ADP Compensation Testing

[Guest SPOT]

Facts:

Compensation defined in plan exludes bonus, commissions and overtime.

In section of document regarding ADP testing, it refers only to "compensation". It doesn't say 414(s) or compensation defined in a particular § of the document. I have assumed it means use compensation as defined above.

414(s) compensation testing passes.

ADP passes using gross compensation

ADP fails using comp. defined in doc.

Does anybody know if I have to use the comp net of bonuses, etc.? Is it possible to use gross?

Thanks in advance

[Guest stryan]

Typically when your plan document modifies the definition of compensation, it will be for the purpose of calculating and allocating contributions. Compensation used for compliance testing remains as sanctioned by the regs.

[Blinky the 3-eyed Fish]

All nondiscrimination testing must be done using compensation that satisfies Code Section 414(s). Because the plan's definition of compensation is not one that automatically satisfies 414(s), you need to perform the compensation ratio test. If the compensation defined passes the test, then it becomes 414(s) compensation for that year and may be used in the nondiscrimination testing. If it doesn't pass, then you must use a definition of compensation that satisfies 414(s).

Your issue, where you would want the compensation ratio test to fail, is interesting. Without something in your plan document, I don't think it would be permissable to skip the compensation ratio test and jump straight to using gross compensation.

[Mike Preston]

I'm not sure I agree with any of this. If the document defines the ADP test, then one performs the ADP test in compliance with the document if that document has a letter of determination. If the document is deficient, it is always a choice whether to amend it or attempt to rely on 7805B relief.

So, first things first, what does the document say? Are you in the RAP? Was there an LOD?

[Blinky the 3-eyed Fish]

Mike, of course you are right that the testing must follow the procedures in the document. However, I have never noticed a document that references the compensation ratio test. If the plan in question can pass this test, all is well (except the ADP fails) because the compensation becomes one that satisfies 414(s).

If the compensation ratio test fails, then I would agree the document is deficient based on the information we have.