Compensation Ratio test failure

[Bill Presson]

We have a plan that has failed the compensation ratio test. They exclude various items (bonus, overtime, etc.) and have always passed previously. However this year, the NHCE group got quite a bit more in bonuses than in prior years. So now the differential is about 5% instead of 3% or less.

I cannot find anywhere an outline of what to do to fix this. Do we just amend to include pieces of comp until we pass?

If so, what happens to the ACP/ADP tests? Are they rerun? Is there an issue that now comp is included that the participants couldn't defer on?

Thanks for any help.

[movedon]

We have a plan that has failed the compensation ratio test. They exclude various items (bonus, overtime, etc.) and have always passed previously. However this year, the NHCE group got quite a bit more in bonuses than in prior years. So now the differential is about 5% instead of 3% or less.

I cannot find anywhere an outline of what to do to fix this. Do we just amend to include pieces of comp until we pass?

If so, what happens to the ACP/ADP tests? Are they rerun? Is there an issue that now comp is included that the participants couldn't defer on?

Thanks for any help.

I would look at the definition of 414(s) comp in the plan and determine whether you have the flexibility to use any definition of comp for testing purposes other than the plan definition of comp. Assuming you do, you don't have a problem as long as all nondiscrimination testing is satisfied when you use a definition of comp for testing that satisfies 414(s). You'll probably need to general test any nonelective contributions. If that doesn't work, then yeah, I guess you would need to amend the comp definition, but I don't think I've ever seen it come to that.

[ESOP Guy]

When is the last time you got an opinion from the plan’s attorney regarding what “de minimis” is for 414(s) testing?

I have seen plan attorneys who will defend a 5% point spread. This is more true if it seems like a onetime thing instead of a new trend. I have seen some that will defend the 5% spread the first time it happens and amend going forward.

In short the IRS has never given good guidelines on what is a 414(s) failure, so one might want to see what everyone is willing to “risk” in this regard.

On the other hand I have seen people insist the spread needs to be less than 1% point.

[ETA Consulting LLC]

Is there an issue that now comp is included that the participants couldn't defer on?

Thanks for any help.

This is a non-issue with respect to deferrals; as long as the Compensation on which deferrals may be made is "reasonable". It doesn't need to be non-discriminatory, but "reasonable". Now, this standard does not apply to "Employer" funded contributions (Match, or nonelective).

Good Luck!

[Bill Presson]

Thanks everyone.