Comp used for a Safe Harbor Plan

[austin3515]

Plan excludes bonuses for purposes of calclulating deferrals, but NOT for purposes of calculating the Safe Harbor Match.  Do I need to pass 414(s)?

[austin3515]

OK, I found something: 1.401(k)-3(c)(6), 

(iv) Restrictions on types of compensation that may be deferred. A plan may limit the types of compensation that may be deferred by an eligible employee under a plan, provided that each eligible NHCE is permitted to make elective contributions under a definition of compensation that would be a reasonable definition of compensation within the meaning of §1.414(s)-1(d)(2). Thus, the definition of compensation from which elective contributions may be made is not required to satisfy the nondiscrimination requirement of §1.414(s)-1(d)(3).

[austin3515]

But what about a Safe Harbor Nonelective Plan? The paragraph sited above deals exclusively with a Safe Harbor Match Plan (the SHNEc is 401k3b).  To me that means I can essentially use any exclusions I want with a SHNEC, but is anyone aware of any red-lines? 

For example, what if I excluded all regular wages and only bonus wages  were eligible?  I'm using an extreme example based on the assumption that some rule somewhere must prevent this.  What rule would prevent this?

[401king]

I don't think excluding normal wages would fit 414(s)-1(d)(2). 

 

(ii)Items that may be excluded. A reasonable definition of compensation is permitted to exclude, on a consistent basis, all or any portion of irregular or additional compensation, including (but not limited to) one or more of the following: Any type of additional compensation for employees working outside their regularly scheduled tour of duty (such as overtime pay, premiums for shift differential, and call-in premiums), bonuses, or any one or more of the types of compensation excluded under the safe harbor alternative definition in paragraph (c)(3) of this section. Whether a type of compensation is irregular or additional is determined based on all the relevant facts and circumstances. A reasonable definition is also permitted to include, on a consistent basis, all or any portion of the types of elective contributions or deferred compensation described in paragraph (c)(4) of this section and, thus, need not include all those types of elective contributions or deferred compensation as otherwise required under paragraph (c)(4) of this section.

[austin3515]

Ahh, but why am I subject to 414s?  For example, do I ever have to satisfy the comp ratio test for a definition of comp for elective deferrals?  I thought I had lots of flexibility on the defintion as long as I used a safe harbor definition of comp for ADP testing? 

[C. B. Zeller]

Regarding definition of comp for safe harbor nonelective purposes:

1.401(k)-3(b)(2) Safe harbor compensation defined. For purposes of this section, safe harbor compensation means compensation as defined in §1.401(k)-6 (which incorporates the definition of compensation in §1.414(s)-1); provided, however, that the rule in the last sentence of §1.414(s)-1(d)(2)(iii) (which generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not apply in determining the safe harbor compensation of NHCEs. Thus, for example, the plan may limit the period used to determine safe harbor compensation to the eligible employee's period of participation.

[Kevin C]

5 hours ago, austin3515 said:

But what about a Safe Harbor Nonelective Plan? The paragraph sited above deals exclusively with a Safe Harbor Match Plan (the SHNEc is 401k3b).  To me that means I can essentially use any exclusions I want with a SHNEC, but is anyone aware of any red-lines? 

For example, what if I excluded all regular wages and only bonus wages  were eligible?  I'm using an extreme example based on the assumption that some rule somewhere must prevent this.  What rule would prevent this?

If you used that comp definition for deferrals, you would likely have a problem with BRF under 1.401(k)-1(a)(4)(iv)(B).  The example given deals with deferrals allowed only from comp in excess of a certain amount, but I think you would get the same result restricting deferrals to be from bonuses only if the HCE bonuses are larger than those for NHCEs..

A more likely problem is the universal availability requirement for catch-ups in 1.414(v)-1(e).  How many of the NHCEs would  be able to defer enough to get to the full catch-up limit if they are limited to only deferring from bonuses?

[austin3515]

OK Kevin C, so BF&F is the issue?  That means I have a LOT of flexibiility to exclude a lot of comp in a SHNEC plan, then agreed?

[Kevin C]

First, let's make it clear that we are discussing the definition of compensation for deferral purposes in a SHNEC plan.  I expected to find something similar to the restriction on deferral comp when using the SH match, but don't see anything. 

For all 401(k) plans, I think BRF is one issue if you are trying to exclude large portions of compensation from being eligible to defer.  Universal availability of catch-ups is another, probably more serious issue.  How much compensation can you exclude from being available to defer before the NHCEs lose the effective opportunity to get to $6,000 of catch-ups?

In the real world, why would you want to severely restrict the deferrals of the NHCEs?  One purpose of the plan should be to help their employees save for retirement.  If I had a client ask about doing this, I would ask what they are trying to accomplish and then try to not laugh at their answer.

TGIF

[austin3515]

Not trying to do something crazy.  I'm asking crazy questions to try and get to the bottom of what the applicable rule is.  I'm talking about bonus and overtime type stuff.  Nothing remotely close to a universal availaibility issue.

[Kevin C]

Those must be some really large bonuses.

You should check your plan document language. Our VS document applies the same rule quoted in your post #2 to deferral compensation for all safe harbor plans, not just those using the SH Match.  I looked at the LRMs and they do the same.

From the safe harbor plan section of the CODA LRMs:
 

Quote

 

2.5 "Compensation" is defined in _____ of the Plan, except, for purposes of this article, no dollar limit, other than the limit imposed by Code § 401(a)(17), applies to the compensation of a Non-highly Compensated Employee.

[Note to reviewer: The blank should contain the location of the Plan's definition of compensation that corresponds to DC LRM 6. However, solely for purposes of determining the compensation subject to a participant's deferral election, the Plan may use an alternative definition to the one described above, provided such alternative definition is a reasonable definition within the meaning of Regulations § 1.414(s)-1(d)(2), and permits each participant to elect sufficient Elective Deferrals to receive the maximum amount of Matching Contributions (determined using the definition of compensation described above) available to the participant under the Plan.]

 

It's on page 31 (page 33 of the pdf) of: https://www.irs.gov/pub/irs-tege/coda_lrm1017.pdf