discriminatory definion of compensation

[Guest C Kampen]

The Plan bases discretionary contribution on gross compensation excluding bonuses and overtime. The differential between the included compensation for the HCEs and nonHCEs is only 3%. Any advise on whether this differential would be considered di minimus for testing purposes will be appreciated. Thanks.

[MWeddell]

Whether the difference is de minimis is a facts and circumstances determination under Reg. 1.414(s)-1(d)(3)(v), so nothing other than an IRS ruling for your client (typically as part of a determination letter application) is authoritative.

That being said, the rule of thumb I've seen used is no more than 2% if de minimis, but I don't see any justification at all for that figure in the regulations.

You may of course allocate discretionary contributions as you currently are doing but use a safe harbor 414(s) definition of compensation and perform general 401(a)(4) testing of the contribution. You'd have to perform general 401(a)(4) testing instead of 414(s) testing, but would be more certain about whether the results would be acceptable to the IRS.

[This message has been edited by MWeddell (edited 11-05-1999).]