Compensation Exclusions

[Guest Mike Schwing]

A plan excludes OT, Bonus, Comm. The plan is 401(k) and pay period match only. I ran compensation ratio test - plan fails - NHCE inclusion % = 80%

HCE inclusion % = 100%

I tried testing 401(k) and match contributions under 401(a)(4) but plan does not pass ABPT - only 67%.

What can I do for this plan? Does the employer have to do a QNEC to pass 401(a)(4)?

Can I amend the plan to not exclude these compensation items within 9 1/2 months after plan year end? If I amend, plan do I just run ADP / ACP on gross compensation or does the employer have to still make some sort of employer contribution becuase NHCE's did not get to contribute or receive match on gross pay in 2003?

Any thoughts would be helpful.

[AndyH]

I think you need to slow down an think about what you are testing. Presumably you are doing the ADP and ACP tests, right? Then the ABPT and 401(a)(4) tests are irrelevant.

Test using gross pay as you suggested, or any pay definition that satisfies 414(s). Then think about QNECS or refunds. 401(a)(4) is not relevant to ADP and ACP testing unless you have multiple companies or class exclusions which does not sound like it is your concern.

[Blinky the 3-eyed Fish]

Just to expand a little, by failing the compensation ratio test, that just means that your plan's definition of compensation does not satisfy 414(s). Since you appear to just have deferrals and matching contribution in the plan, that just means, as Andy so eloquently stated, that you need to test under a definition that does satisfy 414(s).

If there are PS dollars, let us know and the expounding will occur.

[Mike Preston]

Isn't there an issue of discrimination merely by allowing deferrals solely from compensation which is not 414(s) in and of itself?

[g8r]

For deferral purposes, the only standard is that the definition be reasonable. It doesn't have to be nondiscriminatory. I don't have the specific cite on this handy - it might be in the BFR section of the (a)(4) regs. While not directly on point, the rule was reiterated in Notice 98-52 dealing with ADP safe harbor plans.

The best example I can think of as to why it's just a resonable definition is where employees get tips. You can defer out of cash tips and the HCEs probably have no tips.

[Guest Happy Actuary]

You might want to run a general test under 401a4, and provide an add'l NHCE "corrective" p/s contribution such that it is enough to pass, where you are testing:

(contribs/total pay).

This could alleviate the 414s issue altogether

[AndyH]

Happy, he can't general test for ADP and ACP. Those are the exclusive tests for those purposes.

[g8r]

There are two issues being tossed around. The ADP test is used to test the actual deferrals made to the plan. As pointed out, it is the only test you can use and it must be based on a nondiscriminatory definition of compensation.

The other issue (which I think is what the original question was aimed it), is whether you have a discrimination issue if you only allow deferrals out of a portion of compensation. For example, if I only allow deferrals up to 10% of compensation excluding overtime pay, is that a potential discrimination problem? If the NHCEs are the only ones who have overtime, then it "appears" to be discriminatory b/c the HCEs can defer 10% of their total pay and the NHCEs can only defer 10% of only a portion of their compensation. It's a benefits, rights and feature issue. And, for this purpose, the reg specifically states that you don't have to pass the nondiscrimination requirement of 414(s).

See (D) below which I copied from the regulation:

http://frwebgate.access.gpo.gov/cgi-bin/ge...=2000&TYPE=TEXT

iii) Examples. Other rights and features include, but are not

limited to--

(A) Plan loan provisions (other than those relating to a

distribution of an employee's accrued benefit upon default under a

loan);

(B) The right to direct investments;

© The right to a particular form of investment, including, for

example, a particular class or type of employer securities (taking into

account, in determining whether different forms of investment exist, any

differences in conversion, dividend, voting, liquidation preference, or

other rights conferred under the security);

(D) The right to make each rate of elective contributions described

in Sec. 1.401(k)-1(g)(3) (determining the rate based on the plan's

definition of the compensation out of which the elective contributions

are made (regardless of whether that definition satisfies section

414(s)), but also treating different rates as existing if they are based

on definitions of compensation or other requirements or formulas that

are not substantially the same);