Plan definition of compensation

[Gary]

My understanding is that a Plan has a great deal of flexibility w/r/t the definition of compensation for determining accd benefits. i.e. for example, it can include 401(k) deferrals or exclude them.

However, for discrimination testing there are strict guidelines w/r/t the definition of compensation. i.e. 414(s) definition.

Is my understanding on target?

[AndyH]

My understanding is that you can use any reasonable definition of compensation for accrued benefits, whether it satisfies 414(s) or not, provided the plan passes the general test. If you do not wish to general test the plan, i believe the definition must satisfy 414(s).

And yes, the general test must use 414(s) comp.

[Guest Harry O]

I would just add that you can use *any* definition of compensation you want to determine actual benefits under the plan. There is no requirement that it be "reasonable." For example, you could define compensation to include only stock option income.

However, for purposes of demonstrating compliance with section 401(a)(4) you need to determine accrual rates by dividing the actual plan benefit by a section 414(s) definition of compensation (e.g., W-2 comp). This is where any funky definition of compensation will run into problems and may have to be modified to pass nondiscrimination testing.