SH Match plan failing 414(s)

[BG5150]

I have a plan that is failing the 414(s) test on the percentage test. I did not run it through the rate group test.

They are excluding bonuses, and everyone is getting one. My difference is ~5.4% higher for HCEs.

This is a SH Match plan that is determined on a payroll basis (not annual).

Because no deferrals are taken from bonuses, there is no match.

Do I even need to have a correction? If so, what would it be?

[ETA Consulting LLC]

I don't know, but let's walk through it. We know that the standard for Compensation on which deferrals may be made does not have to meet 414(s), but merely be 'reasonable'. Hence, Base Compensation (excluding things like bonuses) will meet that standard.

However, that standard does not appear to apply to anything else.

So, lets assume you have a payroll of $3,000 which includes $1,500 in bonuses and you elect to defer 6%; which will equate to $90. Your SHMAC will, then, be $60; where it would've been the full $90 if all Compensation was used.

If you apply this line of reasoning, then you would appear to have a problem.

I, personally, would be interested in hearing other opinions. Typically, when I design plans with Safe Harbor 401(k) provisions, I try to use Safe Harbor definitions of Compensation as that would be consistent with eliminating the tests (I do admit that this is a potentially worthless piece of commentary, but just keeping my thoughts aligned).

Good Luck!

[Tom Poje]

lets suppose a real simple case Fred made 10,000 and deferred 5%. he also had 1,000 in bonus. the HCE made 200000 and had no bonus. he deferred 5% and received the 4% basic basic match.

Fred received the basic match of $400 - but that was comp less bonus. clearly this is unfair since plan fails 414(s). happens using total comp

he received only 400/11,000 or 3.636% (if bonuses weren't excluded he would have deferred more and received a larger match.

I would argue he must be bumped up on the match to $440 so he is at the 4% rate.

do you have to increase the deferrals by a QNEC as well? well, you are being given a free ride on the ADP test with comp that fails testing, so I'd lean toward saying yes.

you get a free ride on the ADP/ACP test but are excluding bonuses, which means at most

4% of bonus is being lost - and that is only true if all NHCE defer 5% or more.

not sure if that is worth the plan design problem that has been created.

I have never seen any recommendation as to how to correct, so I am only voicing an opinion.

[ETA Consulting LLC]

You know, I applied the principle I've learned a long time ago and actually treated this as if it were my problem; check the plan document. Here's what I came up with.

I looked through the language of the BPD I use for my plans, and it appears to address this issue. It says that should the employer use a definition of Compensation for Safe Harbor 401(k) that does not meet 414(s) for that year, then the Employer shall be deemed to have elected to use Total Compensation for that Year. It's an automatic safety that I never knew existed.

This may help.

Good Luck!

[BG5150]

ETA, what section of the BPD was that in?

[ETA Consulting LLC]

Go to the index. You would find the section that says something like "Plan Compensation: Application to Safe Harbor Formulas." It's in Section 1.97 of the ASCi PPA Volume Submitter.

Sorry for the late response. I don't have my Benefitslink set up to email me when additional responses are made.

Good Luck!

[BG5150]

I don't have my Benefitslink set up to email me when additional responses are made.

Slacker