Compensation ratio test?

[Guest welcomehome]

I have a 401(k) SH plan which excludes overtime, commissions and bonuses. I have to run the compensation ratio test. Does anyone know if Relius runs this as part of the non-discrimination testing? If not, how do I test the compensation for non-discrimination? Thanks.

[Guest smstls]

This is covered under section 414(s) and you are basically looking at what percentage of an employee's pay is treated as eligible earnings under the terms of the plan. As long as this percentage for HCEs does not exceed that for NHCEs by more than a de minimus amount, you're OK. I don't think de minimus has been defined anywhere, but 2% is certainly safe. You may be able to go even higher.

[Tom Poje]

I have a report that might work, but for whatever reason you can no longer post an .rpt on the board. if you give me your email (you dont have to post it on the board, but rather email me directly)

no guarantees on any of my reports, they seem to work but I never know for sure.

I think at some level of relius 10 there will be a report, but it will be awhile before I get converted

[wmyer]

What are you excluding these items from compensation for...just the profit-sharing contribution, I hope. If memory serves correct, you cannot exclude these compensation items for purposes of making the Safe Harbor non-elective or Safe Harbor match.

[austin3515]

I just looked it up in 98-52 (and a couple articles). It can be any 414(s) definition, except that the rule that says you can disregard comp over a certain amount is not allowable.

[wmyer]

thx, austin. so i guess the panel publishers coverage and nondiscrimination answer book should be corrected:

Q 4:36.1 What definition of compensation is used for purposes of determining 401(k) safe harbor nonelective contributions or safe harbor matching contributions?

For purposes of determining safe harbor nonelective contributions (SHNECs) or safe harbor matching contributions (SHMACs) to a 401(k) plan, the allocation must be based on one of the safe harbor definitions of Section 414(s) compensation (see SQ 4:17). In addition, the same Section 414(s) compensation definition must be used for both the SHNECs and the SHMACs. Compensation can be limited to that earned while a participant in the plan. [Notice 2000-3, 2000-4 IRB 413]

[rcline46]

Relius 10.0 does the test for you, but YOU have to decide if it is de minimus.

Excluding overtime, bonus and commission is NOT a 414(s) Safe Harbor definition.

Integrated plans REQUIRE a safe harbor definition. Check your document.

HCE determinations require a safe harbor definition.

They have to report all the items so proper testing can be done anyway.

Allocations can be on ANY definition of pay, and if that definition of pay passes 414(s) you are ok, if not testing can be on any safe harbor definition, if your document provides it.

Funny thing about clients - when you tell them they still have to report it, and you charge extra for doing non-SH comp work, and they might be forced into a SH definition anyway, and they could fail that test costing more in contributions, they have always capitulated to us.

[austin3515]

"Compensation" 98-52 references 1.414(s)-1, and that site seems to incorporate both the safe harbor definitions and anything that passes the ratio test.

See "permissable compensation" section of this article.

http://www.mellon.com/hris/fyi/fyi_02_02_99a.html

Anyone else care to settle this? Or do you agree Wmyer?

[Tom Poje]

Interesting thoughts. I would hold the answer from the Answer Book might need to be expanded on, but I am not sure if it is incorrect.

If a plan fails the 414s comp test what is the correction?

run your ADP test using a definition that satisfies 414s. but there is no test to perform in a safe harbor plan. In fact the regs (certainly the preamble to the new regs makes that clear - a safe harbor plan 'is not permitted to provide that the ADP testing will be used if the requirements for the safe harbor are not satisfied")Thus, at that point, are you allowed to increase your safe harbor contribution using a definition of comp that satisfies one of the safe harbor of 414(s)? I am not sure under what rule you could do that. That defeats the intention of safe harbor 401(k) plans.

(I see the ERISA Outline Book simply says the plan will generally use a definition that satisfies safe harbor 414(s) otherwise it will HAVE to satisfy the 414s comp test (Emphasis mine)

Thus, I suppose if you were 100% guaranteed to pass the 414(s) compensation test every time, you could get by - but can you guarantee that?

In addition, if you were providing the safe harbor on a payroll by payroll basis (thus no true up) I guess that would require you to perform a 414s test every payroll.

[Guest LoloV]

I'm working on a similiar allocation and the intent is to allocate the safe harbor ps excluding bonus and commission amounts from compensation.

The document I am looking at states for Nondiscrimination purposes "...(2) the Plan Administrator will disregard any elections made in the "modifications to Compensation definition" section of Adoption Agreement Section 1.07...The employer, irrespective of clause (2), may elect to exclude from this nondiscrimination definition of Compensation any items of Compensation excludible under Code 414(s) and the applicable Treasury regulations, provided such adjusted definition conforms to the nondiscrimination requirements of those regulations."

This is an annual Non-Elective Safe Harbor PS contribution in which the HCE's are getting the bonus amounts so the compensation ratio test will always pass.

Are bonus and commission amounts considered excludible under Code Section 414(s) if the compensation ratio test is passed?

[Tom Poje]

if the HCE gets a bonus but also makes over the comp limit (200,000 as indexed) then you could still fail the compensation test as the exclusion of bonuses has no effect on their comp for allocation purposes.

If the HCEs are the only people getting bonuses then I guess you would pass as well.