What You Need to Know About Eligible Payroll
Definition & Meaning
Eligible payroll refers to the total wages or salaries of employees who qualify for certain benefits but may not receive a salary increase. This term is often used in the context of employer contributions to employee benefit plans, such as profit-sharing plans. Specifically, eligible payroll includes the wages paid to employees participating in these plans, excluding any amounts they defer into retirement plans like 401(k) or Section 125 plans. Additionally, employers may contribute a percentage of the total eligible payroll, which can also be calculated based on gross wages, not accounting for any deferrals.
Legal Use & context
Eligible payroll is commonly used in employment law and employee benefits law. It plays a crucial role in determining employer contributions to retirement and profit-sharing plans. Understanding eligible payroll is essential for both employers and employees to ensure compliance with benefit plan requirements and to maximize contributions. Users can manage related documentation using legal templates available through US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: An employer has a profit-sharing plan that allows contributions of up to 10 percent of eligible payroll. If the total eligible payroll for the year is $500,000, the employer can contribute up to $50,000 to the profit-sharing plan.
Example 2: An employee earns a salary of $60,000 but defers $5,000 into a 401(k) plan. The eligible payroll for the employer's contribution calculation would be $55,000 (i.e., $60,000 - $5,000). (hypothetical example)