IRS Audit - problem w/ Compensation Definition

[Guest dmartin@swerdlin.net]

My client's 401(K) Plan is undergoing an IRS audit. The plan is on a non-standardized Relius adoption agreement. The client elected to exclude bonuses from compensation in the Plan's definition of "Compensation" on the Adoption Agreement. The plan document also defines "414(s) Compensation" and states that when performing the ADP/ACP Test, the ADP and ACP ratios are calculated using the Participant's 414(s) Compensation.

The IRS agent is insisting that since the client has elected to exclude bonuses from "Compensation" and since the adoption agreement states that "Compensation" is the compensation used for deferral and contribution purposes, it must also be the compensation used for ADP/ACP testing purposes.

Have any of you recently been involved in an IRS audit where the client excludes bonuses from compensation for deferral and contribution purposes, but you have performed the ADP/ACP tests using total pay, and the IRS agent "blessed" it? I am looking for whatever ammunition I can find to back my case.Problem with IRS audit

[austin3515]

Based on the facts you've provided, I'm on board with you. Corbel's documents do allow you to use any 414(s) definition for ADP testing. Did you show him/her the site in the document that spells that out?

I have no audits where this has come up.

[Guest dmartin@swerdlin.net]

Yes, we have pointed out the sections of the document that clearly have a separate definition for the compensation you must use in the ADP/ACP test.

As expected, the document defines "414(s) compensation" in such a way as to give us a lot of flexibility.

The agent isn't buying it, though.

[rcline46]

Have the agent show you the regulations which PROHIBIT you from using alternative definitions of compensation. Request the agent get technical advice or speak with another agent.

The agent is incorrect. It is an unfortunate fact the we in the industry are responsible for providing the agents with their 'post graduate' education.

[austin3515]

Is he/she buying that the Plan is subject to 415? It's written in the document, but if you can't go by the document...

[Guest qualified plan]

Ask to speak to the auditor's supervisor- they all have one. It appears that you have a winning argument.

[Tom Poje]

if you get real lucky you would fail the 414(s) comp test. then you would be required to use 414(s) comp in your ADP test. wouldn't that throw the auditor for a loop.