Compensation Ratio Test

[Susan S.]

The employer's definition of compensation excludes bonuses, so a 414(s) test is required. The only employer contribution is a discretionary match. The ADP/ACP tests are on the prior year testing method. The compensation ratio test is satisfied when I compare the current year HCE's to current year NHCE's. Do I also need to run a compensation ratio test to compare the current year HCE's with the prior year NHCE's to be consistent with the prior year testing method?

[ETA Consulting LLC]

I wouldn't go that far. You are actually comparing the current year HCEs (defined in the current year) to prior year NHCEs (defined in the prior year). This means that it is possible for a single individual to get tested in both groups. What does this have to do with your question? Absolutely nothing

Except.... To make the point that it is an imperfect process that often does not yield to logic. You have just identified another inconsistency in the process, but the bottom line is that testing compensation for nondiscrimination does not cross plan years.

At some point, you stop looking for logic and run with it.

I do like the way you think; it was actually a thought provoking question

[Susan S.]

Thank you very much! Not crossing plan years makes sense.

[Tom Poje]

lets say in 2010 the discretionary match was 75% and in 2011 it was 100%.

it wouldn't make sense (at least to me) to run the ratio test of current year HCE to prior year NHCE comp.

the comp ratio test is simply saying, when I gave 75% match to people based on their comp was that discriminatory due to comp.

the ADP might be harder to pass because you are now comparing a match for the HCEs at 100% to a 75% rate for NHCEs, but discretionary match will always have issues when using prior year unless its consistent each year (which in effect, makes it somewhat not discretionary.

[Susan S.]

Thanks! That is good news because it would be horrible to try to do in Relius.