Plan Compensation and Disability
Rev. 02/09/07, E-mail Alert 2007-2

A frequently asked question we wanted to address: Is disability pay included in compensation for qualified plan purposes? The answer: “It depends.”

Disability payments are not plan compensation if they are paid by the third party insurer instead of the employer.

The question often is does the insurer merely administer the employer's self-insured disability program or is the insurer "on the hook" based upon premium payments made on a contract of insurance? If it's the latter, disability payments are excluded.

Disability payments may be includible if this is really a self-insured operation and there is an obligation to withhold for income tax purpose. Social Security withholding is irrelevant for this purpose. Similarly, inclusion on the W-2 by itself is also not determinative under a 3401(a) definition.