The plan’s definition of “compensation” is important for many different aspects of plan administration — including elective deferrals, allocations, and discrimination testing. Plan sponsors need to be certain that the definition of compensation is properly applied. Failure to do so could result in an operational failure and possibly affect the plan’s qualified status.

Mistakes may arise because many plan sponsors operate their plan based on a plan summary of the definitions and operational requirements. But as the plan is amended, the compensation definition may change while the plan continues to operate as it had previously. To avoid compensation-related mistakes, the IRS recommends the following:

·         Review your plan document for the definition of compensation for each plan purpose.

·         Use the statutory definition of compensation when required.

·         Ensure that your payroll processor and plan administrator receive accurate compensation data.

·         Simplify your plan’s definition of compensation by considering using one definition for all plan purposes.

·         Review your plan for errors and use the IRS correction programs to fix them as quickly as possible.

·         In addition, your plan may avoid mistakes by properly training the plan personnel who determine compensation to confirm they understand the plan document.