[quote=”adamFreeland”]I have client who is an employer who has a SIMPLE plan. We are trying to determine if Section 125 contributions should be included in the calculation for compensation or if they can be excluded.

In Pub 560 from IRS, in the general section it says 125 contributions should be included. However in the SIMPLE IRA section of 560, it does not include Section 125 contributions.

Does anyone have some clarification on this with the documentation that supports it? Thank you.[/quote]

The best thing to do is to check the plan document for it’s definition of compensation. In the meantime, I hope the following helps.

This is from the IRS’ FAQ on their website.

[quote]What definition of compensation applies for purposes of the SIMPLE IRA plan rules in the case of an individual who is not a self-employed individual?
For purposes of the SIMPLE IRA plan rules, in the case of an individual who is not a self-employed individual, compensation means the amount described in section 6051(a)(3) (wages, tips, and other compensation from the employer subject to income tax withholding under section 3401(a)), and amounts described in section 6051(a)( 8 ), including elective contributions made under a SIMPLE IRA plan, and compensation deferred under a section 457 plan. [b]Compensation does not include amounts deferred under a section 125 cafeteria plan.[/b] For purposes of applying the 100-employee limitation, and in determining whether an employee is eligible to participate in a SIMPLE IRA plan (i.e., whether the employee had $5,000 in compensation for any 2 preceding years), an employee’s compensation also includes the employee’s elective deferrals under a section 401(k) plan, a salary reduction SEP and a section 403(b) annuity contract.[/quote][url=http://www.retirementdictionary.com/simpleira.htm%5DLRM §§6-7 (April 2005 )[/url]agrees with this definition:
An example of a SIMPLE plan document that uses this definition is [url=http://www.schwab.com/cms/P-933151.2/simple_ira_basic_plan.pdf?cmsid=P-9…‘s[/url]

According to a post from Gary lesser, who is regarded by other experts including Ed Slott- as the most Knowledgeable person on SIMPLE IRAs. [quote][i]“This differs somewhat from the definition contained in the 1994 See SIMPLE LRM–Listing of Required Modifications and Information Release Package (see Section 7)which allows compensation under a Section 125 plan to be included. That being said, the Note to reviewer provides that it “is optional.” Thus, it does not have to be included. “[/i] [/quote]
It is interesting to note, however, that the more recent LRMs do not include that caveat. Which seems to suggest that the definition of compensation does not include 125 deferrals.

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