3% SH and excluding bonuses from compensation

[bevfair]

Plan adopted the 3% SHNEC provisions, however only NHCE's will receive the safe harbor contributions. The client wants to exclude bonus from compensation for all purposes, including the SHNEC. Since the HCE's do not benefit from the 3% safe harbor contribution, must I still do a compensation test which will probably fail? Or would the exclusion of bonus from compensation for the safe harbor be acceptable in this situation? Thank you.

[Bird]

Can't exclude bonus pay for NHCEs for SH.

[BG5150]

Why can't you exclude bonus for SH if the plan is excluding it for all purposes?

[Tom Poje]

just curious, are there other nonelective contributions (e.g. profit sharing) being made?

let's look at it from another point of view

let's say you had an owner defer the max.

the NHCE makes 10,000 and for the sake of the argument 40,000 in bonus.

now, do you think the IRS wants to give a free ride on the ADP test as well as top heavy?

(so the amount of bonus shouldn't matter, and the fact the HCE doesn't receive the safe harbor shouldn't matter either)

at leas5t in my opinion, but I haven't seen the issue addressed before.

[Bird]

comp for SH must be a safe harbor definition of compensation:

(2) Safe harbor compensation defined. For purposes of this section, safe harbor compensation means compensation as defined in § 1.401(k)-6 (which incorporates the definition of compensation in § 1.414(s)-1); provided, however, that the rule in the last sentence of § 1.414(s)-1(d)(2)(iii) (which generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not apply in determining the safe harbor compensation of NHCEs. Thus, for example, the plan may limit the period used to determine safe harbor compensation to the eligible employee's period of participation.

Tom gave the appropriate reasoning, IMO.

[Kevin C]

comp for SH must be a safe harbor definition of compensation:

Sorry, but I have to disagree with you. Compensation used to determine the SH contribution must satisfy 414(s). It is not required to be a 414(s) SH definition. The cite you posted says the definition of 1.414(s)-1 is incorporated. That definition includes 1.414(s)-1(d) "Alternative definitions of compensation that satisfy 414(s)".

Our PPA approved VS document allows the exclusion of bonus, commission or overtime from the SH compensation definition. Of course, it also cautions that electing those options may cause the definition to fail to satisfy 414(s). Question 1 at the 2014 ASPPA Annual Conference DC Q&A session dealt with how to correct a SH plan using a definition of compensation that was determined to not satisfy 414(s).

[bevfair]

Tom - there are no other contributions, only deferral and SHNEC.

[Stable Two Financial]

comp for SH must be a safe harbor definition of compensation:

Sorry, but I have to disagree with you. Compensation used to determine the SH contribution must satisfy 414(s). It is not required to be a 414(s) SH definition. The cite you posted says the definition of 1.414(s)-1 is incorporated. That definition includes 1.414(s)-1(d) "Alternative definitions of compensation that satisfy 414(s)".

Our PPA approved VS document allows the exclusion of bonus, commission or overtime from the SH compensation definition. Of course, it also cautions that electing those options may cause the definition to fail to satisfy 414(s). Question 1 at the 2014 ASPPA Annual Conference DC Q&A session dealt with how to correct a SH plan using a definition of compensation that was determined to not satisfy 414(s).

I agree with Kevin. Somewhere along the way I think the IRS clarified this point. In the original readings of the SH regulations it was generally read that you could have no compensation exclusions for the SH. Pre-approved documents prior to PPA generally reflected this. Post PPA pre-approved documents state that the definition of compensation has to be tested.

Maybe someone knows/remembers where the IRS clarified it, possibly with the LRM's?

[401king]

Are you referring about a brand new plan for 2015?

If it's a current plan for 2014 then it's already too late to amend.

If it's a current plan and you're talking about amending for 2015, and the notice (already distributed) included bonuses, then it's too late to amend.

[Kevin C]

The requirements for the compensation definition used to calculate the SH contributions in the current regs is the same one used in Notice 98-52. The only recent guidance I've seen on this issue is the informal IRS comment at the 2014 ASSPA Annual conference that if your definition of SH compensation fails 414(s), you can correct with an -11(g) amendment adopted after the end of the plan year. Prior to that, there were some who thought this might not be fixable.

From 85-52: B. Compensation

Except as provided in section V.B.1.c.iii, “compensation” for purposes of this notice means compensation as defined in §1.401(k)-1(g)(2) (which incorporates by reference the definition of compensation in §414(s) and §1.414(s)-1); provided, however, that the rule in the last sentence of §1.414(s)-1(d)(2)(iii) (which generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not apply in determining the compensation of NHCEs. The annual compensation limit under §401(a)(17) applies for purposes of the safe harbor methods.

Thus, a uniform definition of compensation described in this section IV.B must be used for purposes of the basic matching formula or an enhanced matching formula under section V.B.1.a, the nonelective contribution requirement under section V.B.2, and the matching contribution limitations under section VI.B. As provided under §1.401(k)-1(g)(2), an employer may limit the period used to determine compensation for a plan year to that portion of the plan year in which the employee is an eligible employee, provided that this limit is applied uniformly to all eligible employees under the plan for the plan year.

I agree that amending to exclude bonuses can't be done retroactively. If you are looking at making the change for 2015, the problem isn't the amendment timing, it's the SH notice requirement. The amendment has to be adopted before the beginning of the 2015 year, but the SH notice has to be distributed a reasonable period of time before the beginning of the year. Is a revised notice provided now delivered a reasonable period of time before 1/1/2015? It's a facts and circumstances determination. If audited, the IRS gets to decide what is reasonable. And, providing a revised notice listing a smaller SH contribution could result in some upset employees.

We've only had one plan that excluded bonuses from the SH comp definition. Everyone received a bonus and everyone eligible to defer received the SH. Fortunately, they always passed 414(s). I'm not sure how 414(s) testing would work if only NHCEs receive the SH, but I can't see the IRS letting you test the SH comp by only considering the NHCEs.

[Bird]

I thought I replied earlier but maybe forgot to post it - I agree that you don't have to use a safe harbor definition of comp. We always use a safe harbor definition, but in hindsight that decision was based on practical, not regulatory criteria. I took a quick look in our plan docs and barely read the reference.

Sorry for any confusion...