What correction method is to be used when a plan fails the nondiscrim.

[Guest sdbsg]

I have a 401(k) plan that excludes bonuses, vacation pay, and sick pay. I ran the 414(s) test. The test failed with hce inclusion % of 95.4 and the nhce % of 89.2. I know there is no stated deminimus amount. Is it best to try to argue a deminimus amount, or should the employer give a QNEC, or some other correction method?

[david shipp]

I think the issue is that you have to *test* with 414(s) compensation. If your deferral definition doesn't meet 414(s) you don't have to correct the compensation used, but your adp/acp testing results will be different than you would otherwise have anticipated since you have to use a different comp. for testing. If the plan fails the adp/acp testing, standard corrections should be made based on plan provisions.

If this isn't the case or if there are other issues I'm sure someone will chime in.

[Tom Poje]

While no set de minimis amount has ever been determined, according to some IRS agents, 3% or less is considered de minimis. it appears you fail that. so, now it appears the plan fails.

you have two choices:

1. amend plan to satisfy 414(s) and continue to rely on safe harbor rules.

(sure....no problem)

2.don't rely on safe harbor rules - in other words test under nondiscrim (avg ben % test, etc.

[david shipp]

Tom,

I need some help with option #2.

My understanding is that use of a deferral compensation definition that does not satisfy 414(s) simply means that the deferral definition cannot be used in nondiscrimination testing. Since we appear to be dealing with salary deferral contributions only (at least that is all that is referenced), the consequence of failing 414(s) is that a different compensation must be used in determining deferral percentages. If the ADP test is failed as a result, the plan uses its standard correction mechanisms.

I'm not sure how other issues such as ABT fit in.

[Guest sdbsg]

To clarify, the 401(k) plan has both deferrals and company match. The company excludes bonuses, vacation pay, and sick pay when calculating the company match AND deferrals.

[Tom Poje]

I will agree with above comments. use a safe harbor definition for adp test.If plan fails test, use corrective means as allowed by document. hopefully there is no ps contribution (forfeitures) as well. if yes, then would appear avg ben test needs to be done. sorry for the confusion.