Trap for the unwary?

[Brenda Wren]

We rarely recommend to clients that they exclude bonuses from allocation

compensation unless we are fairly confident that the 414(s) compensation

nondiscrimination testing will pass each year. However, in the case of a

Safe Harbor match plan (or a deferral/match plan for that matter), I'm

thinking that even though compensation is defined as ALL compensation, the

plan could result in discrimination another way. The Datair prototype

document has a specific option for allowing participants to defer on their

bonuses. There are 3 options: (1) deferral on bonuses is permitted, (2)

deferral on bonuses is not permitted and (3) a special election will be

made. We have typically asked our client which option works best for their

situation and the way they handle the logistics of paying bonuses. BUT, if

the plan is also a safe harbor MATCH plan with no "true-up" provision, match

calculations are made each payroll period, and the client selects #2,

couldn't this result in discriminatory operation of the plan? (yes, we asked Datair and the initial take on it was "no")

[Tom Poje]

I would agree, if plan does not match bonuses you could fail 414s. And if you fail 414s, I would assume you have to run the ADP test using total comp, and also use current year testing since that is also a requirement of safe harbor plans. And the contribution still has to be 100% vested and no restrictions, etc.