414(s) Compensation Test

[Guest Transeth]

I have a DC plan that defines compensation as regular compensation, EXCLUDING overtime and commissions. The plan fails the 414(s) compensation test. As a result, I go back and INCLUDE overtime and commissions in covered compensation. Do I also have to go back and now include the additional HOURS that are represented by this additional compensation for purposes of computing eligibility and vesting?

[Lou S.]

Any hours an employee works or is paid for need to be included in vesting and eligibility calculations regardless of whether or not the compensation is eligible for the plan benefits.

[BG5150]

^ or entitled to be paid.

[My 2 cents]

Every hour worked in any capacity for any part of the controlled group must be taken into account for purposes of determining if a person, whose current job status makes him or her an eligible employee under the terms of the plan, can now enter. Example: Former union employee transfers to management after at least one year of working more than 1,000 hours as a union employee. That person is eligible for plan entry into the management plan at the next entry date.

Every hour worked in any capacity for any part of the controlled group must be taken into account for purposes of determining if a person, whose current job status makes him or her an eligible employee under the terms of the plan, has enough service for vesting. Example: Former union employee transfers to management after at least five years of working more than 1,000 hours per year as a union employee. That person, upon entry into the management plan, is immediately 100% vested (assuming that the management plan has a 5-year cliff vesting schedule), although the accrued benefit at that point may be $0. Service as other than an eligible employee need not be recognized for benefit accrual purposes.

[Effen]

When you say it "fails the 414(s) compensation test", do you mean the definition has been determined to be discriminatory? If so, you need to amend your plan to correct the problem. You can't just, "go back and INCLUDE overtime and commissions in covered compensation" unless the document permits it.

[Tom Poje]

probably better worded

for allocation purposes you use you current plan's definition compensation..

but then you have to test for nondiscrimination.

so for example, if you allocated 5%, the typical HCE with comp greater than the comp limit, will still appear to receive 5%.

but an individual at 50,000 + 10,000 in commission will appear to receive 2500 / (60,000) = 4.167%.

that would fail if testing is on an allocation basis.

[My 2 cents]

And if fails the test, the plan must be amended to fix things. Can't take corrective action unless the plan explicitly permits it to be taken, which would usually mean adopting an amendment changing the definition of compensation, at least for that one year.