Compensation issue

[Guest jetfaninmn]

If a plan excludes bonuses, what issues arise in regards to 414(s)?

1. If the bonuses are for HCE's only, and we exclude them, the safe harbor definition of compensation remains intact, correct?

2. If the bonuses are for NHCE and we exclude them, are we subject to further testing?

3. If the bonuses are excluded for all, is this still considered a reasonable definition of compensation or are we still liable for futher testing based on facts and cirucmstances?

Thanks!!

[Locust]

414(s) is used for testing, and in a 401(k) plan, you don't necessarily have to have a 414(s) definition in determining elective and matching contributions.

I think a good approach is to use total w-2 compensation with elective contributions added back in - this is an acceptable 414(s) definition because it is safe harbor - in determining the ADP and ACP percetnages. If the test passes, it doesn't matter what your definition is for elective and matching contributions. If the definition for elective and matching contributions excludes bonuses and only highly compensated employees get bonuses, this approach results in lower ADP/ACP percentage.

Review the boilerplate plan language - it probably allows the use of any 414(s) definition of compensation in determining the ADP/ACP percentages.

[Tom Poje]

be careful when you say 'further testing'

are you talking about ADP test or 414(s) testing?

As Locust noted you could use total comp in your ADP test, and if you pass you are done (assuming you also don't have a profit sharing contribution based on comp less deferral)

excluding bonuses is considered 'reasonable' so then

normally, step 1 would be to run a 414(s) comp test.

if you pass, then you could use comp less bonuses in your testing