing. If we have been recordkeeping the plan for the entire plan year and you want to use contributions from our recordkeeping system, leave blank. Roth Contribution The dollar amount of Roth contributions the employee has contributed during the plan year. If we have been recordkeeping the plan for the entire plan year and you want to use contributions from our recordkeeping system, leave blank. Other Contribution This contribution was made to another DC plan, where Prudential was not the record keeper. Enter the amount for the plan year or zeros if not applicable. Non-recurring Comp (mid-year only) - This compensation will only be used in the mid-year ADP/ACP test to calculate the percentages associated with those tests. This compensation will not be projected out for the entire year. November

19 Compensation Glossary Qualified plans under section 401(a) [including section 401(k) plans]: With respect to qualified retirement plans under Internal Revenue Code (IRC) section 401(a), IRC section 415(c)(3) specifically Treasury Regulation section 1.415(c)-2(b)(1) & (d) defines Compensation for purposes of applying section 415 (i.e., the annual additions limitation) and other IRC rules that require a plan sponsor to use a definition of compensation as described in section 415(c)(3), such as identifying an employer s Highly Compensated Employees (HCEs). IRC section 415(c)(3) contains four separate definitions of Compensation from which a plan sponsor may choose: General 415: Compensation generally includes all compensation that is includable in gross income. Simplified 415: Compensation includes only those items commonly considered to be includable in wages. W-2 Wages 1 : Compensation generally includes the wages that are reported in Box 1 of Form W-2. (Note: Although W-2 Wages is the term used to describe this definition under 415(c)(3), a participant s compensation under this definition does not necessarily equal the compensation reported in Box 1 of that participant s Form W-2 for that year. For example, pre-tax elective deferral contributions are not reported as income, but are included in W-2 Wages for purposes of 415(c)(3).) 3401(a) Wages: Compensation includes all wages taken into account for federal income tax withholding purposes. The following chart identifies certain specific components of the four section 415(c)(3) Compensation definitions in detail. This chart is not intended to include all types of compensation includible or excludible under 415, and is not specific to any plan or employer. Inclusion of many of these compensation components depends upon individual facts and circumstances. Questions about the application of these general guidelines to your plan should be referred to the plan s legal or tax counsel. This information is provided only as general guidance. Plan sponsors should always consult legal or tax counsel about the application of any law specific to their retirement plans. Definitions of Compensation General 415 Simplified 415 W-2 Wages 3401(a) Wages Salary or Wages Yes Yes Yes Yes Earned Income Yes Yes No 2 No 3 1 Please note that if your plan year is an "off-calendar" year, actual calendar year W-2 information cannot be used, but rather this amount will need to be created by adding up the components (listed with a YES in the Definitions of Compensation table) for the period that the plan year covers. 2 Earned income is not included in the W-2 Wages definition of compensation described in Treasury Regulation section 1.415(c)-2(d)(4). However, many plan documents specifically include earned income as part of the plan s definition of compensation. If the plan s terms include earned income in conjunction with the W-2 Wage definition of compensation, the standard convention is to include earned income for all testing purposes. 3 Earned income is not included in the 3401(a) Wages definition of compensation described in Treasury Regulation section 1.415(c)-2(d)(3). However, many plan documents specifically include earned income as part of the plan s definition of compensation. If the plan s terms include earned income in conjunction with the 3401(a) Wage definition of compensation, the standard convention is to include earned income for all testing purposes. November

20 This information is provided only as general guidance. Plan sponsors should always consult legal or tax counsel about the application of any law specific to their retirement plans. General 415 Definitions of Compensation Simplified 415 W-2 Wages 3401(a) Wages Overtime Payments Yes Yes Yes Yes Vacation Pay Yes Yes Yes Yes Bonus Payments Yes Yes Yes Yes Commissions Yes Yes Yes Yes Back Pay 4 Yes Yes Yes Yes Other Supplemental Wages Yes Yes Yes Yes Unallocated Tips Yes Yes Yes Yes Allocated (Pooled) Tips Yes Yes No Yes Non-U.S. Income 5 Yes Yes Only amounts Over $80,000, as adjusted Only amounts Over $80,000, as adjusted Sick Pay Yes No Yes Yes Accident & Health Reimbursements Yes No Yes Yes Deemed Section 125 Compensation Optional 6 Optional 4 Optional 4 Optional 4 Deemed Disability Compensation Optional Optional Optional Optional Section 83(b) Elections Yes No Yes Yes Nonstatutory Stock Options Taxable in the Tax Year Granted Yes No Yes Yes Contributions to Unfunded Non-Qualified Deferred Compensation Plans that are Subject to a Substantial Risk of Forfeiture Contributions to Unfunded Non-Qualified Deferred Compensation Plans that are not Subject to a Substantial Risk of Forfeiture Contributions to Funded Non-Qualified Deferred Compensation Plans that are Subject to a Substantial Risk of Forfeiture No No No No No No No Yes No No No No 4 Includible only for the limitation year to which the back pay relates. 5 As an alternative, a plan may exclude compensation earned by a nonresident alien that is neither taxable to the participant nor effectively connected with a trade or business in the U.S., but only if this rule is applied consistently to all employees. Note that foreign compensation for services is still treated as compensation under Sections 415(c)(3) & Section 1.415(c)-2(g)(5). 6 A plan may include deemed section 125 compensation, but only if this rule is applied uniformly to all employees with respect to whom amounts subject to section 125 are included in compensation. November

21 This information is provided only as general guidance. Plan sponsors should always consult legal or tax counsel about the application of any law specific to their retirement plans. Contributions to Funded Non-Qualified Deferred Compensation Plans that are not Subject to a Substantial Risk of Forfeiture General 415 Definitions of Compensation Simplified 415 W-2 Wages 3401(a) Wages Yes Yes Yes Yes "Fringe Benefits" Nondeductible Moving Expenses Yes No Yes Yes Deductible Moving Expenses No No Optional 7 No Golden Parachute Payments 8 Yes Yes Yes Yes Taxable Fringe Benefits Yes Yes Yes Yes Group Term Life Insurance Over $50,000 Yes Yes Yes No Coverage in Discriminatory Self-Insured Medical Plans Yes No Yes Yes Employer-Paid Outplacement Services Yes Yes Yes Yes Expense Allowance Paid Under Nonaccountable Plan Yes Yes Yes Yes "Elective Deferral Contributions" 9 401(k) Plan Elective Deferrals Yes Yes Yes Yes 403(b) Plan Elective Deferrals Yes Yes Yes Yes 125(a) Cafeteria Plan Elective Deferrals Yes Yes Yes Yes 408(k) SEP/SARSEP Elective Deferrals Yes Yes Yes Yes 408(p) Simple Retirement Account Elective Deferrals Yes Yes Yes Yes 457(b) Plan Deferred Compensation Yes Yes Yes Yes 132(f)(4) Qualified Transportation Fringe Benefits Yes Yes Yes Yes Post-Severance Amounts Severance Pay No No No No Regular Pay 10 Yes Yes Yes Yes 7 The W-2 Wage definition of compensation as described in Treasury Reg (c)-2(d)(4) may be modified to exclude amounts paid or reimbursed by the employer for moving expenses incurred by the employee if it is reasonable to believe these amounts are deductible by the employee at the time of payment. 8 Not included in General 415 or Simplified 415 if paid after the date of an employee s severance from employment. 9 For plan years and limitation years beginning after 1997, all deferral contributions must be included when looking at compensation for determining HCEs and Key Employees and for performing 415 and Top-Heavy testing. However, deferral contributions may be included in or excluded from compensation used in ADP/ACP testing. 10 These amounts may only be included to the extent such amounts are paid by the later of 2 ½ months after the severance from employment or by the end of the limitation year that includes the date of such severance from employment. November

22 This information is provided only as general guidance. Plan sponsors should always consult legal or tax counsel about the application of any law specific to their retirement plans. General 415 Definitions of Compensation Simplified 415 W-2 Wages 3401(a) Wages Leave Cashouts 11 Optional Optional Optional Optional Nonqualified unfunded deferred compensation 12 Optional Optional Optional Optional Salary continuation payments for military service participants Optional Optional Optional Optional Salary continuation payments for disabled participants Optional Optional Optional Optional 11 These amounts may only be included to the extent such amounts are paid by the later of 2 ½ months after the severance from employment or by the end of the limitation year that includes the date of such severance from employment. 12 Nonqualified unfunded deferred compensation payments made post-severance are not included in 415(c)(3) compensation unless payments would have been made at that time regardless of severance. However, a plan sponsor may choose to include nonqualified unfunded deferred compensation payments made by the later of 2 ½ months after severance of employment or the end of the limitation year that includes the date of severance if those amounts would have been included under the plan s definition of compensation if paid prior to the employee s severance from employment. November

23 Definitions of Component Items of Compensation Salary Wages paid in fixed payments at regular intervals to an employee for services rendered. Earned Income An individual's (sole proprietor, partner) net earnings (gross earnings less deductions) from self-employment determined in accordance with the rules set forth in Code section 401(c)(2). Overtime Payments Amounts paid for work performed during periods exceeding the established working periods. Vacation Pay Amounts paid to an employee while on vacation, including amounts paid even if the employee chooses not to take vacation. Vacation pay does not include sick pay or holiday pay. Bonus Payments Amounts paid to an employee for outstanding work, including prizes such as vacation trips for meeting sales goals. Commissions Amounts paid to an employee based on a percentage of the money taken in on sales, including commissions paid to salespeople and commissions on insurance premiums. Back Pay Payments awarded by an administrative agency or court pursuant to a bona fide agreement by an employer to compensate an employee for lost wages. Other Supplemental Wages Compensation paid in addition to an employee s regular wages. These wages include, but are not limited to, payments for accumulated sick leave, severance pay (if paid before date severance of employment occurs), awards, prizes, or back pay. Unallocated Tips Tips reported to the employer by an employee, including both tips paid over by the employer for charge customers and tips the employee received directly from customers. Allocated (Pooled) Tips Amounts allocated among employees who receive tips. Amounts may be allocated using hours worked, gross receipts or a good faith agreement. Non-U.S. Income Amounts received from sources within a foreign country attributable to services performed by the individual during either the entire taxable year or any portion of 12 consecutive months during which the individual was present in a foreign country for at least 330 full days. Sick Pay Amounts paid by either the employer or a third-party (such as an insurance company) under a plan because of an employee's temporary absence from work due to injury, sickness or disability (IRC 105(a)), and includes both short-term and long-term benefits. See IRS Publication 15-A or Circular E. Accident & Health Reimbursements Amounts received by an employee through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness. Accident or health reimbursements are taxable if: The reimbursement is an amount attributable to contributions made by the employer that were not taxable to the employee, or the reimbursement is paid directly by the employer. The reimbursement is for medical expenses that are deductible by the employee under IRC section 213(d) for any prior taxable year (i.e., the medical expenses meet the definition of medical care and exceed 7.5% of the employee s adjusted gross income). The reimbursement is made to a highly compensated employee from a self-insured medical reimbursement plan that is discriminatory with respect to either eligibility or benefits provided (i.e., an excess reimbursement under IRC section 105(h)(1). The reimbursement is made to certain S corporation employees Deemed Section 125 Compensation Employer provided coverage that is not available to the participant in cash in lieu of group health coverage under a section 125 arrangement solely because that participant is not able to certify he/she has other health coverage. Such amounts are only included if the employer does not otherwise request or collect information regarding the participant s other health coverage as part of the enrollment process for the health plan. See Treas. Reg (c)-2(g)(6). November

24 Deemed Disability Compensation The compensation a permanently and totally disabled (as defined in section 22(e)(3)) participant in a defined contribution plan would have received for the year if the participant was paid at a rate of compensation paid immediately before becoming disabled if: 1. Participant is not a highly compensated employee before becoming disabled, or the plan provides for continuation of compensation on behalf of all participants who are permanently and totally disabled; 2. Contributions are nonforfeitable when made; and 3. The plan provides for such compensation to disabled participants. Section 83(b) Elections Amounts included in income when an employee elects to have the value of restricted property taxed to him immediately in the year it is received even though the property remains nontransferable or subject to a substantial risk of forfeiture. Nonstatutory Stock Options Taxable in the Tax Year Granted The value of stock options that do not meet the definition of an incentive stock option under Treas. Reg. section and are therefore includable in the employee's gross income for the tax year in which granted. Nonstatutory stock options do not include stock options granted under an employee stock purchase plan. Non-Qualified Deferred Comp Plans Deferred compensation plans that do not meet the requirements of Code section 401(a), including excess benefit plans, nonqualified stock options, top-hat plans, Rabbi trusts, and Code section 457 plans. A funded plan is one for which assets are set aside with a trustee or other third party, beyond the reach of the employer s general creditors, to make future benefit payments. An unfunded plan is one in which the employer merely promises to pay an amount to the employee at a future time, including a plan where assets are set aside to make future payments if those assets remain subject to the claims of the employer s general creditors. Non-qualified deferred compensation is subject to a substantial risk of forfeiture if it is nonvested and rights to the deferred compensation will be lost upon termination of employment for reasons other than retirement, death or permanent disability. Nondeductible Moving Expenses Amounts paid or reimbursed by the employer to the employee for moving expenses that, at the time of payment, it is reasonable to believe are not deductible by the employee (e.g., reimbursement for a loss on the sale of a home). There are many different rules regarding the deductibility of moving expenses. See IRS Publication 521, Moving Expenses, for details. Deductible Moving Expenses Amounts paid or reimbursed by the employer to the employee for moving expenses that the employee could deduct if he paid or incurred them directly. These include only the reasonable expenses of: 1. moving household goods and personal effects from the former home to the new home, and 2. travel (including lodging) from the former home to the new home. See IRS Publication 521, Moving Expenses for details. Golden Parachute Payments Payments of compensation or benefits, made pursuant to rules contained in Code section 280G, to certain employees or independent contractors when: 1. the payment is contingent on a change of ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, and 2. the aggregate present value of payments is equal to or exceeds three times the individual's annualized compensation. Certain exceptions apply to small corporations and payments under certain qualified plans. Taxable Fringe Benefits In general, fringe benefits include a wide variety of items, such as the furnishing of company cars and employee meals. Taxable fringe benefits do not include the value of no-additional-cost services, qualified employee discounts, working condition fringe benefits, de minimus fringe benefits, certain qualified transportation fringe benefits, and on-premises gyms or other athletic facilities. For details on taxable fringe benefits, see IRS Publication 525, Taxable and Nontaxable Income. Group Term Life Insurance Over $50,000 The cost of group term life insurance provided by the employer to an employee, which exceeds: 1. the cost of $50,000 group term insurance, minus November

25 2. any amount paid by the employee towards the purchase of the insurance. An exception applies to certain S corporation shareholders. Coverage in Discriminatory Self-Insured Medical Plans Reimbursements made by the employer to the employee under a self-insured medical plan that discriminates in favor of highly compensated individuals, for medical expenses not reimbursed through an insured accident and health plan. Employer-Paid Outplacement Services The value of outplacement services (e.g., career counseling, resume assistance, or skills assessment) if the employer receives no additional benefit from providing the services, or if the services are not provided on the basis of employee need. Outplacement services received in exchange for reduced severance pay (or other taxable compensation) is also included. Expense Allowance Paid Under a Nonaccountable Plan A reimbursement or allowance arrangement considered to be made under a "nonaccountable plan" as further described at Treas. Reg. section (c). Payments are treated as under a nonaccountable plan if: 1. The employee either does not submit or is not required to timely submit receipts or other documents to substantiate the expenses, 2. The employee is either not required to return allowance amounts not used for business expenses, or does not return the excess allowance timely., 3. The amount is advanced or paid to the employee regardless of whether the employer reasonably expects the employee to have related business expenses, or4. The employer pays a reimbursement to an employee that would otherwise have been paid as wages. 401(k) Plan Elective Deferrals Elective contributions made by an employer on an employee's behalf to a Code section 401(k) qualified cash or deferred arrangement, which are not includable in the employee's gross income. 403(b) Plan Elective Deferrals Elective contributions made by an employer on an employee's behalf to a Code section 403(b) taxsheltered annuity program, which are not includable in the employee's gross income. 125(a) Cafeteria Plan Elective Deferrals Elective contributions made by an employer on an employee's behalf to a Code section 125 cafeteria plan, which are not includable in the employee's gross income. This also includes any medical or dental pre-tax premiums made under the cafeteria plan. 408(k) SEP/SARSEP Elective Deferrals Elective contributions made by an employer on an employee's behalf to a Code section 408(k) salary reduction simplified employee pension plan (SARSEP), which are not includable in the employee's gross income. 457(b) Plan Deferred Compensation Compensation deferred by an employee under a Code section 457(b) eligible deferred compensation plan sponsored by a state or local government or a tax-exempt organization. 132(f)(4) Qualified Transportation Fringe Benefits Compensation deferred by an employee under Code section 132(f)(4) to reflect the amount of compensation reduction elected for qualified transportation fringes. Post-Severance Amounts Compensation paid after an employee incurs a severance from employment. Severance Pay Amounts paid to an employee upon involuntary separation from service with the employer, including a lump-sum payment made for cancellation of an employee's employment contract. See Other Supplemental Wages for amounts paid prior to severance of employment. Regular Pay Amounts paid to an employee for services during the participant s regular working hours, or compensation for services outside the participant s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments that would have been paid to the participant prior to a severance of employment if the participant had continued in employment with the Employer. Leave Cashouts Amounts paid for unused accrued bona fide sick, vacation, or other leave, if the employee could have used the leave if employment continued. Salary Continuation Payments for Military Service Participants Amounts paid to an individual who does not currently perform services for the Employer by reason of qualified military service (as defined in Code Section 414(u)(1)) to the extent those payments do not November

26 exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service. Salary Continuation Payments for Disabled Participants Regular Pay as defined above paid to a participant who is permanently and totally disabled (as defined in Code Section 22(e)(3)) if: 1. Participant is not a highly compensated employee before becoming disabled, or the plan provides for continuation of compensation on behalf of all participants who are permanently and totally disabled; 2. Contributions are nonforfeitable when made; and 3. The plan provides for such compensation to disabled participants. November