Can an Employer use net comp. (comp. after salary deferrals made to a

[Guest Kathleen Fouquet]

It seems to me that safe harbor contributions should be made on gross comp., but perhaps not. Can anyone give me a definitive answer?

[Guest earthy]

Yes, you may use net compensation less 125 pay and 401(k) elective deferrals. IRS Notice 98-52 makes reference to the 414(s) regulations for purposes of defining compensation for the matching alllocations.

Under the 414(s) regulations, for post 1997 years, section 415 compensation may be reduced by the amount of elective deferrals without making the plan's compensation definition faulty. Elective deferrals include: Section 125 pay, 403(B) salary redcution contributions, 457 plan contributions, 401(k) elective deferrals, SIMPLE IRA contributions, and SARSEP elective deferrals.

You cannot mix and match exlcusions for 415 purposes and still meet the 414(s) criteria. Hence, you could not exclude section 125 pay and include the 401(k) elective deferrals.

If you operate the plan in this way, compensation will have to be tested separately using the ratio method under Treas. Reg. 1.414(s)-1(d)(3). This would defeat the whole notion of the per se safe-harbor in that you do not want to have to test at all.

earthy