FAQ 1026: Compensation - Net Compensation

Problem: When running an ADP test the net compensation box was marked. The system is taking gross compensation and is correctly reducing it by pre-tax 401(k) deferrals and cafeteria contributions, however, it is also reducing their gross compensation by their Roth deferrals. The employee contribution screens show Roth in the correct place. The plan specs for Roth have the source type "401(k) Roth" and the source description correct as well. I can't figure out why their net compensation is being reduced by their Roth deferrals.

Solution: One of the safe harbor definitions of 414(s) compensation excludes deferrals. The regulations specifically indicate this refers to deferrals that are not included in gross income. However, these particular regulations were written before ROTH even existed. The following is from the 2012 ASPPA Annual Conf - The intent of the regulations appears to excluded all deferrals; therefore, if one is going to exclude deferrals, one should exclude all deferrals, including Roth deferrals. Over the years IRS has taken the position that Roth deferrals are Salary Deferrals and are handle just like Pre-tax Deferrals.