Safe Harbor- Compensation Definition

[Guest Laura Millwood]

Situation: Plan document states the definition of compensation is W-2, then excludes overtime, bonuses, and commissions. There is a NOTE after the exlusion provisions that states "any exclusion of comp only applies to Employer Discretionary contributions and does not apply to any contribution which is qualified or subject to anti-discrimination testing". My question is - can you exclude these types of compensation in calculating the 3% Nonelective contribution under the safe harbor rules, or must you use full W-2?

[MWeddell]

The short answer is that you must use a 414(s) definition of compensation for the 3% nonmatching contribution to qualify as a safe harbor 401(k) / 401(m) contribution. Section IV(B) of Notice 98-52.

W-2 taxable compensation plus any pre-tax deferrals such as 401(k) and 125 deferrals, automatically satisfies 414(s). If you want to modify it to exclude overtime, bonuses, and commissions, I think you can do that if you perform 414(s) testing and your definition of compensation passes that 414(s) testing as not favoring highly compensated employees. It's an interesting question because it could keep the cost of meeting the 401(k) safe harbor requirement down a bit lower if the employer passes the 414(s) test.