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Is it possible to use a definition of compensation that passes 414(s) testing when the plan's design is using a safe harbor enhanced match per pay?

My fact set is the plan was designed to exclude pay in excess of $125,000.   Since this is a 403b plan, the safe harbor design is used to pass the 401(m) test.  The formula is 100% on 4% salary deferred with comp for employees capped at $125,000.  Since the only employees impacted by the cap are HCEs, the 414(s) testing passes.

But now I am wondering and am getting conflicting answers with some research I am doing that even allows a Safe Harbor plan to exclude any forms of pay even if the exclusions passes 414(s) testing.

I will take any help and feedback.  Thank you.

Brigid

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The safe harbor rules require the use of a safe harbor compensation definition that satisfies 414(s).  1.401(m)-3(c) sends you to 1.401(k)-3(c) for the safe harbor match rules.

Quote

1.401(k)-3(b)(2) Safe harbor compensation defined. For purposes of this section, safe harbor compensation means compensation as defined in §1.401(k)-6 (which incorporates the definition of compensation in §1.414(s)-1); provided, however, that the rule in the last sentence of §1.414(s)-1(d)(2)(iii) (which generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not apply in determining the safe harbor compensation of NHCEs. Thus, for example, the plan may limit the period used to determine safe harbor compensation to the eligible employee's period of participation.

As for limiting compensation to a maximum of $125,000, the plan would need to provide that the limit only applies to HCEs.

 

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Being nondiscriminatory is not automatic here because your HCE comp threshold is determined on the lookback year but you are excluding based on a current level of comp, hence the requirement that it apply only to HCEs.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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