Companies need to reconcile compensation for IRS Form W-3 IRS Form 941 corporate quarterly compensation tax return purposes. The W-3 statement is sent to the Social Security Administration showing total earnings, Social Security wages, Medicare wages, and withholding for all employees for the previous year. IRS 941 is a quarterly report on employment taxes, withholding amounts, deposit amounts, and amounts due to the IRS. The definition of compensation for ESOP purposes is in your ESOP plan documents. These define compensation for purposes of allocating ESOP contributions, determining deduction limits, and nondiscrimination testing. Depending on your plan design, there may be differing definitions for each money source (e.g. ESOP, safe harbor match, discretionary profit sharing, salary deferrals, etc.). Deferrals, fringe benefits, mid-year compensation, and other payments will need to be factored in.
Your census data needs to include several key points:
|
Name Date of birth Date of hire Date of termination Gross wages |
Excluded wages Eligible wages Hours worked Employment type ESOP contribution |
To review compensation, sort the employee census by eligible compensation and make sure no employee’s eligible compensation is in excess of the current year maximum. Read the plan document’s definition of compensation, and make sure you understand what it means. Finally, have a discussion with your third-party administrator specifically about compensation, and make sure the administrator knows all the different types of compensation you provide to employees. The two most common errors are calculating contributions on compensation in excess of the maximum allowed and not following the plan document definition of compensation. Companies can define compensation as W-2 pay below (in 2017), $275,000 per year, or they can define it more narrowly, such as straight pay, but not commissions, as long as this does not have the effect of discriminating against lower-paid employees. Eligible pay also excludes anyone who is not in the ESOP because of the “1042” rules that limit the participation in the plan of sellers, their children, parents, siblings, and spouses, as well as any 25% shareholders, in receiving ESOP allocations when the seller takes a tax deferral on sales to an ESOP.
● Review dates of participation for new participants.
● Review ineligible employees closely.
● Track rehires and how the plan requires their accounts to be treated.
● Determine who is eligible for allocation of contributions and forfeitures (by money source).
● Check vested service.
● Distribute summary plan description (SPD) and summary of material modification(s) (SMM) documents to new participants within 90 days of eligibility.
● Sort the census by date of hire, filter out anyone who would not be eligible based on date of hire, and filter out anyone who received a contribution.
● Sort census by date of birth (DOB), filter out anyone who would not be eligible based on DOB, and filter out anyone who received a contribution.
● Sort census by hours, filter out anyone who didn’t meet the hours requirement, and filter out anyone who received a contribution.
● Sort census by employment type, filter out anyone who would not be eligible based on employment type, and filter out anyone who received a contribution.
● Sort census by date of hire, filter out anyone who would be eligible based on date of hire, and filter out anyone who didn’t receive a contribution.
● Sort census by date of birth, filter out anyone who would be eligible based on DOB, and filter out anyone who didn’t receive a contribution.
● Sort census by date of termination, and filter out anyone who didn’t receive a contribution.
● Sort census by hours, filter out anyone who met the hours requirement, and filter out anyone who didn’t receive a contribution.
● Sort census by employment type, filter out anyone who would be eligible based on employment type, and filter out anyone who didn’t receive a contribution.