6. Definition of compensation

Statement of Requirement: Code §§I RC 401(a)(17), 414(s), and 415(c)(3);

179 | Defined Benefit Plan LRM Package 08/2020 06/2026

Treas. Regs. Reg.§§ 1.401(a)(4)-12, 1.401(a)(17)-1, 1.414(s)-1, and 1.415(c ) )-2; Notice 2001-37 , 2001-25I.R.B. 1340; Notice 2001-56 , 2001-38I.R.B. 277; Rev. Rul. 2003-11 , 2003-3I.R.B. 285; Rev. Proc. 201741,2017-29 I.R.B. 92secs.5.15(1), 5.16(3); ; Notice 2010-15; Rev. Proc. , 2010-6I.R.B. 3902 023-37, 12.02(4), 9.03(3)

Document Provision: _____

Sample Plan Language:

Compensation means compensation as that term is defined in section _____ of the plan and related elections in the adoption agreement. For any self-employed individual covered under the plan, compensation will mean earned income. Except as provided elsewhere in this plan, compensation shall include only that compensation which is actually paid to the participant during the determination period, and the determination period shall be the period elected by the employer in the adoption agreement. If the employer makes no election, the determination period shall be the plan year.

(Note to reviewer: The blank should be filled in with the plan section number that corresponds to section 6.2 of LRM #40.)

(Note to reviewer: Under certain circumstances, other definitions of compensation may be used. However, compensation used in determining top-heavy minimums and compensation in Standardized Plans must be one of the definitions provided in section 6.2 of LRM #40. For purposes of the preceding sentence, the safe harbor alternative definition of compensation contained in Treas. Reg. § 1.414(s)-1(c)(3) may also be used. A plan will not fail to be a Standardized Plan if it uses a plan definition of compensation approved for Standardized Plans but excludes from that definition differential wage payments under Code §I RC 3401(h).

Standardized Plans must permit the employer to elect one of the definitions of compensation provided in section 6.2 of LRM #40 in the adoption agreement.)

Notwithstanding the above, if elected by the employer in the adoption agreement, compensation shall not include any amount which is contributed by the employer pursuant to a salary reduction agreement and which is not includible in the gross income of the employee under Code §§ IRC 125, 132(f)(4), 402(e)(3), 402(h) or 403(b).

For plan years beginning on or after January 1, 2002, the annual compensation of each participant taken into account in determining all benefits provided under the plan for any determination period shall not exceed $200,000, as adjusted for cost-of-living increases in accordance with Code § IRC 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning with or within such calendar year.

If a determination period consists of fewer than 12 months, the annual compensation limit is an amount equal to the otherwise applicable annual compensation limit multiplied by a fraction, the numerator of which is the number of months in the short determination period, and the denominator of which is 12.

180 | Defined Benefit Plan LRM Package 08/2020 06/2026

If compensation for any prior determination period is taken into account in determining a participant’s benefits for the current plan year, the compensation for such prior determination period is subject to the applicable annual compensation limit in effect for that prior period.

(Note to reviewer: Code§I RC 401(a)(17) limits compensation taken into account to $200,000 in determining contributions and benefit accruals and provides that this limit will be adjusted each year for cost of living increases. For 20202 026, the compensation limit was $ 2853 60,000.)

Sample Adoption Agreement Language:

Compensation shall be determined over the following determination period:

( ) the plan year.

( ) a consecutive 12-month period ending with or within the plan year. Enter the day

and the month this period begins: _____ (day) _____(month).

( ) For employees whose date of hire is less than 12 months before the end of the

12-month period designated, compensation will be determined over the plan year.

(Note to reviewer: The plan may provide that compensation will be determined over the period of plan participation during the plan year, as provided for in Treas. Reg. § 1.401(a) (17)-1(b)(3)(iii)(B).)

(Note to reviewer: Code§I RC 401(a)(17) limits compensation taken into account to $200,000 in determining contributions and allocations and provides that this limit will be adjusted each year for cost of living increases. For 2020 2026, the compensation limit was $ 2853 60,000. Treas. Reg. § 1.401(a)(4)-12 (see definition of “plan year compensation”).)

Compensation

( ) shall not include employer contributions made pursuant to a salary reduction

agreement which are not includible in the gross income of the employee under Code §§ IRC 125, 132(f)(4), 402(e)(3), 402(h) or 403(b).

In determining benefit accruals in plan years beginning after December 31, 2001, the annual compensation taken into account for determination periods beginning before January 1, 2002, shall be limited to: (check one)

( ) $200,000

( ) $150,000 for any determination period beginning in 1996 or earlier; $160,000 for

any determination period beginning in 1997, 1998, or 1999; and $170,000 for any determination period beginning in 2000 or 2001.

If neither box is checked, the $200,000 limit shall apply.