ADP testing Gross and/or Net Compensation

[imchipbrown]

I have a two person 401(k) in 2014. One is an HCE, the other NHCE. The Plan has used prior year testing for over 10 years.

In 2013, NHCE deferred 5% of $40,000 gross W-2 (Box 5) which is $2,000. Calculating the ADR using net comp (Box 1) would yield (2k/(40k-2k))= 5.26% ADP. The FT William doc is silent on how to calculate the ADR.

I'd like to calculate the deferral limit for the HCE to be 7.26% of gross (Box 5) compensation.

Any thoughts?

[Tom Poje]

the ft Williams basic document has the following definition for 414(s) comp (e.g. it is not defined in the adoption agreement)

"Section 414(s) Compensation" means compensation as defined in Code section 414(s) and Treas. Reg. section 1.414(s)-1.

since one of the definition that satisfies 414(s) is comp less deferrals that is a legitimate testing option

(generally you can use any def of comp that satisfies 414(s) for testing, unless you have something real specific in the doc)

BUT:

that means all deferrals including cafeteria (people tend to forget that) [though you might pass the comp test using plan deferrals only, which would also be legitimate]

that means for all people. you can't use total comp for current year and comp less deferral for prior year.

[blb25524]

One can use gross versus net. The only concern is that one must be consistent in the testing compensation for the year of testing. If one uses net for the prior for the NHCE's, one must use net for the current HCE's rate.