We need to calculate the allocations for a 401(k) profit sharing contribution. The plan indicates that we should use W-2 wages as the definition of compensation. We assume this means Medicare wages, which include the employee deferrals. Is this correct?

If the Plan defines compensation for allocation purposes as "W-2 compensation", usually if you continue reading the definition of compensation for allocation pruposes, it will tell you whether or not you are supposed to include salary deferrals and cafeteria plan deductions in this definition of compensation. If the Plan is on an adoption agreement, the AA will usually allow the Plan Sponsor to choose whether or not to include deferrals in the compensation for allocation purposes. You cannot assume that deferrals are supposed to be included.