Urgent 401(a)(17) Question, Attn: Tom Poje

[Guest bjschiedel]

We have a client with a custom plan document that limits compensation for purposes of determining contributions and benefits under the plan to $170,000 for the 2003 plan year, not to be indexed with 401(a)(17). Client did this to contain the costs of their annual 5% profit sharing contribution. For ADP testing purposes, can we abandon this restrictive compensation limit and open it up to the statutory $200,000 for the 2003 plan year? You can probably guess that the testing passes using $200,000 and fails with $170,000. Two attorneys have now confirmed that the statutory limit can be invoked for testing purposes even though the document limits compensation to something else for contributions and benefits.

Can anyone give me a citing to this effect? Has anyone actually done this? Tripodi's books have not helped me confirm this.

Please help !!!

[E as in ERISA]

Does your plan define 414(s) compensation? Many plans have one (or more) definition(s) of compensation for allocations, another for 415 limits, another for testing (414(s) compensation).

[Belgarath]

Well, what about 1.401(a)(17)-©(1)? In other words, if the plan is silent on what compensation is used for performing the ADP test, then I think you can use the 401(a)(17) limit. If the plan has specific methodology defining compensation for this purpose as the 170,000 that you use for otehr purposes, then I think you are stuck.

[Blinky the 3-eyed Fish]

I agree with the comments, but wanted to add that a document that defines the compensation definition to use for nondiscrimination testing is a poor document. All that definition does is reduce flexibility and potentially cause problems.

In other words, to honor QDROphile, that document would suck!

[Guest bjschiedel]

The document does not define 414(s) compensation. In the ADP/ACP section it does not spell out a deifferent definition. It references to "Compensation" which is limited to $170,000 and is defined in only one section, the definitions section.

I love the quick responses. I am leaning towards $200,000 and a passing test. Anybody else have anything to add ?

[WDIK]

I don't understand why you are "leaning towards $200,000" if your ADP/ACP section "references to 'Compensation' which is limited to $170,000".

[Tom Poje]

in performing ADP or ACP or the general test (e.g. cross testing), the compensation used must satisfy one of the safe harbor definitions under 414(s).

Does limiting comp to 170,000 satisfy 414s?

lets see:

one safe harbor definition is 415 comp - nope

there are 3 safe harbor modifications:

415 comp less 'special comp - moving expenses, reimbursements, etc) - nope

415 comp less deferrals - nope

exclusion applies only to HCEs - 415 comp modified to exclude any item of comp if exclusion only applies to HCE - but this only refers to excluding comp listed above , so this would appear to be nope.

however, 1.414(s)(2)(iii)last sentence says "A definition of comp is not unreasonable merely because it excludes all compensation in excess of a specified dollar amount."

ah ha. then a document that limits comp to 170,000 would certainly fall under the 'reasonable definition'. therefore 170,000 satisfies 414(s).

now, in your particular plan what comp are you required to use for testing?

A typical Corbel document would allow you to use any compenastion that satisfies 414(s), so you could use either170,000 or 200,000 or for that matter exclude the deferrals from the total comp.

as for your document, I would agree with WDIK. stopping short of anything else, I would express some concerns if the it says 'Compensation' as opposed to 'compensation' [lower case meaning it is not defined]. One still has to follow the terms of the document even if it is more restrictive than it need be.

This is no different than a document's definition of the ACP test which says to use

match and after tax contributions. Such a document would not appear to allow you to shift deferrals (as opposed to a document that says use match and after tax and any elective deferrals not used in the ADP test).

Now, all that being said, I would say I am not 100% sure.

could you amend the document to contain a better definition of compensation? Or at least a clarification of what testing comp is? In other words, can you amend after plan year end? There wouldn't appear to be a cutback, since you are not required to provide a QNEC. It has been discussed before, if plan used prior year testing, could plan switch to current year - that is really unclear. I know many argue since you have 12 months after plan year end to correct the test you SHOULD be allowed to amend. I don't see how amending/clarifying what comp to use for testing purposes would be any different.

so, I simply am not sure in your particular case.

got a bit long winded didn't I?