Eligible Compensation for 15% Limit

[Guest kcousin]

I have a 401(K) plan requiring a QNEC along with a comparability plan. Both plans have different eligibility dates, 401(k) permitting immediately eligibility and comparability having a one year wait. When determining 15% of eligible compensation, which plans compensation would be used? Any help would be appreciated.

Karen

[rcline46]

Use the comp of anyone who was eligible for either plan at any time during the year - use full pay as defined in the plan, but not limited to pay while a participant.

[AndyH]

I'm not sure about the "at any time in the year" part if the plan has one allocation date. Maybe that's true if the plan measured eligibility periodically, quarterly, for example, but I'm not sure about it with the more traditional once per year allocation date date.

I could be wrong but this seems overly aggressive to me.

[Tom Poje]

its not really being overly aggresive.

you have immediate ability to defer - so whether one defers or not, you get to count the compensation, the person is in the plan. even if he quit with 0 deferral

[Tom Poje]

Andy H asks:

Tom, I've never seen this in print other than an Ed Burrows ASPA ASAP a few years ago, and I don't recall him going that far. If you know of this in print I'd like to find it because it could be useful.

a good starting point is the ERISA Outline Book p.7.286, 2001 edition.

the argument is as follows:

the basic point is that the regs are not real clear. They simply say one benefits under the employer's contribution.

well, ees are treated as benefiting for 401k purposes even if they do not defer, they are reported as participants on the 5500 as well.

[AndyH]

Thanks, Tom.

I would still consider this approach to be aggressive. On page 7.288, there is an example of someone not deferring and not receiving a discretionary contribution. It says it such a person's compensation "arguably" may be included in the 15% limit.

Plus, this is one person's interpretation of the 404 limit. Granted, it is considered an expert opinion, but it is still one opinion and there are no cites for this section.

[Tom Poje]

Andy:

so here is the strategy. put in a negative election for 1 penny.

then you would have to include them for comp purposes.

It is one of those things when someone doesn't defer - you have to include them in the ADP test why wouldn't you count them elsewhere.

I agree with you when you say it is one person's opinion.

agressive? hmmm, I am not so sure. suppose an ee defers the first week, and then because of financial problems at home quits deferring. He continues to work the ost of the year and then quits. for all practical purpose he didn't defer. yet you would still include all his comp.

or, I guess consider an ee who enters midyear, and gets an allocation based on midyear comp. Is it any more aggressive to include his full year comp for 15% purposes? just food for thought, but I do understand your caution.