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Compensation Types For Nondiscrimination Testing

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What is the difference between statutory compensation and plan compensation?

Statutory compensation and plan compensation are often the same, but they differ when a plan has exclusions outlined in the plan document. Employers must report compensation accurately for proper 401(k) contributions and discrimination testing.

  • Statutory compensation includes an employee’s total earnings, such as:
    • Wages and salaries
    • Bonuses
    • Overtime
    • Commissions
    • Taxable fringe benefits

  • Plan compensation is defined in your 401(k) Adoption Agreement in section A.15 and may exclude certain earnings, such as:
    • Bonuses
    • Overtime
    • Commissions
    • Fringe benefits
    • Compensation earned before plan eligibility

However, most Betterment 401(k) plans do not exclude bonuses, overtime, commissions, or fringe benefits. Employers should review Section A.15 of the Adoption Agreement to confirm their plan’s definition of compensation.

Why does accurate compensation reporting matter?

  • Contribution Calculations: Employee deferrals and employer contributions are based on plan compensation—incorrect reporting may result in miscalculated contributions.
  • Compliance Testing: Compensation data is used for nondiscrimination and top-heavy testing, confirming the plan treats employees fairly by not having disparity between highly compensated and non-highly compensated individuals.
  • Plan Administration: Reporting errors can lead to compliance issues or the need for corrective actions.

How do I report compensation correctly?

  • The compliance questionnaire census requires employers to report both statutory and plan compensation.
  • Employers must verify and update compensation amounts to reflect actual employee earnings.
  • Betterment only receives compensation data submitted through payroll files.  This means employers are required to confirm that reported compensation (both statutory compensation and plan compensation) aligns with their payroll records for the most accurate and efficient plan audit and testing season.