Compensation for Non Discrimination Testing

[Gary]

A plan made allocations of 5% of compensation for employees based on their total compensation during the plan year.

However, for non discrimination testing we intend to use compensation as a participant only.

So for example an employee that earned $100,000 during the plan year received an allocation of 5% of 100,000 or $5,000 (apparently they made an allocation that was more generous than the plan terms for NHCEs). However, since they entered the plan at mid year based on the plan provisions, it seems that for testing we can use their compensation earned while a participant for the half year or $50,000. This results in a non discrimination testing allocation of 5,000/50,000 or 10%, which helps the results for NHCEs.

Is this an acceptable method of testing? It seems that participant compensation is a non discriminatory safe harbor adjustment to total compensation.

Does anyone know the specific cite in the code and regs that supports this use and method of compensation?

Thanks.

[Mike Preston]

Is this an acceptable method of testing?

Yes.

Does anyone know the specific cite in the code and regs that supports this use and method of compensation?

Not off the top of my head and I don't have time to look it up. Sorry. Maybe somebody else will.