Discriminatory Compensation Question.

[Guest Max Power]

May an Employer exclude commissions from his Plan's definition of compensation?

My problem is that an Employer has six employees, all six receive only commission income, as w-2 income Are all six of the employees excluded from the plan?

[chris]

what accounts for the difference as to how it is reported, eg, W-2 vs. 1099?

[Guest Max Power]

all six Non-highly compensated Employees get a $36,000 draw against commission, the total draw and commission equals each employees's w-2 income.

(sorry about the mix-up, my boss gave me incorrect information). Does the exclusion of commissions from compensation exclude those employees from the plan?

[Blinky the 3-eyed Fish]

If the document's definition of compensation excludes commissions and the employees in question have only commissions, then they have no compensation for plan purposes. I couldn't figure out though from your postings if these 6 non-highly compensated employees are the only employees in the plan. If there are any HCE's then you have to general test the plan using a definition of compensation that satisfies 414(s). If the plan is TH, then you have TH minimums to consider using 415 compensation.

[Guest Max Power]

Thanks for responding Mr. Fish.

There are 2 highly compensated employees in addition to the six non-highly compensated employees.

So the nhcees would be excluded from benefitting under the plan.

Taken to its conclusion, could all 6 nhcees be excluded b/c of excludable compensation leaving just the hcees benefitting under the plan?

So if there is no commission-less compensation, there's no 414(s) compensation ratio testing? And no 401(a)(4) test b/c there's no nhcees?

Forgive my line of questioning, I am new to the finer points of compensation theory/practice.

[mwyatt]

Houston, I think we have a problem...

Facts as I understand this is that total population consists of 6 NHCEs and 2 HCEs. All 6 of the NHCEs' compensation consists totally of commissions. Not sure if you say that your documents currently excludes commissions from the definition of compensation or if this is something you're looking into doing. Assume that the 6 NHCEs are full-time employees and have satisfied the eligibility requirements of the Plan.

I don't think you need to dig too far into the regs to think that an end result of the 6 NHCEs otherwise eligible receiving $0 and the HCEs receiving $$$ would fly too far in testing. Also, as Blinky pointed out, this plan would need to satisfy TH minimums, which look to 415 compensation (which would add back your commissions).

You can have definitions of compensation that deviate from total compensation; however, I think a Schedule Q attachment that showed a 0% inclusion rate for NHCEs would be serious bulletin board fodder down in Covington KY.

[Blinky the 3-eyed Fish]

Max, if you are new to this, then this may be too complex a situation to adequately describe in a few sentences on a message board, but here goes anyway.

Excluding commissions is not a safe harbor definition of compensation under 414(s). Thus you have to perform the compensation ratio test. I won't go into any of those details since you obviously will not pass, as the NHCE's have no compensation under the plan definition, while the HCE have compensation under the plan definition.

So that means you must general test the plan and use a compensation definition that satisfies 414(s). In your case, using total compensation (i.e. including commissions) would be such a definition. So, you have all NHCE's getting a 0% allocation. This obviously again will not pass testing if the HCE's are getting an allocation and you will need to increase what the NHCE's get. This may be available under the terms of the plan or you may need to amend the defintion of compensation to allow for the allocation under 1.401(a)(4)-11(g).

So the moral of the story is you can't try and hose the NHCE's by just excluding commissions.

There Andy, I edited my mistake.

[AndyH]

That'd be the NHCEs, Mr. Fish.

[Guest Max Power]

Thanks fellas for your help. I am new to this and was never really apprised of the implications of the matter in school. So I appreciate the education.

[AndyH]

Blinky, I knew you would; I just wanted an excuse to call you Mr. Fish.

[Mike Preston]

That's Mr. Radioactive Fish, actually.

[Blinky the 3-eyed Fish]

Yes, let's not forget my nuclear contamination issues.