Compensation for Deferrals only and 414(s)

[Nancy D]

Hi, I have a plan that looks like it will fail 414(s), it excludes bonuses and one NHCE gets a bonus of about 43% of her compensation. ( comp is $20,000 and bonus is $15,000). HCEs are all owners and earn about $20,000. I am thinking that if I have a definition of compensation that excludes compensation in excess of $20,000 that will solve my problem. I read in 1.414(s)1(d)(2)(iii) that ... " a definition of Compensation is not unreasonable merely because it excludes all compensation in excess of a specified dollar amount" Am I missing something?

Thanks for any guidance you can offer....

[buckaroo]

If this is a deferral only plan and the definition of ADP testing compensation meets 414(s), then I recall that as long as ADP is passed, no 414(s) testing is required.

[Nancy D]

Thanks Buckaroo, I guess it's hard for me to believe that under 414 (s) an alternate definition of compensation that would allow compensation excluded over a dollar limit passes muster. I am thinking it is too easy a solution to my problem.

[duckthing]

The language you quoted is only part of the picture. It says that your definition could be considered reasonable, but reasonableness is only the one criteria that must be met. The other two are that it "does not by design favor highly compensated employees" and that your reasonable definition also be nondiscriminatory (under the usual de minimis ratio test), so I think you're back where you started. I'm not an expert on this but unfortunately I don't think this is the quick fix you're hoping for.

[Nancy D]

Thanks duckthing. That's what every fiber of my being was saying too. I appreciate your taking the time to answer.

[buckaroo]

Nancy,

My recollection is that this is a deferral only plan. Is the ADP compensation defined differently that the one for eligible compensation for elective deferrals? If so and the ADP testing comp meets 414(s), then my recollection is that all you need to do is pass ADP. If ADP is passed, then it the definition of compensation that you are permitted to defer from is irrelevant. Take a look at 1.401(a)(4)-4(e)(3) and 1.401(k)-6.

[Nancy D]

Thanks buckaroo...