Definition of Compensation

[austin3515]

Client has a SERP plan where executives are deferring compensation on a voluntary basis. The Plan's definition of compensation was amended to include these deferrals in the plan's definition of comp because otherwise, they would miss out on the regular match applicable to their 401k contributions.

When I run a 414(s) test, the additional comp for the HCE's is clearly de miminis (100.5 vs 100). But...

From the 414(s)-1 regs:

(d) Alternative definitions of compensation that satisfy section 414(s) —(1) General rule. In addition to the definitions provided in paragraph © of this section, any definition of compensation satisfies section 414(s) with respect to employees (other than self-employed individuals treated as employees under section 401©(1)) if the definition of compensation does not by design favor highly compensated employees, is reasonable within the meaning of paragraph (d)(2) of this section, and satisfies the nondiscrimination requirement in paragraph (d)(3) of this section.

In my case, the SERP is available exclusively to HCE's (not by definition, but of course it would be very rare for one of the executives to not be considered an HCE). So I think that under no circumstanc can I call this a 414s definition of comp. Does everyone agree? It's not a problem, because obviously I will pass the general test on the profit sharing (everyone gets the same %age, and the HCE's on average get only a tiny bump), and I have plenty of room on the ADP/ACP test. I just want to know which tests to run and which definition of comp to use.

[austin3515]

I'm getting conflicting information on this design now. OThers are suggesting (off line) that for my matching contributions, this design creates an additional level of match, because as I noted above, I cannot treat this as comp for 414s (i.e., so the extra match creates an extra benefit).

Are executives aware that they are potentially "blanking" themselves by participating in these plans? Or is there another interpretation out there would alleviate these suggestions? It would seem to me that there would not be an awful lot of participation (for those under 250K) if there was no way to get them match on this comp.

[MoJo]

Without getting into the weeds (and there is a "cost" associated with this from a tax deductibility/timing issue), why not change the terms of the SERP to provide that the employer will make in the SERP the "match" that otherwise would have been made to the 401(k) plan had the exec not participated in the SERP?

[austin3515]

Because a 401k plan has a lot of perks on top of the SERP (rollover ability being at the top of the list).

[MoJo]

Because a 401k plan has a lot of perks on top of the SERP (rollover ability being at the top of the list).

Yes, but.... One can't have everything (and goose the contribution a bit in the SERP to account for the differences).

[austin3515]

Not much consolation for someone who has a reasonable request

[four01kman]

Without looking at the regs, I seem to remember a "safe harbor" definition of compensation is Social Security Wages. Wouldn't this solve your problem?

[austin3515]

I have never heard of that safe harbor, but it certainly makes me feel like I'm not a crook when my definition of comp basically matches medicare wages!

[MoJo]

Not much consolation for someone who has a reasonable request

Just keep in mind that for every rule out there, there was an abuse that was sought to be cured by the rule. In all honesty, is the amount of the "lost" match of that much consequence to an HCE who has the benefit of participating in a SERP? Sometimes we spend a lot of time (and money) attempting to provide rather (relatively speaking) inconsequential benefits to the well heeled.

Don't get me wrong - I make my living doing just that....

[austin3515]

The well heeled either hire me or pay my bill...