Failing 414(s) in SH Plan

[BG5150]

I have a plan who's 414(s) test is failing by 5.27% because the one and only HCE (the owner) has no bonus.

It's a 3% SH plan. Do I give everybody 3% of their full pay now?

[ETA Consulting LLC]

The first approach is the refer to the plan document and see if there is any language that addresses this scenario. Some documents are actually written with language prescribing you do just that [allocate on full compensation] in that scenario. But, you must yield to the language in the plan; it's a good chance that it's there.

Good Luck!

[My 2 cents]

I have a plan who's 414(s) test is failing by 5.27% because the one and only HCE (the owner) has no bonus.

It's a 3% SH plan. Do I give everybody 3% of their full pay now?

Presuming that bonuses are excluded? Why aren't bonuses included?

I don't work on 401(k) plans - are SH plans allowed to exclude bonuses?

[Mike Preston]

Yes, as long as the resulting plan compensation satisfies 414(s). Full circle, right?

[Tom Poje]

At the 2009 ASPPA Conference, Q and A #62 (of course the caveat is such answers do not necessarily reflect an actual Treasury position)

Question:

The final QACA regulations require a QACA to use a safe harbor definition of compensation for deferrals and employer contributions as of plan years beginning on or after 1/1/2010. Does this also apply to SBJPA (i.e., 401(k)(12)) safe harbor plans? If a plan uses unsafe definition of compensation and then fails the 414(s) compensation test, what is the remedy?
IRS Response:
Under Treas. Reg. §1.401(k)-3(b), the safe harbor contribution under the "old style"
(i.e., 401(k)(12)) safe harbor must be based on "safe harbor" compensation, which
requires a definition of compensation that meets IRC §414(s) (with some limitations).
If the compensation used for the employer contributions does not meet these rules,
the safe harbor contributions are likely insufficient and the CODA (and likely the plan)
won't meet qualification requirements. The correction would be to make up the
difference in contributions using a §414(s) definition of compensation plus earnings for
all affected years. By the way, the compensation eligible for deferral in a 401(k)(12)
safe harbor plan does not need to be nondiscriminatory under §414(s), but only
reasonable. On the other hand, deferrable compensation for QACA purposes must
meet the §414(s) definition. See Treas. Reg. §1.401(k)-3(j)(1)(i), last sentence. (And
you might want to change the definition of deferrable compensation in the future.)

[Mike Preston]

Nice. That nuance is frequently buried.