Non-safe harbor definition of compensation applies on to PS

[cpc0506]

We are working on the PPA restatement for a plan. Current plan is a safe harbor plan that uses a safe harbor definition of compensation (no exclusions to comp) for the deferral and safe harbor match portion of the plan. The definition of compensation for Profit Sharing allocation purposes excludes bonuses and overtime.

Is this ok? What happens if the Compensation Ratio Test fails? In this case, it is only affecting the Profit Sharing. Does this failure affect the safe harbor status of the plan with regards to SD and SH Match.

We want to suggest to the client to use the safe harbor definition of compensation for all sources. Do we have a case to suggest this?

[Tom Poje]

lets say the profit sharing portion was 5% across the board.

since you fail the comp test, that means you have to run a nondiscrim test using total comp rather than comp less bonus and overtime.

if the HCEs had no bonus overtime then if tested on an allocation basis they would be at 5%, everyone else (assuming all others had bonus/overtime) would be less than 5% so you would fail rate group testing. of course you could test on an accrual basis.

In other words, yes, the 'basic' set up is ok, you simply have to test the nonelective portion using total comp and proceed from there. it should not affect the safe harbor status,