Compensation Testing

[Guest phy401k]

Hi,

I am totally confused. We just had training in compensation testing, and the facilitator said that the compensation difference between HCEs and NHCE must be no more than 3% EVEN IF THE COMPENSATION FOR THE NHCE GROUP IS HIGHER. In her example, if the HCE group average was 95% and the NHCE group average was 96%, then the plan would fail compensation testing BECAUSE THE NHCE AVERAGE IS NOT GREATER THAN 3%, even though it is higher. This is exactly opposite of what I have been taught. I have been taught that if the NHCE average is equal to or greater than the HCE average, the compensation testing passes. The only time you have to take into account a de minimum amount (3% is what I've been taught) is if the HCE average is greater than the NHCE average.

Right now I'm so confused I just want to leave this business altogther -- probably not a bad idea. Could someone please clarify this issue for me? And a reference site would be sooo appreciated, whether I'm right or completely wrong.

Thanks!

[Laura Harrington]

I imagine your trainer just did not explain herself very well. I doubt she meant to tell you that if the NHCE % was higher that the test would fail.

Here is what the regs say is required in order for the definition of compensation to be nondiscriminatory.

Treas. Reg. 1.414(s)-1(d)(3):

Nondiscrimination requirement--(i) In general. An alternative definition of compensation under this paragraph (d) is nondiscriminatory under section 414(s) for a determination period if the average percentage of total compensation included under the alternative definition of compensation for an employer’s highly compensated employees as a group for the determination period does not exceed by more than a de minimis amount the average percentage of total compensation included under the alternative definition for the employer’s nonhighly compensated employees as a group.

Simply put, it says the HCE average percentage cannot exceed the NHCE average percentage by more than a de minimis amount. (The definition of de minimis is found nowhere in the regs, but 3% is generally accepted to be considered de minimis).

Basic math application: If the HCE average is 95% and the NHCE average is 96%, the HCE average does not exceed the NHCE average by more than 3%. Therefore, the definition of compensation would be considered nondiscriminatory.

Laura

[Guest phy401k]

I imagine your trainer just did not explain herself very well. I doubt she meant to tell you that if the NHCE % was higher that the test would fail.

Here is what the regs say is required in order for the definition of compensation to be nondiscriminatory.

Treas. Reg. 1.414(s)-1(d)(3):

Nondiscrimination requirement--(i) In general. An alternative definition of compensation under this paragraph (d) is nondiscriminatory under section 414(s) for a determination period if the average percentage of total compensation included under the alternative definition of compensation for an employer’s highly compensated employees as a group for the determination period does not exceed by more than a de minimis amount the average percentage of total compensation included under the alternative definition for the employer’s nonhighly compensated employees as a group.

Simply put, it says the HCE average percentage cannot exceed the NHCE average percentage by more than a de minimis amount. (The definition of de minimis is found nowhere in the regs, but 3% is generally accepted to be considered de minimis).

Basic math application: If the HCE average is 95% and the NHCE average is 96%, the HCE average does not exceed the NHCE average by more than 3%. Therefore, the definition of compensation would be considered nondiscriminatory.

Laura

Actually, I asked specifically in the example she gave. I think she copied the example from another source and transposed the HCE and NHCE groups. It was actually on her power point presentation as a failure, so I was somewhat shocked.

Thanks for the clarification.

[John Feldt ERPA CPC QPA]

You may be interested to read this:

http://benefitslink.com/boards/index.php?s...st&p=161125