Compensation

Compensation is perhaps the most important information needed to administer a plan correctly. The plan document defines compensation used for contribution allocation and administration purposes. The following topics describe the specific types of compensation that may need to be provided to Blue Ridge for accurate plan administration. This information is part of the annual Blue Ridge year-end information request which includes a Year-End Questionnaire and the Year-End Employee Census Information form or spreadsheet.

Gross Compensation

Generally, this can be found by running a year-end compensation report from your payroll system. It is typically the amount reported for employees in Box 1 of Form W-2 plus pre-tax 401(k) and 403(b) deferrals and Section 125 / cafeteria plan deductions (usually includes pre-tax employee-paid items such as health and dental premiums, HSA contributions and FSA deductions). This amount should not be reduced for compensation that is excluded for plan purposes (a plan document provision).  That amount will be reported separately under “Excluded Compensation.”

Special situation – Post-Severance Pay and Severance Pay:

  • Any post-Severance Payments for services paid within the later of 2½ months after the severance of employment or the end of the plan year that includes the date of severance of employment should be added to the reported gross wages.
  • However, Severance Pay (compensation not related to services performed) is not considered compensation for plan purposes and should be deducted from the reported gross wages.

Entry Date Compensation

A plan may exclude compensation paid prior to an employee’s entry date into the plan for purposes of determining employer contributions. Entry date compensation for an employee’s initial year of plan participation begins on the date the newly eligible employee satisfies the plan eligibility and entry date requirements and ends on the last day of the plan year.

For Example: A plan’s entry dates are January 1 and July 1. An employee met the eligibility requirements on April 20 and began making 401(k) salary deferrals on July 1. For this employee, their entry date compensation to report to Blue Ridge is the gross compensation paid during the period July 1 – December 31.

Note: In the above example, the employee started contributing on their entry date. However, had the employee not begun contributing until a later date, the entry date compensation for employer contributions would still be compensation from July 1 – December 31.

Excluded Compensation

Certain forms of compensation may be excluded for plan purposes and must be specifically described in the plan document. The excluded compensation cannot cause the plan to discriminate in favor of Highly Compensated Employees (as determined by a test that looks at compensation ratios for each group).

Other Compensation: Sole Proprietor, Partnership, and Limited Liability Companies

Contribution rates for partners or sole proprietors are dependent on the amount of their earned income reduced by employer contributions and ½ of the self- employment tax. It is important to report the earned income amount determined before any reductions for employer contributions and the self-employment tax. Blue Ridge calculates the circular formula with the earned income. If an owner-employee has both W-2 reportable income and earned income, only W-2 earnings should be reported on the Year-End Employee Census Information form or spreadsheet. Earned income before any reductions should be reported to Blue Ridge on the Year End Questionnaire.

Depending on the type of federal tax filer, IRS reporting forms provide the necessary information to report on the Blue Ridge 401K Year-End Questionnaire. Note that the amounts reported should be the amounts before reductions for employer contributions to the plan.

  • For a partnership or a limited liability company treated as a partnership: Net earned income from self-employment is usually the amount listed on Form 1065, Schedule K-1, box 14, code A.
  • For a sole proprietor: The preliminary amount on Line 31 of Schedule C is the earned-income amount to report.

FICA Wages

Starting in 2026, employees who earned more than a set amount of FICA wages (as reported in Box 3 of Form W-2) from the plan sponsor in the prior calendar year (for the first year, this means 2025 wages) must have any catch-up contributions made on a Roth basis. The 2025 FICA wage threshold used to determine who is subject to this requirement in 2026 will be $150,000; however, this amount will be adjusted each year for cost-of-living changes. Individuals who do not receive FICA wages (such as partners or other self-employed individuals) are not currently subject to the mandatory Roth catch-up requirement.