414(s) compensation vs. 415(c)(3) compensation

[jlea]

A client wants to use a definition of compensation that qualifies as a 414(s) safe harbor for purposes of contribution and testing. Specifically, they want to define compensation as wages, etc. but excluding reimbursements/expense allowances, fringe benefits, moving expenses, deferred compensation, and welfare benefits (mirroring 1/414(s)-1©(3)). From a factual perspective, they do not want to have to include noncash items (e.g., use of company car, gift certificates awards, etc.) in the amount from which employees are permitted to defer. Potential contributions to the plan include elective deferrals, matching contributions and employee after-tax contributions.

Questions:

(1) Can such a plan use a 414(s) safe harbor definition of comp for both testing AND contribution? That seems odd to me from a logical perspective in the sense that a comp def that satisfies 415©(3) satisfies 414(s), but here they're using a def that satisfies 414(s) but not 415©(3) . . .

(2) If the answer to (1) is yes, mustn't the plan use a different definition of comp for other purposes in the plan - e.g, defining HCEs, Key EEs, etc.? And, in that event, doesn't the plan need a separate definition of comp for those purposes? (Noting then that def would need to comply with the 415 regs.)

(3) Would these answers change if the plan permitted a discretionary profit-sharing contribution? Would that only come into play in years the employer opted to make such a contribution?

[austin3515]

1) Yes. You can always use a 414(s) safe harbor definition of comp. You can use one 414(s) for a match, a second for profit sharing allocations, a third for ADP testing, a fourth a(4) testing, you get the idea...

2) The definition of comp for determing HCE's and keys is prescribed by statute, so every qualified plan uses the same one. Its 415(something or other).

3) See my answer to 2).

[Tom Poje]

but a plan must always use 415 comp for top heavy

and to satisfy the gateway minimum, 415 would again be used, though this couldbe from date of participation.

[jlea]

Okay, to make sure I've still got this straight:

The plan can use 414(s) comp for purposes of contributions and ADP/ACP testing.

If the plan fails its ADP/ACP test and ER elects to make target QNEC/QMAC, then such target contributions are tied to limits that involve 415 comp (even though the plan used 414(s) comp for the ADP/ACP testing).

As always, the plan must use 415©(3) comp for HCE and TH purposes.

[movedon]

Tom - re using 415 comp for the gateway - that's only for the 5%, right?

[Tom Poje]

correct. not the 1/3 rule.

[zimbo]

So, if we use 414(s) compensation for everything we can think of, we still need to use the new 415 compensation (generally effective in 2008) for TH minimums, gateway minimums using the 5% rule, and HCE determinations? Am I missing anything?

This creates complexity because 415 comp forces us to find out about post employment pay, sometimes even into another year. If an ee terminates 12/1/2008 but has credited post severance pay received early in 2009, does it count for 2008 or 2009?