414(s)

[Guest Lex]

A Plan excludes per diem from compensation used to allocate the employer profit sharing contribution and for the match percentage. After allocating the PS and making a match throughout the 2001 plan year, it is discovered that the definition of compensation does not pass the 414(s) test.

What are the solutions for both the PS and the match, as they are discriminatory?

[jaemmons]

Lex,

Is the "per diem" allowance paid under an "accountable plan" by which the employer only fronts or reimburses for substantiated expenses? If so, then they are not W-2 wages, but T&E expenses for the employer.

If it isn't, the definition of comp needs to be amended and corrections need to be made to the allocations and testing for the prior plan year.

[Guest Lex]

It is not paid under an accountable plan.

I have read somewhere that if 414(s) fails, one can use rate group testing.

Anyone have supporting information?

[jaemmons]

I don't know of any "rate group" testing for compensation definitions. The Treasury Regulations outline a specific way to determine the avg %'s, including alternatives (i.e.-individual, aggregate or a combination of the two (with certain restrictions)).

The only groups that are tested are the entire HCE group and the entire NHCE group. You cannot disaggregate and test subgroups.

You may want to take a look at Treas Reg 1.414(s)-1(d)(3)(iv)

[Guest Lex]

ERISA Outline Book- page 9.12 seemed to indicate this. I was surprised also. Any comments on that page?

[jaemmons]

I suppose you can demonstrate that the allocations of the match and PS satsify rate group testing, adding back the per diem allowances to the testing compensation, but the rate of match is not going to pass 401(a)(4) because this is calculated using allocation rates not EBARs. Since the plan is including more comp for the HCE's than NHCE's, the chances of passing this test are very slim. Therefore, they are going to need to make additional contributions anyway.