Doc says OK to contrib up to 15% of comp - but what's comp? Plan year?

[Guest mulrenan]

Our plan states an employee may contribute from 2% to 15% of salary. It doesn't state whether this means annual compensation (salary) or the salary for the period when first eligible. For example, if an employee is eligible on July 1 (employment date was Jan. 2 same year, and the annual salary is 100,000, is the employee limited to 15% of 50,000 (half of 100,000 since not eligible until July 1) or his annual of 100,00?

[KIP KRAUS]

If you don't have a difinition of salary in the plan document, you should. Most plans I've been envolved in define salary, or compensation. I have never seen a plan that allowed an employee to make contributoions on prior earning, i.e. earnings prior to becoming eligible to contribute. In your situatio, oru plan would only allow contributions from eligibility date forward. If the 15% doesn't get the employee to the annual IRS max too bad.

If contributions are payroll deducted, which in most cases they are, if you allowed the employee to max out based on prior earnings, he/she would have to contrinute a percentage hogher than 15%, which is contrary to the plan's maximum percentage allowable.

[LCARUSI]

Any contribution with respect to compensation previously received is not, by definition, a salary deferral contribution.

[Guest mulrenan]

thanks Kip Kraus and lcarusi for your comments

[Guest Tracy]

Our Plan states that when an employee becomes eligible - let's say July 1 - they become eligible as of the beginning of the plan year, i.e., January 1, so we would allow the participant to contribute more than 15% for the remainder of that year as long as the annual deferral does not exceed 15% of annual compensation or the $10,000 limit. If you'd like to know the definition we use in our plan document, let me know.

[LCARUSI]

Tracy -

Seems to me that if you do that, you would have to use the full year's compensation for ADP/ACP testing.

Thus, if the employee joins the plan on 7/1 and contributes 5% of pay (pay from 7/1 to 12/31), then his or her deferral percentage would be 2.5% - you would have to use the full year's pay in the denominator.

This probably wouldn't be helpful in discrimination test results.

[Guest GregSelf]

Just a follow up to Tracy's point. The Corbel Regional Prototypes allowed you to define eligible/testing comp as comp from the beginning of the plan year, regardless of entry date. In these cases, we would also (for those clients who requested) let the participants contribute more than the maximum in order to bring the annual %s up to the max. We got confirmation from Corbel's ATTY's on this prior to using this approach. LCarusi is right though, it usually had negative affects on the ADP/ACP tests.