Is tip income considered in 401K matching?

[David]

Restaurant client recently told me they (H & W S Corp shareholders) went with another safe harbor 401K plan provider and that they are the administrators. I advised that they shouldn't be the administrators since it requires that they understand all the laws and rules related to the 401K plan. However, they made the change to save money.

Now they are asking if employee tip income should be considered in the matching contribution amount. They also switched payroll companies and the old payroll company included tip income in the employee deferral amount and the employer's matching amount. The new payroll company says that tip income is not included in 401K income deferral and matching.

I can't find anything in my tax research that specifically addresses tip income as it relates to 401K plans. Shouldn't their plan documents address tip income since this is a 401K plan for a restaurant?

Does anyone know if tip income is considered in 401K contributions or does anyone know any cites that specifically addresses this?

Thanks. 

[Lee B]

There are some significant legal practice liability issues involved in the situation you are describing.

Unless this was an area where I had expertise, I would decline to get involved.

[Gail in Virginia]

I would recommend that they read the plan document thoroughly and discuss this with the plan administrator who should know the ins and outs of the document and the law regarding 401(k) plans.  Oh wait, against your advice they ARE the plan administrator.  Gee, wonder what we should do now?

[David]

Ha, ha. That's exactly what I want to tell them - check with their plan administrator. But I figure I'll take the high road and explain that this is an example of why they should not be the administrator.

[Roberts]

Can they call the previous plan administrator and ask? I think you were telling us they switched. Just say something along the lines of we want to make sure we follow the same policy. Can you look at past payroll and see how it was handled previously with contributions?

 

I don't have documentation but my understanding was that tips which flow through the paycheck are included, anything else isn't. If a tip is received in cash, it can't be included in the equation. Credit card tips are included and cash tips that are pooled and paid via paychecks.

[jklcpa]

Read the plan document. It must specify the definition of "compensation" for each of the specific purposes of employee contribution, the match, and for nondiscrimination testing.

 

[David]

Thanks for the help, everyone.

I told them to review their plan document which should explain what is included in the contributions and matching. 

[Medlin Software, Dennis]

49 minutes ago, Roberts said:

I don't have documentation but my understanding was that tips which flow through the paycheck are included, anything else isn't. If a tip is received in cash, it can't be included in the equation. Credit card tips are included and cash tips that are pooled and paid via paychecks.

Cash tips, if the employee reports them to the employer, do appear on a paycheck as income for tax and other calculations, then deducted (since already received).  If the employee elects to pocket their cash tips, and not declare through payroll (presumably - ha - reporting on their own), then they lose out on including their actual income for many purposes, which those types of employees learn the hard way if they ever need to show all income for a car or property loan, or to qualify for things like housing programs.

--

Tipped employees do get the shaft often.  Some states do not consider tips as "income" when needed to calculate unemployment, family leave, or other benefits (good employer lobbies, no employee lobbies).

[BulldogTom]

My understanding is that if they are W2 income, they are eligible wages for 401K purposes.   This is dangerous water your client is treading in.   They should know the rules for the plan because if they don't, and some employee has a smart lawyer relative, it could get very expensive.   If you are preparing their payroll, your E&O might be on the line if/when it comes time for depositions.

Tom
Modesto, CA

[DANRVAN]

21 hours ago, David said:

tip income as it relates to 401K plan

Compensation for 401k is broadly defined in reg 1.414(s)-1.  There is a lot of flexibility and also safe harbor rules.

As others have mentioned, you need to read the plan for details.