Nondiscriminatory compensation question

[Guest dietpepsi]

I'm trying to determine the best way to prove a definition of compensation is or is not discriminatory.

Situation one: Compensation used to calculate employer contribution is pay based on what the participant was paid in the last pay period of the year times 26 pay periods.

Situation two: Compensation used to calculate employer contributions is pay minus current year bonus, plus prior year bonus.

With both situations I am ending up with compensation greater than total comp for the plan year. Would both of these situations require a general nondiscrimination test or is there another way to prove nondiscrimination?

Thanks

[rcline46]

There are only 2 ways to prove non-discrimination in compensation - either use a safe harbor definition under 414(s), or to do the test under 414(s).

[JDuns]

There are only 2 ways to prove non-discrimination in compensation - either use a safe harbor definition under 414(s), or to do the test under 414(s).

Or you could do the general test calculating contribution or benefit accrual rates as a percentage of compensation as defined under a safe harbor definition under 414(s) (like box 1 W-2). If this passes the general test, the plan design is OK even though the Plan compensation definition by itself does not pass the 414(s) discrimination test.

[Guest dietpepsi]

Can I do the test under 414(s) if the alternative compensation is higher than total compensation?

[rcline46]

Of course you can.

There is a 'but' - remember that the allocations cannot exceed the 415 limits based on the real 415 pay for the year!

[Guest CMC]

I have a question that's in this same vein.

Client uses plan's definition of comp for 401(k) elective deferrals & matches AND testing.

Plan's definition is a 415©(3) definition reduced by the excludable items listed in 1.414(s)-1©(3) (reimbursements or other expense allowances, fringe benfits (cash and noncash), moving expenses, deferred compensation and welfare benefits) (the "Safe Harbor Excludable Items") PLUS signing bonuses.

Seems to me this alternative definition does not by design favor HCEs and is reasonable b/c signing bonuses are irregular & additional.

Question is for purposes of testing the definition under 414(s) whether "total compensation" has to include the Safe Harbor Excludable Items listed above.

Regs talk only in terms of excluding certain elective deferrals listed in ©(4), but excluding the Safe Harbor items would seem to more quickly isloate the impact of excluding signing bonuses. (And why would you have to re-test for stuff the Safe Harbor Alternative Definition squarely lets you exclude anyway?)

Anyone think it is o.k. to leave these items out of total comp?

[Locust]

CMC - Your definition double counts signing bonuses. Why would you do that?

You can test for nondiscrimination using any 414(s) definition. Both 415 compensatin and and 415 compensation without the safe harbor exclusions would be 414(s) definitions. Locust

[Guest CMC]

Sorry if explanation above wasn't clear. The plan definition excludes signing bonuses in addition to excluding the Safe Harbor Excludable Items we are squarely permitted to keep out. The exclusion of signing bonuses is what seems to take the definition outside of 414(s) thereby necessitating the special compensation nondiscrimation (or ratio) test called for under 414(s). My question is, when I go to compare plan comp to total comp as part of that test, can I exclude from "total comp" the Safe Harbor Excludable Items listed in 1.414(s)-1©(3).