What qualifies as compensation for the purposes of a Defined Benefit plan calculation?
Compensation must be earned income from active employment in the business sponsoring the plan. Generally, this is all income that is subject to FICA taxation. For a sole proprietor, compensation would equal net earned income from the business after deducting employer FICA taxation and qualified retirement plan contributions. This can also be W-2 earnings if the business files as a corporation. Passive income such as rental income or shareholder income does not qualify.
