Compensation excluded from eligible earnings definition

[Guest Mike Spickard]

I have a 1500-life plan that excludes "productivity pay" from the definition of eligible earnings. By and large, it represents an annual bonus paid to mid-level and production employees, not one of whom is an HCE.

I ran a "smell test", and found that for the group that gets paid a "productivity bonus", about 2% of total earnings are not eligible. So, about 98% of possible earnings are counted toward computation of the pension benefit. On the other hand, for my HCE group, about 99.5% of total earnings (ignoring the $205k limit) are included in the pension calculation.

On the face of it, I don't think this is discriminatory, but cannot find any hard and fast rule in the Code or regs. that specifies what the threshold is for a discriminatory definition of pay.

Any thoughts, short of submitting a demonstration to the IRS?

[rcline46]

Your test for NCE compensation must include ALL NCEs, not just those who have pay limited. It might be that under this condition the average may exceed 98%.

There is no rule as to what a 'de minimus' amount is under 414(s). I feel comfortable at under 3%. Others have different opinions.

[Guest Mike Spickard]

Thanks. You make a good point, and indeed with other NHCE's in the mix, the average percentage of "includible" pay is 98.4%.

Have you ever submitted a demo to the IRS, and if yes, have they given you any feedback about what is considered discriminatory?

[AndyH]

Why would you ignore the 401(a)(17) limit? I'm not sure that is right.

[Guest Mike Spickard]

Andy,

I see your point, and I think there may be some latitude there, but I am just trying to be conservative for now.

Believe me, I would like to make the argument that some of my HCE's only have a 33% inclusion ratio:

$205k included/$615k in total pay

[AndyH]

I would consider that extremely aggressive, not conservative. Each person is limited to $205,000 under the law, so if each is being treated as if they have $205,000 in pay, then each is at 100% IMO.

[Guest Mike Spickard]

Andy,

I think I confused you. In my opening post, my inclusion %'s have considered HCE's at 100% if they were making more than $205k, even if they had some of their pay excluded (as long as it does not take them below $205k).

I think we are on the same page.

[AndyH]

Mike,

Understood. Sorry for the confusion.

BTW, we have the same Award placques on our walls. Mine (I won 2-on consecutive days) came 7 years after yours. Small world. Now if I could only motivate myself to study for the EA tests like you did!

[Blinky the 3-eyed Fish]

Those EA tests are so easy; they are giving the designation away to all who want it.

[Guest Mike Spickard]

Andy,

So you won the prestigious Martin Rosenberg award? Belated congrats.

The EA tests were hard back in 91-92, and I am thinking they must be much harder right now, but Blinky seems to disagree.

[AndyH]

Yeah, we're in the same club. I won it twice. There is actually someone who won three times. I qualified a third time but no cigar.

I have no idea what Blinky's icon means. As if he hasn't already disguised his true self enough!

[Blinky the 3-eyed Fish]

I won biggest catch at the Annual Boat 'n Bass Marathon of Fishin'.

BTW, it my attempt at self-deprecating humor. I thought they were hard too.

[david rigby]

Not if you are prepared!

[AndyH]

That must be quite a fishin' contest out there in Phoenix.