401(k) safe harbor match plan excludes bonuses, so 414(s) compensation ratio test is run. Plan excludes pre-entry compensation. Test was run with pre-entry compensation excluded from only the numerator, not the denominator. Adding back the pre-entry comp to the numerator "fixes" the failed comp ratio test, but not adding back the bonuses. My understanding was that the period of compensation should be the same for the numerator and the denominator when calculating the ratios, meaning, pre-entry compensation was excluded from both. My asppa materials below seems to agree with that, but I can't find any code or regulation to cite. What are your thoughts? I feel that doing a retroactive amendment to "Add back" pre-entry compensation would be 1. not a valid corrective amendment since you're not correcting a true failure, you're correcting, I believe, the perceived failed testing, but actually just using incorrect testing methodology. And 2. not a valid discretionary amendment since we're talking the prior year and this would increase match benefits as well, presumably.
ASPPA study guide materials:
Employee Who is an Eligible Participant for Only Part of Year
The nondiscrimination testing rules permit the compensation of an employee to be measured for just that part of the
plan year that he or she is an eligible employee. Presumably, then, to demonstrate whether a modified definition of
compensation satisfies IRC §414(s), the compensation ratio of an employee described in this paragraph may be determined
by dividing modified compensation for the portion of the year that the employee is eligible by the total compensation
for the same portion of the year.
EXAMPLE 4-15. Midyear Entry Date. An employee becomes eligible for a plan on July 1. The plan
year ends December 31. Therefore, the employee is eligible for only the last six months of the plan
year in which the employee first becomes eligible. The plan excludes bonuses from the definition of
compensation. The employee’s compensation ratio may be determined as compensation (excluding
bonuses) for the period July 1 through December 31, divided by total compensation for the employee
for the same period. The employee’s total compensation would include any bonuses paid during the
six-month period in which the employee was eligible for the plan year. If a bonus was paid in June, it
would not be included in the employee’s total compensation reflected, neither in the numerator nor
in the denominator of the employee’s compensation ratio.
