Safe Harbor and 414(s)

[david shipp]

Notice 98-52 provides guidance on new 401(k) safe harbors. Section V.B.1.c.ii, Restrictions on Types of Compensation That May Be Deferred, specifies that the definition of compensation from which deferrals can be made must be a reasonable definition of compensation under 1.414(s)-1(d)(2) (but need not meet the nondiscrimination requirements of -1(d)(3)).

Is this a requirement that is applicable only to safe harbor plans, or has it been the rule applicable to all 401(k) plans?

Heretofore, I have interpreted 1.401(k)(a)(4)(iv), Application of nondiscrimination requirements to plans w/CODAs, to say that general discrimination is met through the ADP test and that availability of deferrals is met through 1.401(a)(4)-4(e)(3)(iii)(D). This last section indicates that the availability of each rate of deferral is determined by calculating the deferral rate based on the plan's definition of compensation "regardless of whether that definition satisfies section 414(s), but also treating different rates as existing if they are based on definitions of compensation or other requirments or formulas that are not substantially the same."

I have interpreted this to mean that a plan meets the availablity requirement if the same definition of deferral compensation is used for all participants, and that the definition did not have to meet 414(s) in any part.

How does the provision in Notice 98-52 practically affect the definition of eligible compensation that plans can specify for deferral?

Can commissions be excluded under the "reasonable definition" of 1.414(s)-1(d)(2)? This section provides that "irregular compensation" can be excluded. Are commissions "irregular compensation?" (It is understood that the ADP testing definition of compensation will have to satisfy 414(s).)

As a sidenote, it appears that a 414(s) definition of compensation must be used in determining the amount of matching contributions, which could be a problem if deferrals are based on a non-414(s) definition. Still working on this one.