Compensation for deferral and match

[MPLSLAW]

Plan definition of compensation is W-2 plus 401(k) and 125 elective deferrals and reduced by the safe harbor taxable fringes in IRC Section 414(s) regulations. This includes "deferred compensation". The plan sponsor has an elective deferred compensation plan ("SERP") in which senior executives participate. The 401(k) master plan document (national prototype) allows the sponsor broad discretion in designing procedures for participants to make elective deferrals and limit is the 402(g) limit. The sponsor's payroll dept has been applying 401(k) deferral election percentages by the senior execs to their gross pay, before the SERP deferrals. The match is fully discretionary - no formula or limits in the document. Company announced that it would match "100% of deferrals up to 4% of pay". Sponsor also uses gross (before SERP deferrals) pay for applying the match.

Recordkeeper believes sponsor needs to do voluntary correction under EPCRS as it was using a compensation definition not in the plan. The recordkeeper uses the 414(s) definition of compensation for ADP and ACP testing and the plan passes both tests every year. Code section 401(k) and (m) cite to 414(s) compensation in describing the ADP and ACP test. For deferrals, section 401(k) just describes a plan that allows an employee to elect cash or deferral into the plan. 1.401(a)(4)-1(b) regs say that deferrals and matching contributions are deemed to pass 401(a)(4) if the ADP and ACP tests are passed.

Does the sponsor have a good faith argument that its administrative procedures and practices are not violating the plan document and 401(a)?

I recall that on a previous post it was suggested that the sponsor amend the plan to adopt Medicare Wages to solve this issue.

[Kevin C]

A few questions:

1. What does their deferral election say?

2. Are the senior executives maxing out their deferrals in the 401(k)?

3. Is the match determined payroll by payroll or on an annual basis? or, with a true-up?

4. Do the senior executives have plan comp in excess of the 401(a)(17) limit ?

I'm wondering if they would have received the same match for the year if the correct compensation definition had been used and if their deferrals for the year ended up being what they elected. Sometimes you get lucky and an error produces the same result as doing it right.

[MPLSLAW]

1. Deferrals are just for a percentage of compensation (i.e. "10%")

2. Yes, they are maxing out deferrals

3. payroll by payroll match

4. Some execs (not all) have total comp in excess of 401(a)(17)

I recall that we looked and the match would have been different if plan comp had been used

[QDROphile]

My take, based on how you report, is that the use of "gross" for application of the deferral percentage is OK and the use of the unreduced compensation for calculating the match (the number for application of the 4% to determine the maximum) is an operational failure -- not following plan terms. Best practice would be to include an explanation of the details about application of the deferral percentage in the deferral election form or the SPD.

[KED]

I think you have issues. First, the plan definition of W-2 compensation does not include nonqualified deferred comp deferrals. In addition, as I recall, there are discrimination/401(a)(4)/discriminatory rate of match issues when you include deferred comp deferrals as part of comp since those deferrals generally are made only by HCEs.

[Guest A_Dude]

My 2 cents... it's either operational you applied the compensation definition wrong. Or you want it really to be the other way, and have a document failure. Pick which one. The biggest problem faced is that HCEs have been using a "discriminatory" definition of comp, which increases the amount of match they received. It did pass testing, so it's allowable...at least for allocation of the match.

[austin3515]

Take a look at this post that I started. I think you do have problems. Reality is I think a lot of SERP's have this problem, but very few realize it.

http://benefitslink.com/boards/index.php?/topic/53313-definition-of-compensation/?hl=deferred+comp+compensation+serp