What is "de minimus"?

[K2retire]

Client would like to exclude commissions from plan comp. At least in the first year, all of the newly hired employees who earn commissions are NHCEs. So we're using 100% of the HCE compensation and the NHCE compensation can not be lower by more than a "de minimus" amount.

The client seems to think that a 5% difference is acceptable. That seems high to me. Since I understand that the regs don't address this, does anyone have any experience with what auditors have accepted?

[BG5150]

FWIW, Relius Administration uses 3% as its threshold before it issues a warning that the formula might be discriminatory.

[ESOP Guy]

There is no good answer to this question.

I have had ERISA attorneys advise my clients that 1% is the max, and another 7%.

5% strikes me as pushing it, to put it kindly.

I had a client years ago that used commissions and they had a version of your problem. When the economy was good enough of the salesmen were HCEs to make the test pass. The economy would slow down and they would all become NHCEs and they would fail the test.

Your client might be setting themselves up for a bigger headache then they realize.

[John Feldt ERPA CPC QPA]

If HCEs will not normally be receiving any commissions, then this could be a problem regardless of the size of the percentage.

I recall Tom Finnegan (I think it was him) mentioning that if a plan excludes some type of compensation which on average is only a small percent of pay (maybe only 1 or 2 percent) BUT if only NHCEs ever receive that type of pay, the IRS would likely say it is discriminatory by its definition. I think the argument is that the IRS would say that a "de minimis exception" was meant as that: an exception, not as a standard for the plan.

For example, suppose a plan exclude bonuses for allocation purposes, which was making the HCEs compensation average normally about 5% lower than total pay, and a year comes along where cash flow slows so no HCEs get bonuses, but a few NHCEs still received bonuses. In that case, assuming the average percentage is small, then the exception applies, but no bright line exists to say whether or not 3%, 5%, or otherwise is considered to be "de minimis".

That's probably not the situation you have, but may be worth considering.

[K2retire]

In this case they are expecting commissions to be significant for the individuals who receive them. The non-commission income is minimum wage, but they expect several of the commissioned employees to have enough commission to become HCEs. They are counting on the fact that it is only 3 or 4 employees out of 100 or so in the plan to make the average work for the test. (I agree it is a bad idea!)

So in years when they don't pass, how do you fix the fact that those people should have been allowed to defer on that income?

[Jim Norman]

What is the client trying to accomplish? Why do they care if they can defer on their commissions?

Usually when clients say they want to limit comp, what they really want to do is limit the employer contribution expense. If it is a matching contribution, could they accomplish a similar result with a cap on match? If a PS contribution, could they limit the PS contributions and pass a general test?

[K2retire]

They want to limit comp for both deferrals (I have no idea why) and match (presumably to save a few bucks). They don't usually do a PS contribution, but they would also want to limit comp for that purpose if they did.

Since they are dealing with a very small population, I proposed simply eliminating that job classification from the plan entirely. They thought that would be a morale issue. Why they don't think excluding the major portion of someone's pay is a morale issue escapes me.

[austin3515]

If HCEs will not normally be receiving any commissions, then this could be a problem regardless of the size of the percentage

I have a hard time believing that excluding over-time which is only paid to NHCE's would be an issue if the ratio test was passed, Are you saying that is an issue? I thought it was purely a numerical test.

edit

OK, now I rememer tht it can't be desinged to favor HCE's, but the fact that HCE's do not receive the excluded comp does not make it discriminatory. There is something in the regs somewhere... So excluding ove-time isn;t discriminatory soelly because all HCE;s happen to be exempt from over-time.

[John Feldt ERPA CPC QPA]

I was also surprised by the comment, but that's what he was saying.

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

A quote from Mr. Finnegan "in fact they are very clear that if you have a definition of pay that will consistently yield a lower inclusion percentage for NHCes, it likely fails, regardless of the differential."

[austin3515]

(ii) Scope of consistency rule. Compensation will not fail to be defined consistently for a group of employees merely because some employees do not receive one or more of the types of compensation included in the definition. For example, a definition of compensation that includes salary, regular or scheduled pay, overtime, and specified types of bonuses will not fail to define compensation consistently merely because only salaried employees receive salary and these specified types of bonuses and only hourly employees receive regular or scheduled pay and overtime.

This is the paragraph I was referring to. Maybe it doesn't provide the assurance I thought it did, sicne it seems only torelate to this consistency issue.

But this paragrpah specifically lists the folloiwing items that may be excluded (of which over-time is one). Perhaps the issue is that commissions might not be considered irregular if they are part of someone's regular compensation package.

(ii) Items that may be excluded. A reasonable definition of compensation is permitted to exclude, on a consistent basis, all or any portion of irregular or additional compensation, including (but not limited to) one or more of the following: Any type of additional compensation for employees working outside their regularly scheduled tour of duty (such as overtime pay, premiums for shift differential, and call-in premiums), bonuses, or any one or more of the types of compensation excluded under the safe harbor alternative definition in paragraph ©(3) of this section. Whether a type of compensation is irregular or additional is determined based on all the relevant facts and circumstances. A reasonable definition is also permitted to include, on a consistent basis, all or any portion of the types of elective contributions or deferred compensation described in paragraph ©(4) of this section and, thus, need not include all those types of elective contributions or deferred compensation as otherwise required under paragraph ©(4) of this section

This has been an eye-opener for me, as I had previously been under the impression that basically any type of an exclusion is acceptable, provided it satisfied the ratio test. Apparently, that is not the case...