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Guest Mr. Kite

"Compensation" excludes bonuses

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Guest Mr. Kite

Client's 401(k) excludes bonuses from the definition of compensation, and because the usually HCEs get larger (percentage-wise) bonuses than NHCEs, there is not a problem with a discriminatory definition of compensation. However, a couple of years ago, because of a downturn in business, the client did not pay bonuses to the HCEs, but paid the NHCEs as usual. So it looks like the definition of compensation for this year is discriminatory because now "compensation" for HCEs = total compensation, whereas "compensation" for NHCEs is less than 100% of total comp. The client does not match or otherwise make nonelective contributions.

Has anyone come across this type of situation? Any ideas of how to correct it?

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Guest Mr. Kite
Are the NHCE's getting bonuses of over 3% of pay?

What years do you want to work on?

The year is 2007. I don't have the exact figures on the amount of the bonuses, but the difference in average percentages exceeds the 3% rule-of-thumb de minimis amount.

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I'm not sure the expression 'how to correct it' sums up the situation.

based on your question, you have followed the terms of the document, excluding bonuses in determining the contribution.

so far so good.

you have also run the comp test, though it failed, you still ran it, so again so far so good.

now, because the comp test failed you must test (nondiscrimination) the contribution on the basis of a definition of compensation that satisfies 414(s).

so for instance, the HCE received 5% of compensation and the NHCE (when using total compensation) only received 4% of compensation. It is possible that if you impute disparity that will be enough to pass testing.

or its possible to test on an accrual basis and hopefully the gateway minimum will have already been satisfied.

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Tom, there is no er contributions so the 'fix' is even easier. He must run the ADP test on a safe harbor definition of compensation (ie on total pay, not pay less bonus). If any corrections are due, use EPCRS cuz it is now too late for normal fixing for 2007.

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