Ask the Experts October 22, 2019

Ask the Experts – Reasons for Certain Retirement Plan Definitions of Compensation

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning retirement plan administration and regulations.
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“I recently read your Ask the Experts column about the differences between 3401(a) “pay stub” compensation and W-2 wages as a retirement plan definition of compensation. I was hoping the Experts could elaborate as to why an employer would choose one over the other? I understand this may have to do with the other benefits the employer may offer to his/her employees.”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

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Certainly! As the column points out, these definitions are two of the more popular definitions plan sponsors use as their definition of compensation for retirement plan purposes, though it is possible to utilize other definitions as well. The primary difference between the two definitions is that 3401(a) compensation will include fewer pay codes than a W-2 compensation definition, because wages subject to withholding are generally only those wages included on an employee’s pay stub (in fact, 3401(a) compensation is sometimes known as “pay stub” compensation, as you labeled it in your question). Thus, compensation items that do NOT appear on an employee’s paystub but are included in year-end W-2 reporting, such as the taxable cost of group term life insurance in excess of $50,000, are NOT included in Section 3401(a) wages.

As you indicated, the decision as to which definition to use (or an alternate definition) would be somewhat dependent on the types of other benefits an employer may offer to his/her employees. If any employer does NOT offer any benefits that would not be listed on an employees pay stub, but would be listed on the year-end W-2 if offered (such as, for example, group term life insurance), then it is probably irrelevant as to which definition is used; just choose the one that is easier to administer for the entity that is calculating contributions to the plan. If the employer does have a lot of items that are added to the W-2 that are not present in “pay stub” compensation, it might be easier to communicate a 3401(a) “pay stub” definition of compensation, since contributions will correspond to employees’ pay stubs.  However, as noted, there are other factors which should be considered when making that determination.

Regardless of the definition chosen, someone should regularly review all of your pay codes to confirm that each pay type is properly included/excluded from the plan compensation definition, based on the definition of compensation that is being used.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.
Participants October 22, 2019

Putting a Price Tag on Workplace Financial Stress

According to John Hancock’s research, debt is one of the most significant indicators for financial stress, and most people are dealing with some kind of debt.

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John Hancock Retirement this week offered PLANSPONSOR an early look at its forthcoming Financial Stress Survey.

The sixth annual edition of the survey shows more than half of employees worry at least once a week about personal finances while on the job, causing workplace distraction and a loss of productivity. This loss of productivity, combined with absenteeism from financial stress, has major impact on organizations, John Hancock finds.

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In dollar terms, absenteeism and lower productivity tied to financial stress is costing more than an estimated $1,900 per year, per employee, and totaling an estimated annual loss of $1 million for midsized employers and $19 million for large employers.

Patrick Murphy, CEO, U.S. Retirement, says the survey report shows employers cannot afford to ignore their employees’ financial stress.

“Our 2019 Financial Stress Survey highlights a downward trend on retirement readiness and indicates participants’ financial situations are at risk, with 36% of participants responding they are not in a good financial situation,” Murphy warns. He points to other stats showing 71% of participants are worried about having financial difficulties.

“This is the most we have seen from this survey in the past six years,” Murphy says. “We must come together as recordkeepers, financial representatives, and plan sponsors to help participants plan for their future and better understand the underlying cause of stress and its effect on retirement savings.”

Some good news for employers is that the survey shows financial wellness programs, when properly structured and executed, may improve job retention, reduce stress levels and buoy job productivity. However, some survey findings underscore the challenge of building effective financial wellness programs. While 88% of employers say they currently have or are developing a financial well-being strategy, only 20% of participants claim their employer offers “anything more than a limited financial wellness program.”

Higher than in previous years, about half (49%) of workers consider themselves behind schedule when it comes to saving for retirement. Fifty percent of respondents feel they would be at least somewhat more productive at work if they did not worry about finances while at their jobs—up from 43% last year. This trend is disproportionately impacting the younger workforce, the survey results show.

Only 18% of respondents feel very confident in their ability to make the right financial decisions, showing a decrease over the past three years. About one-third consider themselves very knowledgeable about basic financial concepts, such as managing debt (33%) and budgeting (31%).

According to John Hancock’s research, debt is one of the most significant indicators for financial stress, and most people are dealing with some kind of debt. Fifty-nine percent say their debt is a problem, with more than one in five saying it’s a major problem. And among participants with student loans, 76% say debt is a problem, with almost half calling debt a major problem.

“This is hitting younger generations particularly hard, as 46% of participants aged 36 and younger have as student loan,” the survey report explains. “People who say their debt is a major problem and people with student loans have much higher financial stress than those who don’t. Women feel more financial stress than men, likely because they rate their financial situations worse than men. They’re also more worried about having financial difficulties.”

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