3729 / What is counted as compensation for purposes of applying the Section 415 limits to defined contribution plans?
Compensation to which the limit is applied is the compensation for the limitation year from the employer maintaining the plan.1 It includes wages, salaries, fees for professional services, and other amounts for services actually rendered (such as commissions, percentage of profits, tips, and bonuses).2 Compensation also includes (i) elective deferrals to 401(k) plans, SAR-SEPs, SIMPLE IRAs, and Section 457(b) plans to the extent not includable in the employee’s income and (ii) any amounts contributed or deferred by the election of the employee and excluded from gross income of the employee under IRC Sections 125 (cafeteria plans), 132(f) (qualified transportation fringe benefit plans), or 457 (deferred compensation plan of a government or tax-exempt organization).3 The foregoing items may be used as a simplified safe harbor definition of compensation.4
The regulations also permit the following to be included as compensation to the extent they are includable in the gross income of the employee: certain payments received under an employer’s accident and health plan, certain moving expense reimbursements, the value of nonqualified options in the year granted, and certain property transferred in connection with the performance of services.5
In the case of a self-employed person, his earned income is compensation.6