414(s) Compensation Ratio Test

[buckaroo]

I have a client that has a 401(k) plan recordkept by us and a DB plan recordkept by another firm.  Most employees are eligible for both.  The compensation definition for all aspects of the 401(k) plan excludes commissions.  The employer has a few employees who earn commission only.  My general understanding is that if an employee has no eligible compensation for a plan, then they are excluded from the testing.  Further my understanding is that only folks who are benefitting form a particular money source are include in the 414(s) compensation ratio testing.  Therefore, in this case, if one of my commission only participants has only 100K in commissions, they would not be included in the 401(k) plan's testing (e.g. ADP/ACP, 401(a)(4)) because they are not benefitting.  Then, if they are not benefitting, then they should not be included in the 414(s) compensation ratio testing.  Is that correct?   

Part II - If they have a separate division that is include in the DB, but excluded from the definition of eligible employee for the 401(k) plan, then they should be obviously be included in the coverage testing for the 401(k), but not in the benefitting group and consequently, not included in the 414(s) compensation ratio testing for the 401(k) portion.  Does this sound correct as well? 

Thanks in advance. 

[Tom Poje]

at the 2008 ASPPA Conference, Q and A #1

A 401(k) plan disregards commissions as compensation for plan purposes. One employee has only commissions, therefore could not defer. Assuming the compensation definition satisfies 414(s) testing, is this person included in the ADP test as a 0%, or would they be excluded from the test completely since they have no compensation for plan purposes?

response:

Refer to Treas. Reg. §1.401(k)-2(a)(3)(i), last sentence, which requires that you include all eligible employees in the testing.  What is an eligible employee?  Per Treas. Reg. §1.401(k)-6, it is someone who is directly or indirectly eligible to make a deferral for the year.  Is this guy eligible?  Yes, you must include him as 0%

......................

This went against what was given as an answer in the past so the answer is clear as mud.

Or perhaps the 'logic' in the past was, if the person has no comp and no deferrals that would be a 0%. usually such people would be HCEs (e.g. owners with no sched C income) and to include them in the ADP test would be a 'gift' to the other HCEs as far as testing goes, so don't include them at all, because we want the test to be as hard as we can on the HCEs.

at least in 2008 a couple of reg cites were provided, whether you agree or disagree is another matter.

such answers given do not necessarily reflect an actual Treasury position, so some will say use the answer that was provided in the past, but then one could say the same thing the old answer was incorrect and use the new answer.

[buckaroo]

Thanks Tom.  I appreciate your reply.  So for the second part of the question.  if a PS has an excluded group from a plan, but eligible for a different plan, would they need to be included in the 414(s) test for the first plan, if they are not eligible for it due to an exclusion in the plan document?