SH Match Plan failing 414(s)

[BG5150]

I have a plan that fails 414(s). They are a safe harbor match plan. (QACA, 100% of first 1% comp and 50% on all other deferrals up to 100% of pay)

Plan excludes bonus for allocation purposes, plan allows people to defer from bonus.

Thing is, if I include bonus, the employees' deferral rate goes DOWN, therefore DECREASING the match.

Should I just let it go?

Also, for the PS. Can I allocate it excluding the bonus (it's a pro-rata allocation) and then TEST it using full comp? (It's about a 7% PS, so I think I'd be ok with gateway.)

[Tom Poje]

since you fail 414(s) that implies the HCEs are favored by the situation (they probably have comp > comp limit so excluding bonus)

as you said, including bonus reduces match on people.

but...the person had no chance to defer on the bonus, so arguably you need to provide a make up deferral for lost opportunity...ugh, but that sounds reasonable to me (but then I dress oddly, so what do I know)

as for testing, if you fail 414s you can't use that definition of comp in testing, there is nothing wrong in using a definition of comp that satisfies 414s even though it is not the same as comp used for allocation purposes.

[Kevin C]

Being a QACA requires that the compensation definition used to determine the match satisfy 414(s) [1.401(k)-3(j)1)(i)]. With the definition used failing 414(s), it has to be fixed. First, check your plan document. Some of them automatically revert to gross comp if the specified safe harbor compensation definition fails 414(s).

As for the match being reduced when compensation increases, can you provide a numerical example? I don't see how that would happen. I also think you have a typo in your OP with the match formula.

For the PS, you are not required to allocate using a 414(s) compliant compensation, you just have to test using one. See 1.414(s)-1(a)(2).

[BG5150]

Never mind my silly "match goes down" thing. It's been a long day.

Good news is that the PS passes on a contributions basis imputing disparity using full comp.

Now, I just have to give everyone more match. No other way around that.

[Tom Poje]

yes and no??

suppose the person deferred 1% and made 9000 comp and had 1000 in bonus.

since comp test failed,

do you say "when figuring the match I have to figure things based on total comp"

or do you say

I can't use comp less bonus to determine what I can defer because that fails 414s

the person couldn't defer on 1000 so I need to make that up as well?

in other words, if I had used total comp to start with he would have deferred an additional $10.

since this is a safe harbor and you are getting a free ride on testing on both tests not just ACP

I haven't seen the issue fully addressed before, nor even thought about it this way, except for the comment/suggestion the document should address how to handle things if plan failed 414s, which of course they don't.

if the plan wasn't safe harbor, you still fail 414s which means normally you would try testing both ADP and ACP using total comp. so how do you fix 'both tests' in the situation of a safe harbor where you can't test using comp.