Potentially Discriminatory Definition of Pay

[Guest cole stevenson]

One of our clients sponsoring a final average pay DB pension plan currently has a straightforward definition of pay for benefit accrual purposes. It's simply annual base compensation actually paid. Overtime & bonuses are excluded.

Senior management wants to change this comp definition to include one type of bonus. Of course this particular bonus type is only paid to certain key contributors across the company. By and large these are all HCEs.

On the surface, this would seem to create a discriminatory alternative pay definition. [under §414(s) rules I think.] I'm interested in any reactions as to whether my worries are legit. And I welcome any creative thinking for how to make this work.

Many thanks,

Cole

[AndyH]

Your instincts are right. You run the compensation ratio test under 414(s). That is pretty simple. If that fails your alternative is to test the plan under the General Test of 1.401(a)(4). That test almost never fails, the only question is whether or not the client will run out of money before it passes.

Kidding aside, the question is what will the general test cost and whether or not it is worth it to the client.

But first try the 414(s) test, although there is a good chance it will fail.

[Blinky the 3-eyed Fish]

Of course your current definition of pay does not satisfy 414(s) as a safe harbor and must be tested each year as well.

[AndyH]

Ooh, my eyes glazed right over that factoid. Thanks.

Excluding OT while including some bonuses could be troublesome. You might need to do the general test to pass.