De Minimis comp for 414(s) testing for DB plan

[AndyH]

I'd appreciate some opinions on what constitutes a "more than de minimus" comp differential for 414(s) testing for DB plans.

If a DB plan excludes bonuses, for example, and all HCE's are at the dollar limit, therefore recognizing 100% of their comp, and the NHCE comp ratio is 98%, is this a violation of 414(s)?

Assume the plan is a safe harbor and wishes to avoid general testing.

I realize this is largely a matter of opinion, but I'd like to hear what standards others use. We tend to take a very conservative approach, i.e. any greater percent for HCE's may be a problem.

[Guest]

We use the same standard in our firm,but if I had to I think I could live with a 5% differential.The only justification for saying 5% is the "safety valve" rule of 1.401(a)(4)-3©(3). Apples and oranges of course,but it's the best I can come up with.

[Guest]

I would think that Andy's client may have a problem. Since you are using a non-safe harbor comp definition (base pay) you will have to submit a demo with the determination letter request. The purpose of the demo is so that the IRS can rule on your language.

I think that anything comp definition that favors the HCE's in any way is at some risk of being challanged. Since your base pay def. would favor HCE's I think you have some risk, but thats why you submit it for approval.

[AndyH]

Thank you both for the feedback. I did not get too specific at first, as I was interested in general comments, as I run into this fairly often.

The situation that prompted this post was a takeover plan that excludes bonus' and may not have been tested in the past.

The HCE rate (for 1999) was 99.5%. The NHCE rate was 99.0%. We're amending for GUST, and therefore trying to consider proactive non-mandatory changes as well. Not having much history, we're not sure whether this pattern will repeat itself, or whether there is past exposure.

We're pretty sure we could pass the general test if needed, but we obviously have to weigh the relative costs, and it's a decent size plan, so there would be some work for a(4) tests.

We decided to raise the issue and the risks, and in fact the sponsor will change to a safe harbor comp definition as a result.

Keith's comments about the demo was a very interesting twist that we hadn't thought about.