Compensation Less Deferrals in ADP/ACP testing

[Tinman]

When testing a 401(k) plan using compensation less deferrals as the testing comp, in some instances this causes the participant's deferral % to exceed 100%.

Can anyone help with a cite so I can direct the employer's accountant to verify this is ok?

[John Feldt ERPA CPC QPA]

First, cite the section of the plan document that states that Plan Administrator can operationally determine the Compensation definition for testing purposes provided that the definition chosen must satisfy Internal Revenue Code Section 414(s) and its corresponding regulations.

Then, send them IRC 414(s) and the regulation 1.414(s).

Edited to add: Have them look at 414(s)(2) in particular.

[Tinman]

Thank you! That's just what I needed.

[Tinman]

On second look.... it's not totally what I needed.... I'm still looking for something - official example or cite - that indicates it is an acceptable practice for an ADP test using comp-less-deferrals to have the ADR(s) in excess of 100%. Using the cites above, I can verify that we can use this type of comp for testing, but it's the ADR of 100+% that's giving us the issue.

Thanks!

[John Feldt ERPA CPC QPA]

Cite the section of the document that described the ADP test. Probably there's a paragraph that defines the actual deferral ratio as the ratio of deferral to the compensation, with no reference to any 100% being the maximum ratio.

If they insist the ratio cannot exceed 1, perhaps ask for the cite that prohibits that from occurring, since the IRS-reviewed plan document does not contain such a limitation?