Defining Covered Compensation

This chapter provides an overview of covered compensation and discusses how to:

• Use covered compensation results.

• Define covered compensation rules.

Understanding Covered Compensation

Covered compensation is defined as the average of the social security taxable wage bases over a period of 35 years up to and including the year in which an employee reaches social security retirement age (SSRA). Covered Compensation for workers with SSRAs in the future change every year when the new taxable wage base (TWB) is published.

The law prohibits discrimination by a plan in favor of highly compensated employees. Under permitted disparity rules, however, a plan may provide a greater benefit for those earnings for which an employee doesn't receive Social Security benefit.

You can use the covered compensation function to define rules that enable you to provide different levels of benefits for earnings above and below the maximum taxable wage base.

Using Covered Compensation Results

The covered compensation function produces a single dollar amount. You typically use this amount in the benefit formula or one of its components. For example, you can set up custom statements that find average earnings up to covered compensation and in excess of covered compensation. You can then reference these custom statements within the benefit formula.

See Also

Using Custom Statements and Spouse Eligibility Statements

Defining Covered Compensation Rules

To define compensation rules, use the Covered Compensation (COVERED_COMP) component.

This section provides an overview of the covered compensation rules definition, lists the page used to define covered compensation rules, and discusses how to set up covered compensation rules.

Understanding the Covered Compensation Rules Definition

The covered compensation rules definition comprises TWB table selection, period basis, and rounding rules.

Page Used to Define Compensation Rules

Setting Up the Covered Compensation Rules

Access the Covered Compensation page (Set Up HRMS, Product Related, Pension, Components, Covered Compensation, Covered Compensation).

Use Table in Effect On

Basis

Rounding Rule

Depending on when and if your plan adopted the various IRS rounding options, select one of the following as your rounding rule:

• No Rounding.

• Apply $600 Rounding with $3,000 Rounding Effective as of 1990 Plan Year.

• Apply $600 Rounding with $3,000 Rounding Effective as of 1994 Plan Year.

• Apply $600 Rounding for all Plan Years.

• Apply $3,000 Rounding for all Plan Years.

When you use one of the $600 or $3,000 mixed options, the system uses 600 USD rounding for all years up to the threshold year and 3,000 USD rounding for the threshold year and beyond.

To change the rounding rule as of any other date, create multiple definitions and create separate effective-dated rows in the covered compensation function result.

If all 35 years in the covered compensation calculation are later than the last year in the Taxable Wage Base table, the unrounded value for the last year is used as the final covered compensation.