I have a client that faces this issue every year due to their compensation definition excluding bonuses and overtime. They fail the ADP test and look to the 414(s) test to see if they can pass. They fail the 414(s) test by a small amount and then process corrective distributions to the HCE's until they can pass they test. This avoids the need for a QNEC or other employer corrective contribution being required.
Interestingly, last year, the client was subjected to an IRS plan audit because the corrective distributions exceeded $50,000 for the plan year (due to layoffs). The IRS currently has an initiative underway to audit all plans that issued corrective distributions in excess of $50,000 for a plan year. One final finding of the audit was the IRS auditor directed the plan to run an annual 414(s) test and to take corrective actions to pass the test. The plan recordkeeper does not want to run the test as they are only set up operationally to run the test every three years.
Bottom line - this client felt the best option for them was corrective distributions for the HCE's until the 414(s) test can be passed. Changing the definition of compensation to include bonuses and overtime was determined to be too costly from a matching contribution perspective. Hope that helps.
