Is it true or false that if a plan provides an employer match based on employee deferrals, both components must use the same definition of compensation?

The statement is false because the employer match and the employee deferrals in a 401(k) plan can indeed be based on different definitions of compensation. It is not a requirement for both components to use the same definition.

In practice, the employer can choose to define compensation for the purposes of matching contributions differently than the definition used for employee deferrals. This flexibility allows companies to tailor their retirement plans to better suit their compensation structure and goals. For instance, an employer may decide to match contributions based on a broader definition of compensation that includes bonuses or certain types of incentive pay, whereas employee deferrals might only apply to base salary.

This variance can help employers strategically incentivize certain behaviors or retain talent while still complying with regulatory requirements. Understanding this distinction is crucial for plan administrators and employers when setting up or reviewing the provisions of a 401(k) plan.