definition of compensation for 401(k) safe harbor plans

[Guest Jane Freeman]

A safe harbor 401(k) plan excludes bonuses from the definition of compensation. The compensation ratio test was performed and the inclusion percentage for the NHCEs is 5% less than the inclusion percentage for the HCEs. According to most this does not pass the "deminimus rule". I know that if the compensation ratio is not passed you can use the general test under 401(a)(4) to show that compensation is not discriminatory. Is this general test available for safe harbor 401(k) plans since safe harbor 401(k) plans must use a definition of compensation that satisfies 414(s)? In other words, if the plan satisfies the nondiscrimination test under 401(a)(4), does it also satisfy 414(s)?

Thank you.

[MWeddell]

No.

You need to have the plan's definition of compensation used for the purpose of computing contributions satisfy 414(s) -- either by meeting a 414(s) safe harbor definition of compensation or performing a 414(s) test that passes. You can't somehow use 401(a)(4) or any other test.

You'll need to modify the plan's definition of compensation so that it does satisfy 414(s) or else you will not satisfy the 401(k) / 401(m) safe harbors and instead will be subject to 401(k) and 401(m) testing.

[Lori Friedman]

Doesn't this definition of compensation (exclude bonuses) also fail the safeharbor provisions of Sec. 410(b) and cause the plan to use rate groups for its coverage testing?

[Blinky the 3-eyed Fish]

No, there is no such thing as safe harbor provisions for 410(b). You are thinking of 401(a)(4). Having a safe harbor formula, but basing that formula on a definition of compensation that does not satisfy 414(s), does mean that you will need to general test the plan for nondiscrimination.

[Lori Friedman]

You're right, Blinky. I got confused because the general test for nondiscrimination applies Sec. 410(b) to each rate group.