414(s) Comp Ratio Test

[emmetttrudy]

I've seen some other threads on this topic but still somewhat confused on this issue. A plan is a safe harbor match plan with no allocation of other employer contributions (including profit sharing). The plan excludes bonus compensation. When the 414(s) test is run it fails (none of the two HCEs have any bonus).

What is the correction, if any?

I was reading a Q&A from an Ft Williams presentation and they mentioned that if you have a safe harbor matching plan and choose to exclude bonuses you do not need to apply the compensation ration testing.

[ESOP Guy]

Can't speak to the safe harbor portion of the question as I just haven't worked on them in almost 5 years.

A couple of points however:

1) When you say it fails by how much does it fail? The failure is not defined well. The HCE and NHCE ratios have to be different by no more then a "de minimis" amount. I have seen lawyers be fine with as much as a 7 percentage point spread. (I am not comfortable with that large of a spread but I have seen it.) So there might be some value in finding out how comfortable everyone is with what de minimis is in this case.

2) I have also understood the correction is to allocate based on a definition of compensation that does pass nondiscrimination.

[emmetttrudy]

the current ratio is 93.32%. almost everything I have read says 3% or less is the "standard" although no official IRS guidance has been issued.

[Tom Poje]

one of the places he idea to use total compensation comes from: [Q and A #62, 2009 ASPPA Conference.]
What happens if a safe harbor plan fails the compensation test?

IRS officials have indicated that the correction method would be to make up the difference in contributions using a Section 414(s) definition of compensation plus earnings for all affected years.

A reminder that the answers reflected in Q and A’s are the ASPPA representatives’ interpretation of the IRS officials’ responses, and not direct quotes. They are intended to reflect as accurately as possible the statements made by the government representatives. This material does not represent the official position of the Internal Revenue Service, the Treasury Department, or any other government agency; nor has it been reviewed or approved by the Service or Treasury.]
.....
the concept may work fine if it is a 3% SHNEC, but I think when a match is involved there are other issues. Do you match only on total comp? that may make a difference if the ee deferred more than 5% based on comp less deferrals. But, let's say the ee deferred 3%, and his bonus was $1000. so if he was allowed to defer on bonus he would have deferred $30 more, so it would seem he should receive a match on that 'missed' deferral.
clearly though the plan you have is discriminatory because the HCEs have no bonus.