Compensation to use in ADP test

[jkharvey]

The plan document excludes commissions in its definition of compensation. This exclusion impacts 6 of 8 HCEs and 4 of almost 100 NHCEs. It seems that this definition would meet 414(s). Is this correct? Also, if it meets 414(s) would comp less commissions have to be used in running ADP test? The test is failed if commissions are excluded and passed if included. Any thoughts?

[Guest]

I would first check document. (I realize in some cases this might be even more confusing, but...)

For instance, the Corbel document sitting in front of me says " use 414(s)" in the test.

Under definitions, 414(s) is defined as '415 compensation' (which means you would include comissions) this particular document does go on to define 414(s) only from date of participation, so read everything.

[jkharvey]

Thanks, Tom. Next question, then. The document says that ADP compensation will be 414s comp. 414s comp is then defined as compensation as defined in the ER's adoption agreement. In my case, comp in the adoption agreement excludes commissions. Sounds to me like you are saying that I should be using comp w/out commissions for my ADP test?

Thanks

[AndyT]

Tom P.,

Couldn't one argue that 414(s) comp = any comp that satisfies the 414(s) test? And in this case, since it will obviously pass the 414(s) test, could we conclude that it is 414(s) comp?

I don't know, maybe there is something in the 414(s) Regs that would deny this line of reasoning.

[Guest]

hmmmm. A big hmmmm.

Or at least a 'be careful'

I can certainly have a document that defines comepensation for 'allocation purpose' as comp less commissions. This is not the same as 414(s) comp. In fact comp less commissions is not a definition of 415 comp.See 1.414(s)-1©(2)

safe harbor def of 414(s) = 415 comp. Another variation of the safe harbor 414(s) would be to exclude ALL deferrals.

Lastly, you can vary 415 comp IF you can pass compensation ratio test. (comp - commissions / total comp) and compare HCEs to NHCEs. sort of like the ADP test, the avg of the ratios can only vary by a diminis amount.

[Guest]

my hmmmm was in regards to document that defines 414(s) comp as 'comp as defined in adoption agreement'

if adoption agreement said comp was

'comp less bonuses' and only nhces had bonuses, then you would be stuck wouldn't you.

this implies one of the following(?):

1. adoption agreement would have to have language to prevent this from happening

2. adoption agreement has a comp def for allocation purposes and a different def for 414(s) purposes buried somewhere

in the example you cited, your comp def would indeed seem to pass 414(s) testing, and therefore could be used for ADP test purposes. but again, suppose in your example no HCEs had commissions and 4 of 100 nhces had commissions. then it would the 414(s) test. then what? that was the point I was trying to make.

by the way, pre 1998, the definitions were reversed. 414(s) = 415 comp, but you could add back deferrals. Now that 415 comp def changed the reverse is true. you are allowed to subtract off deferrals!