Part 1: Eligible Compensation

Common Finding

Plans have the ability to define the Plan’s eligible or ineligible compensation. It is vital that those involved in payroll are well aware of these delineations. The Company’s payroll calculations for employee retirement withholdings and employer match or profit-sharing benefit need to agree with the Plan’s definition of compensation. For example, Company A added a new compensation code for $1 shift differential for working weekends. When setting up this earning type in the payroll software, management should verify that the new pay code is or is not utilized in retirement calculations. Additionally, when processing payroll after this change is made, it is a great idea to verify it is working properly by reperforming the calculation.

Most Plan’s choose W-2 earnings or 415 wages. These choices include nearly all taxable earnings. However, some Plans have chosen to exclude certain types of earnings such as bonuses, commissions, or fringe benefits (such as employer paid health insurance, allowances, or certain types of reimbursements), just to name a few.


When a new compensation type is created or new payroll software is used, it is important to verify whether it is eligible compensation as defined by the Plan to ensure deferrals are calculated correctly. It may benefit your Company to verify compensation types are correctly classified as eligible or ineligible compensation as defined by the Plan in your payroll software on a regular basis, or as needed when the Plan is amended, or changes are made to your payroll software.

If you are unsure what qualifies as eligible compensation, refer to the Plan’s adoption agreement or contact your Third-Party Administrator (TPA).