ADP / Net Comp Testing

[austin3515]

Participant contributes 80% of pay and we use net comp. So 401k = 8,000, comp = 2,000 percentage = 400%.

Relius let's it through. Anyone have a problem? I'm not aware of any reg and this is not a target QNEC situation.

[ETA Consulting LLC]

I believe it is technically correct as the Compensation used is safe harbor (e.g. Gross net of deferrals). When the rules were originally written, this could never happen as you would meet the 415 limit by merely deferring 20% of pay.

Given all the changes since then (E.g. 415 limit is 100% of pay, deferrals aren't included in deductibility limit) with no adjustment to the possibility of an inflated number, I think you're okay. When you're fortunate enough to have a NHCE defer $8,000 out of $10,000, your test is good. When you have an HCE (perhaps through spousal attribution), you may want to test on gross compensation.

Good Luck!

[austin3515]

When you have an HCE (perhaps through spousal attribution), you may want to test on gross compensation.

Had that happen before too, with the retiring owner or something, and then you panic