Compensation definition

[Guest JM123]

Can a plan be designed to limit matching contributions to compensation earned in an eligible job classification? My understanding is that it could, provided that the ACP test is satisfied using a 414(s) definition.

[ETA Consulting LLC]

Sure. You can design a plan to do anything, as long as it passes the necessary non-discrimination tests. In your case, you're looking at merely have a non-discriminatory definition of compensation for "allocation purposes"; which is basically the same since you're looking to test under ACP using the same definition of compensation used to "allocation purposes". It seems as if you're on the right track.

Good Luck!

[12AX7]

ETK: You don't need a definition of compensation to be "non-discriminatory" for "allocation purposes". For testing purposes, the definition does have to meet 414(s) or be "non-discriminatory". In other words, they do not need to be the same.

[Guest JM123]

ETK: You don't need a definition of compensation to be "non-discriminatory" for "allocation purposes". For testing purposes, the definition does have to meet 414(s) or be "non-discriminatory". In other words, they do not need to be the same.

Thanks to both for your input.

So the plan can limit matching contributions to compensation paid for employment in Job Category X. For testing purposes, however, compensation paid for Job Categories X and Y must be included. I assume that for testing purposes, disregarding compensation for Category Y would not satisfy 414(s) and would not be "reasonable" under Demo 9. Therefore, the ACP test would be administered based on compensation paid in both job categories.

Does it matter that the employees in the excluded job category are all NHCEs? I think it needs to satisfy 410(b) coverage on a disaggregated basis, right?

[ETA Consulting LLC]

ETK: You don't need a definition of compensation to be "non-discriminatory" for "allocation purposes". For testing purposes, the definition does have to meet 414(s) or be "non-discriminatory". In other words, they do not need to be the same.

We both know that, but if the definition of compensation used for the allocation of match is not "non-discriminatory", then you have another set up tests to show the rate of match is non-discriminatory based on a "non-discriminatory" definition of compensation. I tried not to open this can of worms in my response.

The important thing is to know "which" tests need to be performed when you try to do certain designs.

So, we agree.

Good Luck!

[Guest ENT]

Can a definition satisfy 414(s) if it excludes compensation for periods during which an employee is in an excluded job category (that is not an excludable group for purposes of the coverage rules)?

[ETA Consulting LLC]

It can, but may not be safe harbor; unless the classfication difference is between union & non-union. One or two employees in the category shouldn't cause a significant difference on the compensation ratio test.

Suppose you had a company that covered the owner and salaried employees. Also suppose that all other employees where hourly for 1/2 of the year and then became salaried. While they would benefit under 410(b), their compensation would be only 1/2 of the entire year compensation.

This would not qualify as a safe harbor exclusion to compensation. 414(s), however, does allow you to include compensation only for the period of eligibility. I always interpreted this to mean prior to the age/service and entry date eligibility.

Good Luck!