Ask the Experts September 19, 2023

Is Retroactive Pay Included as Compensation for Plan Purposes?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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Q: We are a public university with a number of collective bargaining groups. Due to contract negotiations, it is not unusual for such employees to be awarded retroactive salary increases, with a lump sum in retroactive pay provided to represent the salary increase amount on salary already paid. Is this pay included or excluded as compensation for retirement plan purposes? We have a 403(b) plan for elective deferrals only, to which we allow all employees to defer, and a 401(a) plan for employer contributions that does cover some of the collectively bargained groups.

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Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: The answer is, as it is for many similar questions, that it depends on the language in your plan document and could be defined differently between your 401(a) and 403(b) plans. Some plan documents specifically exclude retroactive pay from the definition of compensation, but other plans may consider retroactive pay to essentially be regular pay that is merely paid late, and thus such compensation would be included for retirement plan purposes.

 

If there is any doubt as to whether your plan document language includes or excludes retroactive pay in the definition of compensation, you should contact outside counsel that either prepared the document or is otherwise well versed in such plan document issues. Finally, you can always amend the definitions, and in a public plan you have a good degree of latitude to do so, since public plans are not subject to Internal Revenue Code Section 414(s) compensation “ratio” testing, which restricts the ability to modify definitions of compensation.

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.

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