Plan Having Trouble with 414(s) Compensation Test

[rocknrolls2]

Company X maintains a 401(k) plan for its employees. In an effort to revitalize interest among its employees, X is considering the adoption of a design-based safe harbor 401(k) plan. Based on the way it compensates its employees, it has generally used a list of certain items that are eligible to be counted as benefitable compensation and the remainder of such items are not counted. In testing compliance with 415 and certain other requirements, including ADP/ACP testing, X uses the W-2 earnings definition. In order to be able to use a safe harbor approach, the plan must amend the definition of benefitable compensation to meet one of the 415 alternatives or to subject such definition. As a result of the test, the inclusion percentage for HCEs is between 1 and 2 percentage points higher than the percentage calculated for the NHCEs. From your experience is this a more than de minimis difference sufficient to cause the plan to fail the 414(s) nondiscrimination test and therefore preclude the use of a safe harbor design?

Thanks.

[John Feldt ERPA CPC QPA]

The W-2 definition for allocation of contributions is deemed to satisfy 414(s). You do not have a 414(s) failure if that is the plan's definition of pay for allocation purposes.

[rocknrolls2]

J4FKBC, As you will note in my post, compensation for allocating contributions is "a list of certain items that are eligible to be counted as benefitable compensation and the remainder of such items are not counted." Since this definition does not satisfy the W-2 definition, therein lies the problem.

[John Feldt ERPA CPC QPA]

My misunderstanding. De minimus is not defined, but many practitioners believe that 3% or less is de minimus. However, be careful about this. I'll post a link to another thread where that was discussed.

[rocknrolls2]

Thanks for your help.

[John Feldt ERPA CPC QPA]

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